Painful Overhaul May Pay Off For Automakers

In 2009, deep in the throes of the economic meltdown, Detroit's iconic North American International Auto Show was a dreary affair. But this year, earnings are up for the Big Three, and new vehicles may breathe new life into automakers. Industry watcher Paul Ingrassia talks about the 2011 show.

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NEAL CONAN, host:

Two years ago, amid bankruptcy, stupendous losses and bailouts, Detroit's annual North American International Auto Show looked a lot like a wake. This year, it couldn't be more different. Sales are up. Profits are up. GM and Ford show good profits. Chrysler is breaking even. The flash is back, and a spate of new electric and hybrid vehicles promise a brighter future for the big three.

If you work in the U.S. auto industry or if you've bought a domestic car in the past couple of years, has Detroit turned it around? Give us a call: 800-989-8255. Email us: talk@npr.org. You can also join the conversation on our website. That's at npr.org, click on TALK OF THE NATION.

Paul Ingrassia is the author of "Crash Course: The American Automobile Industry's Road from Glory to Disaster." He recently wrote about the 2011 auto show for the Wall Street Journal, where he used to be the Detroit bureau chief. He's with us now by phone from Naples, Florida. And thanks very much for being with us today.

Mr. PAUL INGRASSIA (Author, "Crash Course: The American Automobile Industry's Road from Glory to Disaster): Thank you, Neal.

CONAN: And you wrote that tough love is beginning to bear some fruit for the domestic auto industry.

Mr. INGRASSIA: Well, that's exactly right. I mean, if you look at really what happened two years ago with President Obama's automotive task force, what Detroit really wanted was just give us some money, loans or whatever they wanted to be called, but throw money at the same, old system.

And the automotive taskforce said no. They insisted on really strict and tough structural reforms. So, basically, brands, longstanding brands like Pontiac and some more recent brands like Hummer were discontinued. They were losing money. Brands were one thing. The dealer ranks were thinned. Factories were closed. Workers lost jobs. Managers lost jobs and lost part of their pensions.

I mean, really, it was what I call the great restructuring, if you will, following, obviously, on the great recession. And it really has produced remarkable results, at least to date. The - for example, in 2005, 2006, GM and Ford, which were the only two companies that were public back then, were losing tens of billions of dollars. GM lost $10.6 billion in 2005. Ford lost 12 billion plus in 2006.

And even though industry-wide car sales were at - near an all-time record, now car sales are at historically low levels, the companies have slimmed down enough that they're making very handsome profits despite the historically low level of cars.

CONAN: Chrysler, as you point out, breaking even.

Mr. INGRASSIA: Yeah.

CONAN: Ford and GM doing quite a bit better. You wrote GM's hourly labor costs now amount to just six percent of its revenue in North America. That's down from nearly 30 percent a few years ago when the company was paying tens of thousands of workers to sit idle and paying the full freight for employee health care.

Mr. INGRASSIA: Well, that's correct. Those were part of the structural reforms. Actually, the employee health care thing got a start even before General Motors went bankrupt. But as part of the bankruptcy proceedings, the automotive taskforce insisted on abolishing the UAW jobs bank - UAW, of course, United Auto Workers. And the jobs bank method, if a worker was laid off, he or she could get paid 95 percent of their salary indefinitely while waiting to be recalled to work or not recalled to work. It actually made it quite desirable to be laid off.

CONAN: And it has changed quite a bit. Another point you think of is that when the five percent - employees now pay five percent of their own health care costs, up from nothing. And five percent is just about a fifth of what the average American employee contributes out of wages to his own health care plan.

Mr. INGRASSIA: Yeah. This is definitely a work in progress. I mean, these companies, the worst thing they could do is confuse a comeback with a victory. This is not a victory, and it should not be mistaken as such. They have progress to make on health care costs.

Ironically, UAW retirees pay about 20 percent of their - the cost of their health care, whereas active workers pay only five percent, which is - so something is out of whack here. And there's issues that still have to be addressed. There's still some (unintelligible) work rules in some of the factories that have to be done away with.

