By on June 18, 2010

To say that the auto industry has had a rough several years would be an understatement of epic proportions. The bailouts of GM and Chrysler dragged many of the industry’s challenges into the open, and the dramatic rescue effort brought an unprecedented level of public awareness of long-festering problems with Detroit’s business model. Here at TTAC, these troubles have provided much grist for our discussions, which tend to focus on the product, business and customer care factors. But behind the decades of Detroit’s weak products and poor business practices, lies a political-economic narrative that tends to be left out of the discussion. In End of a Dream or The Great Auto Crash: An Inside Story, economist William Vukson fits the great sweep of macroeconomic policy since Richard Nixon into a slim volume, and explains Detroit’s dramatic collapse in terms of trade and fiscal policy rather than, say, Detroit’s “Deadly Sins”.

Needless to say, this is something of a departure from standard TTAC analysis, which tends towards product-driven explanations for Detroit’s collapse. The temptation to see GM and Chrysler as the anti-Horatio Alger stories of our times, in which good companies make bad and fall from riches to rags as a pure function of the free market, is undeniable. And if The Great Auto Crash has a shortcoming, it’s that it largely ignores Detroit’s relationship with the consumer in favor of Detroit’s equally dysfunctional relationship with Washington DC and the globalizing economy. But Vukson isn’t an industry specialist (his previous work includes consulting on the Euro launch, and books on currency, and macroeconomics), and his tale of currencies, politics and international relations no more completely explains  the auto crash than a purely consumer-driven explanation. As a backdrop to Detroit’s failure in the marketplace, however, The Great Auto Crash is indispensable.

It is not for nothing though, that economics is widely referred to as “the dismal science.” After a promising preface, Vukson dives into a defense of the Federal Reserve policies of recently disgraced former chairman Alan Greenspan. Without the benefit of Vukson’s economic narrative, this seems like a something of a non-sequitor, as it touches only briefly on auto industry-specific details. Keep reading though, and Vukson’s narrative unfolds in an epic sweep, starting with the Cold War policies of Richard Nixon, all the way through the Bush-Obama industry bailout.

After detailing the challenges faced by auto industry analysts attempting to read a US car market that has collapsed from nearly 17m units of annual sales to about 10.5m units, Vukson sets the way-back machine to the early 1970s, when the US auto industry’s dominance was first challenged by foreign competitors and pressure from rising inflation, OPEC and safety advocates like Ralph Nader.  Nixon, argues Vukson, inherited an auto industry that faced little external pressure, and was focused largely on balancing economic gains between the union and OEM pricing power. But the first cracks were already beginning to show. The US market, long closed to competition, was opened to key cold war allies like Japan and Germany. Vukson holds that this decision, though motivated by geopolitical rather than economic concerns, would have one of the more lasting impacts on the US industry.

These foreign competitors were not expected to ever replace the Detroit firms, but were rather seen as curiosities that would soon go the way of French and Italian brands, as well as the many British sportscar makers of the post-war import boom. And though he acknowledges that Detroit’s quality was in a sorry state by the mid-1970s, he avoids drawing the conclusion that superior quality alone accounts for the rise to prominence of German and Japanese automakers.

The Ford administration’s resolution of the first OPEC energy crisis, argues Vukson, allowed Detroit to continue a “business as usual” approach that ignored the potential for a second energy crisis. When the second energy crisis hit, Detroit was left vulnerable by its own complacency, which was enabled by the “false hope” of the Ford administration. When energy prices doubled between 1978 and 1980, the imports which were only allowed market access for geopolitical reasons, suddenly found themselves holding the ball with an open path to the end zone.

Much of Auto Crash is devoted to changes that came about in the Reagan administration, particularly the inflation-busting experiments of Fed Chairman Paul Volcker. With the auto industry already struggling under pressure from OPEC and safety advocates, Volcker’s decision to halt runaway inflation with tight monetary policies sent interest rates soaring above 18 percent, and made the dollar appreciate considerably against the Japanese Yen. Vukson writes:

It was not necessarily a fact that the Japanese made more fuel efficient cars, hence the American consumer was focused on hedging the increasingly erratic prices at the pumps; but it was more a testament to the undervaluation of the Japanese imports which was made possible by tight Fed money policies to the point where these vehicles were just too good to pass up or, at least experiment with.

