Should we spare a dime for Detroit? Part 2

No one becomes overweight overnight, and the Big Three weren't always in critical condition. It's hard to believe, but these companies were once world leaders and innovators to boot. Where once they were the exemplars of American industrial might and prosperity, they are now regarded as bloated, expensive, slothful anachronisms. So what happened?

Have you ever heard that admonition, "you have to be able to handle success?" Well the Big Three failed to do that. They had a comfy oligopoly on the North American market. It's hard to remember this, but GM once had 50% of the North American market. They got fat and lazy. They handed out contracts that they shouldn't have. Quality began to suffer. If you want to read a good tale about Detroit's fall from grace, than read The Reckoning by David Halberstam. It was published in 1986, but the Big Three are no more fit to compete than they were then against foreign car companies.

To use a crude analogy, the Big Three are like a professional athlete or musician who was a superstar who supported his extended family and an enormous entourage as well. He is now no longer making millions of dollars, but it doing pretty well as an announcer. The problem is, he's still supporting a small army.

GM is the product of a bygone era defined by corporate paternalism and defined benefit plans. Instead of riding the bull of globalization, the bullis goring them.

David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan is rather morose on the topic of specifically GM's prospects for survival. "Every one of the Big Three faces a problem right now of about $2,000 to $2,500 per vehicle produced cost disadvantage. If that plays out over time, they're all dead," says Cole. "It's change or die. Everything is driven by a profitable business. If you can't be profitable, you can't be in business. That is, I think, recognition that everybody is aware of."

Asked two years ago on 60 Minutes, how this happened CEO Rick Wagoner said:

"We have a long history, almost 100 years. We have a lot of employees. We have a lot of retirees, a lot of dependents. … Promises were made about benefits to those people that weren't very expensive when they were made. And it's really given us some financial challenges."

Some have gone so far as to say that GM's health care costs are higher than those for steel and glass. If that's true, than they are in the wrong business.

Have you heard of the Jobs Bank? Read and weep. I hate to use this word, but this is downright un-American. Hopefully, this sort of largess will be cut in order to save the industry.

There's also the fact that they don't make cars that Americans want to buy. In most Americans minds, foreign cars represent greater value, both in terms of reliability and the secondary(used car) market. However, there's a cognitive dissonance at work here. Despite the continuing improvement of American cars in quality surveys, Americans' just don't want to eat the home cooking.

So does that mean if Detroit got its cost structure under control and started making cars that people wanted, that there problems would be solved. No. The business landscape isn't static. The Japanese, Koreans, and Europeans won't go down without a fight. Furthermore, the Big Three would still face nascent and potentially lethal threats from China, Brazil, and India. All these actors have the implicit backing of their governments who will spend whatever it takes to create and expand their domestic auto industry.

In part 3, I'll discuss the various options on the table, their likelihood, and investing strategies.