But a lot of the old abuses, you know, on both the part of management and labor have really just been - have been treated with tough love, which was painful, but had to be done.

CONAN: Painful but had to be done. There were a lot of prices to be paid, at heavy costs.

Mr. INGRASSIA: Yeah. We shouldn't lose track that, you know, dealers lost franchises, workers lost jobs and certainly have had trouble gaining - many of them who have lost their jobs have had trouble getting back on their feet financially, because nothing paid them as well as a UAW job that they'd had. So it's been a painful process. Many managers lost jobs, lost part of their pensions, executives did. So it's been a painful process, but it was just unsustainable, frankly, without ongoing taxpayer subsidies which - you know, guess what? We're already running trillion dollar budget deficits. We can't afford them.

CONAN: And Paul Ingrassia, as you looked at it, the new lines of products that are coming out of Detroit, are they competitive with their foreign rivals? Are they good products?

Mr. INGRASSIA: Yeah. Absolutely. They are competitive. I mean, I'm not quite sure all of them are - or many of them are, what you might call, compelling in the sense of being, you know, clearly far better than the foreign competition, although some of them are very, very good. But the - but they certainly are competitive.

I mean, you know, the Ford product lineup, for example, with the Ford Fusion, a mid-sized car, is absolutely a top-drawer. And in terms of quality ratings, it has higher quality ratings, Ford does, from consumer reports, than Toyota now -which, of course, had its own quality issues last year.

The new General Motors Chevy Cobalt is a, really, an excellent compact car that the company had just lacked for decades, to be honest with you, in terms of quality and attractiveness and that sort of thing. The new Jeep Grand Cherokee is just a terrific vehicle. It's, you know, it's a bigger vehicle, obviously, than the others.

So there are a lot of excellent products in Detroit out there. Although, look, there's a lot of excellent products from the - from Hyundai, Subaru. Those are probably the two hottest car companies in many ways right now, but also Honda, Toyota and the others.

CONAN: Is the propulsion revolution fully underway?

Mr. INGRASSIA: You know, it's beginning to feel that way, Neal. You know, for a long time, this whole thing had - this transition from hybrid cars - from internal combustion engines to hybrid cars, electric cars, et cetera, had the feel of a novelty. But when you walk around the floor of the Detroit show today, there's enough stuff there that really gives it a feel of reality, not novelty, for the first time.

Certainly, you know, the Chevy Volt has been very hyped and, you know, they're not going to sell very many of them this year. And, unfortunately, it includes a federal tax subsidy of $7,500, which I think is - you know, for a nation running trillion-dollar budget deficits, why are we paying people to buy this thing? It's a little nutty.

CONAN: Well, it - we own the company, so I guess we're - it's in our interest to see it succeed.

Mr. INGRASSIA: Yeah, we do. But why should we pay twice?

(Soundbite of laughter)

Mr. INGRASSIA: If you know what I mean.

CONAN: I get you. Let's see if we can get some callers in on the conversation. We're talking with Paul Ingrassia, the author of "Crash Course: The American Automobile Industry's Road from Glory to Disaster." He's talking about the beginning of a turnaround. 800-989-8255. Email: talk @npr.org.

Alex is with us from Holland, Michigan.

ALEX (Caller): Hello. I've had - my family's had three luxury cars in our time with vehicles, and - two Chryslers, one Ford. The Ford was my car when I was a kid, and I ran it into the ground pretty good. And it just kept going until U was about 20 years old. Then it finally died on me. We just have a new Chrysler, and it is a very, very good car, our older Chrysler. I wouldn't buy that one ever again.

(Soundbite of laughter)

CONAN: And when...

ALEX: So I've seen...

CONAN: ...you needed the - and you bought the Chrysler?

ALEX: We bought - we got a new Chrysler. And we gave them a second chance after the first one, and I'm shocked. It's an amazing vehicle. I haven't had a problem with it since. The other one, we had electrical problems after the first week.

