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Failure of Design

by The Editors

Car Guys vs. Bean Counters: The Battle for the Soul of American Business, by Bob Lutz (Portfolio, 256 pp., $26.95)

When I was born, one out of every two cars sold in the United States was made by General Motors. As the biggest corporation in the world, GM produced 10 percent of everything the United States made to win World War II. When GM CEO Charles Wilson was (mis)quoted as telling Congress in 1953, “What’s good for General Motors is good for the country,” some were furious but few doubted he knew what he was talking about.

Fifty years later, GM was in pieces on the floor, as were Ford and Chrysler. Despite rising sales after the trough of the early Eighties, costs and debt were so overwhelming that even a $17 billion loan from the Troubled Asset Relief Program in 2008 to GM and Chrysler couldn’t save them from looming bankruptcy (a humiliation that Chrysler had been spared once already by Jimmy Carter). A year later, President Obama ordered a government-supervised reorganization of both — which left Washington owning 61 percent of the company that once symbolized American free enterprise.

Explaining this decline and fall on a Gibbonesque scale is what Bob Lutz, GM’s former vice chairman, who left shortly after the government takeover, tries to do in his new book. Lutz is no Gibbon, and the story is already familiar to any reader of Paul Ingrassia’s Crash Course or Alex Taylor’s Sixty to Zero. But it’s good to be reminded again of just how America all but killed off its most important manufacturing industry — and how nearly every attempt to reverse the decline only made things worse.

Lutz started at GM in the glory days of the Fifties and Sixties, when its divisions produced classics such as the Pontiac GTO, the Buick Riviera, the ’55 Chevrolet with its V-8 engine (which sold in record numbers), and the Cadillac Coupe de Ville. GM designers Harley Earl and Bill Mitchell are Lutz’s archetype “car guys,” who understood how to create cars that were both innovative and appealing to the American public, and were built for every purse and purpose, as GM’s Pater Patriae Alfred Sloan once put it.

Then in the Seventies and Eighties, the accountant “bean counters” took over — including Lutz’s biggest bête noire, GM CEO Roger Smith. They understood numbers better than they knew cars. Steadily but inexorably, GM, like Ford and Chrysler, began to move in the direction of short-term profits instead of long-term vision and growth.

Yet as Lutz himself admits, the two forces that backed GM and the rest of the auto industry into a corner had nothing to do with beans. The first was Congress, with its decision in 1975 — in the shadow of an Arab oil boycott and a growing green movement — to impose Corporate Average Fuel Economy standards on cars sold in America, set at 18 miles per gallon by 1978 and 27.5 mpg by 1985. Overnight, the cars that had made GM’s reputation, and the sales numbers for the Big Three, became “gas guzzlers” that the companies couldn’t produce even if customers wanted them. All three scrambled to retool and redesign. Chrysler, already in trouble, tipped into bankruptcy. At GM, as Lutz describes it, the CAFE standards became the excuse for a disastrous change to front-wheel-drive designs. The result was a series of mediocre models that no one wanted to drive, let alone buy. But German and Japanese auto companies, living with higher gas prices for years, had entire fleets ready to go to market.

Suddenly cars by Volkswagen, Honda, and Toyota were no longer for oddballs but defined the mainstream. A race began for the sale of small and mid-sized cars, with America’s auto industry trying desperately to catch up, shedding factories and jobs along the way. When Roger Smith (the man Michael Moore chases after in his 1989 movie Roger & Me) decided that GM had to beat Toyota at its own high-productivity, low-cost game, he set up GM’s Saturn division, which proved a financial head-on crash.     

The CAFE madness continues to this day, of course, steadily tightening the screws on America’s car makers. In fact, it permanently skewed the auto market. It relegated the two- and four-door sedan market to the former Axis powers, but left light trucks like the Dodge Ram, Ford 150, and Jeep Cherokee exempt. GM, Ford, and Chrysler came to rely on rising sales of SUVs to remain profitable, because SUV buyers didn’t care how much gas the vehicles burned as long as they did the job and looked tough. The result was that, far from cutting back on oil imports, Washington’s policies expanded them. In 1973, they accounted for 35 percent of U.S. oil consumption; in the past decade, they have reached as high as 60 percent.

Even so, the Big Three could have remained profitable by dominating this strong if narrow domestic market, except for a second major factor. This was the unions, specifically the United Auto Workers. After World War II they and the Big Three developed an uneasily cozy relationship, as Lutz admits, with the UAW negotiating with one carmaker every three years for a contract that was the model for everyone else. The employee benefits in those contracts went steadily upward until 1990, when GM CEO Bob Stempel gave way on everything the UAW wanted, including zero-co-pay health insurance for workers and their families. Ford and Chrysler were forced to follow suit, even though the policy held all future profitability hostage to the cost of x-rays and hospital stays.

“In 2001,” Lutz writes, “I repeatedly asked those who were present in 1990 just what the hell they were thinking at the time.” It turned out GM’s “bean counters” had assumed that health-care costs had peaked, and would go down over the next decade. They turned out to be wrong as, Lutz asserts, they were so often wrong. Then came 9/11, followed by the 2008 financial panic, in which the mountain of debt became a landslide and General Motors found itself transformed into Government Motors.

As for the future, GM has put its faith in its electric Chevy Volt. Lutz mounts a spirited defense of the car, calling it “a shining testimonial to the company’s vision and willingness to accept large risk.” But that risk is cushioned by billions in loans from the federal government, which have yet to be repaid. In addition, there’s something bizarre in citizens’ paying a subsidy of $7,500 in tax credits on a car costing $41,000 made by a company that’s still partly owned by those same citizens.

Still, as Paul Ingrassia has pointed out, the GM bailout may have a silver lining. It forced the unions to claw back their mammoth benefits packages, which has enabled both GM and Chrysler to regain some control over their costs. A decade ago, employee wages and benefits accounted for a third of the cost of building a car; now they’re less than 10 percent. UAW workers still pay only 5 percent of their health-care costs, and pictures of Chrysler workers smoking pot on the job haven’t done much to reassure the public that Detroit is back. But it’s a step toward recovery.

The real test is whether GM and America’s other car companies can sell cars again. But sell to whom? Right now, U.S. sales are less than 20 percent of the world market, whose fastest-growing sector is China. The reigning king of world auto sales is Japan’s Toyota, which surpassed GM for the first time in 2007 (the tsunami has sent its numbers down this year, but that’s likely to be only a short-term problem). Meanwhile, analysts agree that South Korea’s Hyundai is today’s hottest car company, and that the man who most resembles Henry Ford in his drive and vision is Ratan Tata of India’s Tata Motors.

Lutz surely has it right: Car makers with a “passion for excellence” will always win out. It’s just been a long time since they spoke English.

– Mr. Herman is a visiting scholar at the American Enterprise Institute.

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