Vukson does acknowledge, however, that Detroit’s complacent response to the first energy crisis resulted in crude, uninspiring products that were rushed to market when the second energy crisis hit. Was this complacency the original sin? Would the Japanese automakers have made the gains in this period that they did had the Dollar-Yen relationship not spun out of balance? Vukson’s implied answer to both of these is no. In any case, he argues that the more crucial decision in the Reagan era was not Volcker’s inflation-busting per se, but the government’s response to growing pressure from Japanese automakers.

Though Reagan helped break OPEC’s power and check inflation, the final leg of his economic policy would prove to be the most disastrous yet for the Detroit firms. In the effort to secure currency concessions from Japan, the Reagan administration demanded import restrictions, and more fatally, demanded that Japanese firms produce more of their vehicles in the United States. Given the industry’s relatively rapid transition from serving a protected market dominated to the Detroit 3 to a far more globalized, competitive environment, this would prove to be the final nail in the protectionist paradigm.

With consumers already tempted by more-efficient, higher-quality Japanese cars, the rise of transplant manufacturing broke Detroit’s long-unanimous support in congress. The transplants’ decision to build plants in non-union Southern states not only helped maintain their cost-competitiveness, it divided the American body politic to the point where protectionist policies of the past had no chance of being exhumed, and enabled the loud opposition to the Bush-Obama industry bailout. The NAFTA free-trade deals of the Bush I and Clinton administrations further complicated the political perspective on Detroit, especially when Detroit became a major beneficiary of cheap Mexican labor. Low oil costs were the major government priority in terms of Detroit-friendly policies, and once again it allowed complacency that led to the short-term SUV boom.

With quality improving thanks to intense transplant competition, yet another problem was building for Detroit by the time Bill Clinton took office. Cars were lasting longer and car ownership was outstripping the population, leading to concerns about the sustainability of the industry. With Alan Greenspan in charge at the fed, financial deregulation became the industry’s great hope for a sustainable future. Taking advantage of Greenspan’s low Fed rates to offer cheap loans and cheaper leases, the industry was able to revert to a more fashion-oriented business model than the pragmatic, fear-driven approach of the 1970s. This drove huge profits in fashionable segments like SUVs and luxury cars, as the industry convinced more and more consumers to trade in their vehicles after two to four years, despite the fact that they would now last longer than ever.

But the low rates that enabled this consumer debt binge was also combining with the rise of global free trade to hollow out the American manufacturing sector while hiding its effects in subsequent technology and real-estate bubbles. This, argues Vukson, is ultimately why GM and Chrysler collapsed just a few years ago. With collapse of the credit markets, the cheap loans and leases that kept the US market “sustainable” above 15m units were no longer available, causing the entire industry to collapse to its current level. Already staggering under legacy costs, and having never fully recovered from the OPEC/currency imbalance/transplant body slams, GM and Chrysler’s immune systems were unable to survive the correction that occurred in 2008 and 2009.

Of course, Detroit had no shortage of opportunities to turn itself around, most recently with the huge profits of the SUV era. Vukson tends to trace Detroit’s inability to capitalize on the good times in preparation for the bad to government policies like Alan Greenspan’s low interest rates, which he says caused Detroit to become complacent. And if you subscribe to a more free-market philosophy, it’s tempting to dismiss this analysis as apologia. This response, however, would be missing Vukson’s main point.

Though it’s interesting to dissect the decline of Detroit, and though focusing strictly on that single phenomenon requires more than just macroeconomic analysis, there’s a larger issue at play here. The final bankruptcy and bailout of GM and Chrysler were but symptoms of a larger issue, and one that has not been resolved by the bailout: drastically reduced demand for automobiles in the US. The bailouts and reorganizations at GM and Chrysler have helped these two firms adapt to a dramatically smaller market for new cars, but it will only have been worth it if future growth is still possible. Because of inertia in consumer perceptions (not to mention anger at the bailout), GM and Chrysler’s future depends more on a pick-up in the overall market than on major gains in market share (which never happen without a fight). But, says Vukson, financial “magic” was the key to the market’s “sustainability,” and now it’s gone with no obvious replacement waiting in the wings.