(Soundbite of laughter)

CONAN: All right. Well, that may have been the old Chrysler. Maybe this is...

ALEX: Exactly. It was an older Chrysler, and for a while, they slipped up. And now, they're doing good. I think they can compete now.

CONAN: All right. Alex, thanks very much for the call.

ALEX: Thank you.

CONAN: Appreciate it. And Chrysler is the - well, of course, Ford did not go into bankruptcy and did not accept federal money. GM and especially Chrysler did. Is Chrysler going to make it, do you think?

Mr. INGRASSIA: Yeah. I really think so, actually. You know, Sergio Marchionne, who is the CEO of both Fiat and Chrysler - Fiat is really the controlling -well, the UAW has more shares in Chrysler. But under the ownership structure, really, Fiat has managerial control. And, you know, they're bringing a lot of discipline to the company. Quality is improving. And some other products look very good. The Chrysler 300 sedan and Chrysler - Fiat is actually reintroducing the Fiat brand with a cute little urban - two-seater urban car - well, it's four seats, but it's really two - called the Cinquecento, or the Fiat 500. It looks terrific.

CONAN: And let's go next to Mark, and Mark's with us - calling from Detroit.

MARK (Caller): Yeah. Hi. I'm thrilled to be on the show. Thank you very much. Well, it's pretty dire here, so - in the Detroit area, so we're hoping that they have turned it around. We are looking to a change in one of our vehicles or probably - I've always wanted a Jeep. But chances are, it's going to be my wife's vehicle. So I think we're looking at Ford. Traditionally, over the last 10 years or so, we've really - we've bought Toyotas. But, you know, my wife bought them years before that and swore by them up and down. But we haven't been as impressed lately.

And, you know, coming from Detroit, buying Toyota was, you know, kind of - not necessarily the most popular thing at first. But, you know, I remember the days when Iacocca was saying buy American, buy American. But his number one seller was the minivan that was built in Canada, and it had a Mitsubishi engine. So...

(Soundbite of laughter)

Mr. INGRASSIA: Right.

MARK: ...it's kind of hard to really understand the old buy American thing, I think.

CONAN: Mark, so if you're going to buy a Ford for your wife's car, which one are you considering?

MARK: I know that she really likes the Flex. We have a buddy that - he's in middle management at Ford. Unfortunately, we can't get a discount. But they have a Flex, and we're seeing more and more of those around. So we're probably going to look at that. I know it doesn't take Flex fuel, but...

(Soundbite of laughter)

MARK: ...you know, that might be a little - that was a little confusing at first, but it seems like a good car, you know.

CONAN: Paul Ingrassia, what's the - what are the reviews like on the Ford Flex?

Mr. INGRASSIA: You know, it has been a good car. I mean, I think the one thing that the Flex might have an issue with is that, you know, it's - the Flex is basically a three - has three rows of seats. It's sort of a part-minivan, part-SUV. And now that Ford has taken the Explorer and made that less of an SUV and more of a crossover vehicle, those vehicles look fairly close together in a market place. And you got to wonder if there's room for both of them in Ford lineup long term.

CONAN: Well, Mark, good luck with your - with whatever it is you decide to go with.

MARK: Thank you.

CONAN: We're talking with Paul Ingrassia, former Detroit bureau chief for The Wall Street Journal. He visited the 2011 Detroit International Auto Show, and came away maybe thinking the United States industry is on its way back. You're listening to TALK OF THE NATION, from NPR News.

And let's see if we can go next to - this is Craig. Craig with us - another caller from Detroit.

CRAIG (Caller): Yeah. I'm an automotive engineer, and I worked with, obviously, a lot of automotive engineers. And it seems like many of them drank the Kool-Aid. They're constantly complaining about the unions and so on and so forth, and their labor problems. But, I mean, the - when it comes down to some numbers I've seen, the American auto company was only paying a couple dollars more per hour for their labor costs. They don't really have such a disadvantage as they would like to think, a lot of times. Folks would happily have paid their employees whatever it took to build the Prius, if they had a Prius.

