Strike's Over, Now GM's Real Challenge Begins

Here in Detroit, good news is hard to come by. Unemployment is the highest in the nation. The murder rate is up. Foreclosures are rampant. Even the Tigers, the comeback kids who made it to the World Series last year, aren't headed back to the playoffs. But on Wednesday morning, Motown finally woke up to some good news—General Motors and the United Auto Workers reached a contract deal, ending a potentially fatal nationwide strike after only two days.

Just how good is this deal? In one stroke, it will lop $1,000 off what it costs GM to build every car and truck that rolls down its assembly lines, analysts estimate. That will go a long way toward finally making GM—as well as Ford and Chrysler when they soon adopt similar deals—competitive with Toyota. After being given up for dead by so many, this is Detroit's Lazarus moment. "This," says CSM Worldwide auto analyst Michael Robinet, "is a game changer."

As details of the deal spread, Wall Street went for a joy ride on Detroit's newest model, the bandwagon. GM stock soared nearly 10 percent. Analysts issued buy recommendations. Standard & Poor's reversed course and put GM, Ford and Chrysler's credit ratings in review "with positive implications." They were all especially excited by how, in one stroke, GM unburdened itself of $51 billion in retiree health-care costs by setting up an independent trust controlled by the union. They also like how the new contract doesn't actually give workers raises, but just lump-sum payments over the next four years.

For the union, GM agreed to put more new models in U.S. factories. And the automaker funded the independent health-care trust with an estimated $35 billion, enough money, according to UAW president Ron Gettelfinger, to provide retiree medical benefits for the next 80 years. Plus, the trust will protect retirees from creditors if GM ever goes bankrupt—now a distant prospect.

But before we all start dancing in the streets here in the Motor City, it's probably worth remembering that American car buyers still don't see a lot of positive implications in Detroit's SUV-heavy model lineup. And they are, after all, the ones who ultimately decide Detroit's destiny, not the unions or the moneychangers. And as a new J.D. Power survey shows, foreign-car buyers still steer clear of Detroit for the same old reasons—quality, gas mileage, resale value, dependability. And because so many baby boomers remember being stuck by the side of the road by an American clunker, they are unwilling to believe anything good could ever come out of Detroit.

"The American public hates the American auto industry like they hate Osama bin Laden," says Global Insight auto analyst John Wolkonowicz. "They feel like they got screwed by Detroit. If GM, Ford and Chrysler went out of business tomorrow, the typical American would say, 'Good, they deserved it'."

Does Detroit deserve that? Well, its bad reputation is certainly well earned. In the 1980s, I owned a Detroit-built car that was so riddled with quality problems that my father-in-law, who owned an auto repair shop, recommended I park it on the railroad tracks. But like my experience, that view of Detroit is dated. For the most part, Detroit doesn't really make those clunkers of old anymore. In fact, Buick recently shared top billing in a J.D. Power quality survey with Lexus.

Now, not every car Detroit builds has top-notch quality, as any flip through Consumer Reports will show you. CR's "Top Picks" models again this year were all Japanese brands. But the difference between first and worst is much narrower than it once was. So even Detroit's worst cars today are nowhere near as bad as they once were. (OK, bring on the hate mail. Wolkonowicz tells me that every time he says something nice about American automakers, his IN box fills with vitriol. "People say, 'you're stupid'," he says, "It's a very emotional issue.")

Detroit's problem today is not so much how it builds its cars, rather, it's which models it chooses to build. There are still way too many guzzlers and far too few mileage misers in Detroit's lineup. Take the Chevy Tahoe SUV, which GM smartly redesigned last year. It drives well, looks good and is better on gas than the previous generation Tahoe. And yet, dealers have a four-month supply of Tahoes piling up on their lots, twice the inventory they need. Why? "The Tahoe is not doing well because with gas at $3 a gallon, people don't want to feed it," says Wolkonowicz.

When Detroit tries to go small, the results are too often underwhelming. Take the new Ford Focus, which will certainly save you money at the gas pump, but won't set your pulse pounding like, say, the Mini Cooper from BMW or the Scion xB from Toyota. The Focus is another in a long line of cars that blend into the pavement. "The 2008 Focus is what people expect from Detroit," says Wolkonowicz, "blandmobiles."

But last week, while driving around Motor City, I came upon a cranberry colored car that caught my eye. Fit and trim, I was convinced this cleanly sculpted sedan was something new from Volkswagen. As I pulled closer, though, it turned out to be the new Chevy Malibu (which isn't actually out yet, but, naturally, is riding the roads in Detroit). The old model Malibu is one of the ugliest cars in GM's lineup, but this new one, amazingly, looks hot. And it's very good on gas, thanks to its six-speed transmission and four-cylinder engine. Will that be enough to pry people out of their Accords and Camrys? No way, says Wolkonowicz. "Camry and Accord people," he says, "won't set foot in a Chevy showroom."

So in the end, overhauling its contract with the UAW isn't enough to save Detroit. Sure, that extra $1,000 per car is a huge help. Detroit can use it to cut prices or install standard features like satellite radio or airbags everywhere or gas-saving transmissions. But this "transformational" new contract only buys time. It doesn't fix American automakers' fundamental problem. What Detroit really needs is to re-engineer its image. And that will take years, even decades, of producing hot models that overcompensate for the sins of the past. The question remains: does Detroit have enough road left to get that tough repair job done?