Will the market return to 15m or more units any time soon? It’s hard to say that Vukson is optimistic on this point. The only real options he leaves on the table are resisting calls for financial regulation and allowing the financial “magic” to continue, or “aggressive spending” to counter the industry’s decline, specifically in the area of green technology and improved production models. Neither of these options are particularly attractive, especially for free-market-oriented thinkers, but the alternative could be an industry stuck battling for a market that refuses to grow organically. From this perspective, perhaps a more fitting title for the book would be The Great Auto Correction. In any case, Vukson’s ability to condense decades of economic and political policies into a slim, easily-understood volume is of far more value than attempts to politicize his findings. As always, the truth is a complex thing, and The Great Auto Crash adds another valuable level of analysis for more product-oriented industry-watchers.

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23 Comments on “Book Review: The Great Auto Crash...”

  • avatar

    combining with the rise of global free trade to hollow out the American manufacturing sector

    There has been a typical recession decline over the past 3 years, but as of 2007 the American manufacturing sector was producing more than ever. What “hollow out” are you referring to?

  • avatar
    Gardiner Westbound

    Is Vukson paid by the word? He has produced a grand explanation for a problem that is far more easily explained.

    Arrogance cometh before the fall. The Detroit Three settled for good enough instead of striving for excellence. Their non-stop efforts to please Wall Street, maximize executive bonuses, and buy off the union bosses looked after everything that mattered, except product and customers. They engineered mean time to failure (MTTF) to coincide with warranty expiry, until consumers realized buying an Asian brand largely avoids shoddy quality, early failures, poor customer care and warranty disputes.

    A 2006 Business Week report said General Motors will increase its key parts MTTF from 130,000 to 160,000 kilometers coincident with the longer 2007 GM warranty, still well short of average 200,000 to 250,000 kilometer vehicle service life. It will take years to attain that standard, if ever. The cars are still nowhere near as good as the competition including Hyundai, Kia and Honda.

    Meanwhile Government Motors is spending billions of taxpayer dollars to persuade consumers they are the best. It’s the same old story, build crap cars and lie. It isn’t working. GM’s Canadian market share has slid to 12.1-percent from 23.1-percent in 2005. In 2000, it held more than 27-percent. Some say GM is fudging the numbers. It’s actually closer to 7-percent!

    • 0 avatar

      I don’t think Mr Vukson’s narrative precludes criticism of GM and Chrysler management. It provides context for Detroit’s mis-steps, but it certainly doesn’t excuse them.
      In any case, wordiness isn’t an issue. The whole book comes in under 100 pages, and it covers a lot of ground. There’s even a fantastic section of advertisements from the 1950s through the late 1980s, with analysis that ties them to trends and events in his narrative. Though TTAC readers might prefer a more management or industry-focused book, this makes for a great overview of the larger trends in government, trade and finance.

  • avatar

    Here is the other question – Detroit didn’t see any of the past three oil crises. Why? Oil comes from politically unstable places and for that and many other reasons is subject to volitile price moves.

  • avatar

    Mr. Vukson has his timeline messed up. VW was popular in the United States before the early 1970s – if I recall correctly, its U.S. sales actually peaked in 1970. Imports began making serious inroads during 1957-59. Their sales collapsed when the Ford Falcon, Chevrolet Corvair and Chrysler Corporation’s Valiant debuted for 1960, but sales were on the upswing again by 1965.

    As for the Reagan Administration negotiating voluntary import restriction agreements with the Japanese – I seem to recall both management (especially Lee Iacocca) and the UAW pushing heavily for these restrictions.

    • 0 avatar

      The VW Beetle isn’t mentioned once in the book. In terms of tracking import brands’ progress in the consumer psyche, that’s a bit of a milestone to miss.
      I don’t think there’s any argument that voluntary import restrictions were favored by Detroit. The then-Big 3 were less thrilled about the Plaza Accords which induced Japanese investment in transplant factories, but Honda and Nissan had already committed to US production by the time that agreement was reached. Ironically, Toyota was the only major Japanese firm that was literally pressured into transplant manufacturing (likely due to their conservative Japanese employment policy)… and we all know how that turned out.