But the executives are always planning for only 18 months ahead for their stockholders to turn a profit, versus Toyota and other companies will plan 10 years out for the health of the company and their employees. And in the end, they want to sit there and blame the employees. And the reporters seem to (technical difficulties) all the time, that their labor costs are such a problem. The American Auto companies have - many times, have come up with wonderful products. And then they spend seven years sitting on it instead of redesigning it and keeping up with the market trend, and then complain they don't have anything to compete again.

CONAN: Paul Ingrassia, I think the consensus a couple of years ago is there was plenty of blame to go around in Detroit.

Mr. INGRASSIA: Yeah. I think there was. You know, it is true that the wages that they - Detroit pay were really are about the same as the Japanese, German and Korean factories who built - that build cars in these countries - in this country. But the difference was, is that there were lot of restrictive work rules and there was basically no-deductible health care plans, and that sort of thing.

And essentially, those - that kind cost burden is one of the factors, not the only factor, but one of the factors why some of the Detroit products - for example, years ago the Ford Taurus almost died because Ford didn't invest money in renewing the Taurus. So, yeah, there was plenty of blame to go around, period.

CONAN: And it's interesting. You come to the conclusion that it is too early to judge yet that Detroit has, in fact, learned its lesson as, you said earlier, has learned to tell the difference between a comeback and a victory.

Mr. INGRASSIA: Well, that's right. I mean, you know, this has happened before. Don't forget, in the early and mid-'90s, the Japanese were very slow to catch onto the SUV boom. Detroit earned record profits throughout the mid-'90s and the late 1990s on the backs of SUVs and pick-up trucks and all that sort of thing. And then they just blew it in the early years of the new century, sadly, with sort of sliding back into their own ways. So only time is going to prove whether they really have gotten the message. Well, let's hope so, but only time will tell.

CONAN: And you also suggest that given what's happened so quickly in the auto industry - again, after the loss of many factories and many jobs and many dealerships. But nevertheless, this is something that maybe other industries -indeed, the country - can learn from.

Mr. INGRASSIA: Well, you know, I think that's really the interesting point. If you look at, you know, two years ago, Neal, it seemed that Detroit's problems were absolutely intractable. And then came a hard-nose dose of, first of all, a big crisis, and then a hard-nose dose of political will, frankly, from an administration that, you know, I was a little surprised that the Obama administration had this much will and imposed a tough-love solution.

So if we can, you know, at least address the problems of Detroit with promises, the promise of improvement, or even a cure, why can't we imply the same tough-love methods to the federal budget deficit and the whole entitlement structure that we have in this country that has helped produce that deficit, and also to the public employee pension plans that are threatening to bankrupt many of our states? Those are huge problems that will swamp this country if they're not addressed.

CONAN: And they are, of course, viewed as intractable right now, maybe as intractable as Detroit's problems were a couple of years ago.

Mr. INGRASSIA: Well, exactly. There was a very interesting op-ed piece a couple of days ago in The Wall Street Journal by a law professor at the University of Pennsylvania suggesting that Congress should pass a law that allows states to declare bankruptcy. And, you know, it's not a bad thought. And there's no way that GM and Chrysler would have made it through this restructuring without the ability to renounce contracts and, you know, to renounce their financial obligations that they have accumulated over the years that they could not afford to meet.

CONAN: Well, Paul Ingrassia, thanks very much for your time today.

Mr. INGRASSIA: Thanks, Neal.

CONAN: Paul Ingrassia, the author of "Crash Course: The American Automobile Industry's Road from Glory to Disaster." You can find a link to his Wall Street Journal piece on "The Great Auto Restructuring" at a link in our website. Go to npr.org, click on TALK OF THE NATION.

Tomorrow author, Maxine Hong Kingston on confronting aging. She just turned 65.

This is TALK OF THE NATION, from NPR News. I'm Neal Conan, in Washington.

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