    • 0 avatar
      DC Bruce

      I agree with you that is a serious omission. I am a great fan of the Beetle and its clever engineering. That a car designed in the 1930s could be functional into the 1970s is a great tribute to its designer. One of the things that the Beetle did was introduce Americans to cars with high assembly quality. The Beetle was a cheap car: it lacked many of the features that Detroit was touting as luxury features: automatic transmission, power steering, power brakes; electric window lifts; air conditioning. Yet it was better assembled, so that one didn’t feel that you were driving a “cheap” car. It was cheap to operate not just because it didn’t use much fuel, but also because it did not break down and was inexpensive to repair.

      The sad (for VW) fact is that, by the early 1970s, VW was very well established in the US market with a line of cars, all based on the air cooled, rear-mounted flat 4 engine: the Beetle, the small station wagon “squareback” and its “fastback” variant, the 2-seat Karmann Ghia and, of course, the Bus. These were all successful cars, perceived as high quality and reliable. Unfortunately, the limits of the air-cooled, rear mounted engine configuration in complying with increasingly stringent emissions requirements (and increasing consumer demand for air conditioning) were reached, and VW stumbled very badly in its transition to conventional water-cooled in-line engines. This happened just as Japan was getting better and more sophisticated at building cars for the US market. With a few exceptions, early-1970s Japanese cars were, appearance-wise, 3/4 scale interpretations of what Japanese thought American cars looked like. They were relatively crude — but reliable.

      It seems like what the author describes is the changing ecology of the business environment in which Detroit had to function. But the business ecology always changes — just ask IBM what that’s like. Which, in my mind is why, the real story is — and should be — how Detroit failed to adapt to these changes, not how the ecology of the car business changed over the years.

      Anything else is just excuses, AFAIC.

    • 0 avatar

      I think you’ve got that exactly the wrong way around.

      The Beetle was a terrible car, slow, noisy, amazingly thirsty and a real death-trap with swing axles and the pertol tank in front of the driver.
      Beetle sales declined rapidly after the “compacts” like the Dodge Valiant and Ford Falcon were introduced in the market (BTW, both those cars used less fuel than the Beetle).
      By the mid-60s VW had run crying into the arms of the West German government.
      The Rabbit/Golf, their first water-cooled car, was an outstanding success and made them the company they are today.

      And what about the J-cars ?  They were a very successful competitor to the European and Japanese competition.
      It was rotten cars like the Pinto, Vega and Omni that ruined Detroit’s reputation.

  • avatar

    as an aside, “The dismal science” is a phrase coined by Thomas Carlyle in a work called “Occasional Discourse on the Negro Question” wherein he advocates reintroducing slavery as he considers it morally superior to a capitalist market-oriented system.

  • avatar

    Volcker’s decision to halt runaway inflation with tight monetary policies sent interest rates soaring above 18 percent, and made the dollar appreciate considerably against the Japanese Yen.

    I remember 18 percent interest rates on cars, and I’ll say that it had a profound impact on car buying habits for my friends and family. It wasn’t in buying cheaper models….

    The shock of what you were paying for what you were getting caused a very intense interest in how long the car you were buying was going to last. In the past, you’d been able to buy a car and trade it in after 2 or 4 years. If you started having trouble with a car, you just dumped it and bought a new one. However, with these insane interest rates, that wasn’t going to happen. You were going to have to keep that car a loooooong time since the interest rate had you digging an equity hole faster than you could ever hope to fill it.

    People started actively looking for quality. You couldn’t buy your way out of car problems – you were going to have to live with them for a (shocking in those days) 60 months.

    Consumer Reports entered their heyday.

  • avatar
    DC Bruce

    Any discussion of the US car market is incomplete without a discussion of US population trends. Beginning with the late 1960s, the Baby Boomers entered into their car-buying years in increasing numbers. This certainly pushed the market, as the number of first-time car buyers grew rapidly. Now, as the Boomers move into senescence and death, the opposite is going to happen. The number of buyers of replacement cars is going to shrink.

    Which, in my book, is an argument for not keeping any car company on life support. Doing so just makes all of the market participants sick, with continued excess supply. I think the US market would have been healthier if Chrysler had been sold for scrap.

  • avatar

    Regarding “‘aggressive spending’ to counter the industry’s decline, specifically in the area of green technology and improved production models.”

    Medium term, hybrid and EV models will necessarily be experimental and creatively chaotic.

    Long-term, expect future EV vehicles to have far fewer components and fluids than current day internal combustion based cars.

    Add in stronger materials, better coatings, swappable main components, collision avoidance, precise MTTF sensors and future cars should have much longer lifespans.

    • 0 avatar

      I think you’re right – I think the transition to EVs will be similar to what the airlines went through when they transitioned from piston engines to jets and turboprops.

      Prior to jets and turboprops a plane like the Boeing 317 had 4 – 28 cylinder radial engines.

      Although reliable in flight, the Wasp Major was maintenance intensive. Improper starting technique could foul all 56 spark plugs, which would require hours to clean or replace. As with most piston aircraft engines of the era, the time between overhauls of the Wasp Major was about 600 hours when used in commercial service.

      I think increased service life and reduced mainaince will turn out to a huge factor in the adoption of EVs.

    • 0 avatar

      @jmo If you’ve ever seen “Who Killed the Electric Car” that film theorizes that one of the reasons GM was so eager to kill and crush the EV-1 was because of the threat to its parts and repair business.

  • avatar

    Never dismiss the multi-trillions of dollars diverted within the USA economy during the Cold War era while many of our economic competitors were sheltered under our “nuclear umbrella.”

    Not the only cause of today’s multitude of problems but can’t be ignored.

  • avatar
    Dr Lemming

    Haven’t read the book, but if he’s a fan of Greenspan and opposes financial regulation that suggests a pretty conservative economist. Even major Chicago School economists have reconsidered their “let the market work its magic” mantra.

  • avatar

    I may pick up this book to see how Mr Vuskin describes the car financing business of the last dozen years or so. Easy credit helped Detroit – their financing arms were their only profitable divisions for a while.

    Five years ago, any 1/2 brained financial analyst could see that a Toyota/GM balance sheet comparison was equivalent to a Switzerland/Zimbabwe credit rating comparison.

    Fast forward to ’08, the bubble blows. GM and GMAC (and its Housing ATM arm Ditech) circle the drain. NO ONE was going to lend to a GM (market cap 10 Billion) when there’s healthy competition down the road (Toyota, Honda) worth 4-8 times as much (each) – in a market that was contracting by ONE THIRD.

    The clean solution would have been to disappear one third of the market (GM/Chrysler) and let the others profit accordingly.

    • 0 avatar

      Clean for who? I’m pretty sure a massive midwest depression would have been real messy, even for Toyota and Honda…

    • 0 avatar

      Get rid of 1/3 of the market and sales have to go someplace. Actually, the most likely benefactor (I forgot to mention) of a GM/Chrysler liquidation would have been Ford. Once adjusted to no GM or Chrysler, others’ sales would have increased accordingly.

      The depression you (incorrectly) assume would have been mitigated by others’ sales increases.

    • 0 avatar

      The Depression would have come due to the collapse of the auto supplier industry that is tied to all the North American assembly plants. Ford can’t survive if Visteon, American Axle and others go down… and they would have gone down if Chrysler and GM were liquidated.

  • avatar

    I know that Ford did not take bailout money nor go C11 but it’s not just GM and Chrysler that lost market – and mind – share during the 70’s – 90’s. And it was not just those two who participated in the SUV boom or the easy credit financing. Ford was right there along side of them. Also in Chrysler’s case they did not have control of their own destiny from about 1998 onward. They might have ended up more like Ford than GM if they were able to pilot their own ship (and scrap Bob Eaton, but that’s another topic).

  • avatar

    So,..the book is recommended?

    I’ll hafta pick it up.

    I would recommend “the Reckoning” by David Halberstam.
    Thats a great read about the coming of the end of the US auto industry.It seems like lots of people saw this coming for years….and it was written in 1986.

    I wish Mr. Halberstam was alive today to see Toyota overtake GM.

  • avatar

    Flameded, it is beginning to look like toyota may not overtake gm after all. Many of the people that were sucked in by all of the hype are now starting to see things as they really are.

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