RECKONING to REVIVAL: PART I How workers rebuilt the U.S. auto industry
RECKONING to REVIVAL: PART I
How workers rebuilt the U.S. auto industry
Automotive News | December 24, 2013 – 12:01 am EST
— UPDATED: 12/24/13 6:07 am ET
Editor’s note: The U.S. auto industry has come full circle, from boom to bankruptcy to boom. Detroit’s road from reckoning to revival was shorter than expected. This 4-part series examines how workers defied history and why Detroit’s new strength is embodied in Chrysler’s reborn Jefferson North assembly plant in Detroit.
Privately, Iacocca fretted that Jeep dealers couldn’t sell all 180,000 Grand Cherokees the factory could produce, so he ordered up a Dodge version to hedge his bets.
The Dodge model never saw the light of day.
"We kept stalling it and stalling it and stalling it, and he’d get madder and madder and madder," recalled Bob Lutz, president of Chrysler in those days. "And then the Grand Cherokee launched and almost immediately the plant was sold out."
The upscale Jeep ushered in the golden era of the SUV, catering to affluent baby boomers looking for a sense of adventure on their commute to the shopping mall and soccer sidelines.
By 1995, three years after Jefferson North opened, the plant was building more than 300,000 Grand Cherokees a year and Chrysler was booking record profits.
Said Lutz: "You talk about a money machine!"
The fall that followed in 2008 had been a long time coming, yet no one was prepared for its severity.
High-profit SUVs like the Grand Cherokee made Chrysler, General Motors Corp. and Ford Motor Co. the richest automakers on the planet, earning $72 billion from 1995 through 1999, more than the combined profits of all the other carmakers in the world, according to consultant AlixPartners LLP.
That enabled car companies to award generous contracts to workers and encouraged them to pour development dollars into ever-larger, fuel-thirsty SUVs, while ceding the market for cars to Asian and European automakers.
By the turn of the century, the fallacy of that strategy began to be exposed as runaway labor costs and rising gasoline prices sapped the Detroit Three’s strength and sent their combined profits plunging to $13 billion from 2000 through 2004, while Asian and European automakers made $125 billion.
"You could see this train heading toward a cliff 20 years before it happened," said John Hoffecker, managing director of AlixPartners, who worked with GM on its reorganization. "You knew it was going to happen sometime. You just didn’t know when."
The plunge came when Lehman Brothers collapsed in September 2008, taking the global economy with it. Detroit was running out of cash and would soon be begging Washington for a bailout.
Though GM and Chrysler were in the worst shape, the smell of death was in the air for all three American automakers. "If you let GM and Chrysler go down," said Lutz, who by 2008 was vice chairman of GM, "Ford would have been next."
Now, after the fifth anniversary of Lehman’s fall, the U.S. auto industry has come full circle, from bankruptcy to boom.
The U.S. government on Dec. 9 sold its remaining shares of GM stock, which reached an all-time high this month. The next day, GM named its first female CEO, Mary Barra, daughter of a GM die maker, who rose from the factory floor to the executive suite.
Detroit’s road from reckoning to revival was shorter than almost anyone imagined. The wreckage left GM and Chrysler wards of the state and forced Ford to hock the founding family’s name — the actual Ford oval — to get lifesaving loans. From that emerged three growing companies that earned $55 billion in the past three years and are selling more vehicles than at any time since 2007.
Back in 2006, when U.S. auto sales boomed, GM, Ford and Chrysler managed to lose money on every model they sold because of their crushing costs, according to the Center for Automotive Research. "That’s the big change," said Kristin Dziczek, analyst for Ann Arbor, Mich.-based CAR. "Selling fewer cars, making more money."
Those fatter profits come from leaner companies that radically restructured, reducing debts and employees, while paying their newest workers half what the veterans get.
The Detroit Three also overhauled their lineups to field their best cars in a generation, which now command higher prices than formerly formidable foreign offerings.
Ford’s fashionable Fusion, whose looks draw comparisons to Aston Martin, has an average price of $27,444, which exceeds the Toyota Camry by $3,251, according to researcher Kelley Blue Book.
"It’s flipped," marveled Lutz, 81, who served as a senior executive at all three Detroit automakers over the last half-century before retiring in 2010. "All of a sudden, the Japanese are behind."
The lessons of Detroit’s downfall and recovery resonate for all American industry. It’s a cautionary tale on the futility of believing size equals strength.
And it’s the redemptive story of rediscovering the basic joys of design and ingenuity that originally inspired the industry’s founding fathers.
"What happened to Detroit was emblematic of what has happened to American industry generally," Lutz said. "There was always this exaggerated sense of the importance and power of American industry, whereas in fact American industry was, decade after decade, getting weaker and weaker."
Detroit’s new strength is embodied in Chrysler’s reborn Jefferson North Assembly Plant. The Jeep factory has gone from barely breathing to bursting at the seams. Its future was in doubt when it closed during Chrysler’s 2009 bankruptcy.
Since then, employment there has more than tripled to 4,500, from fewer than 1,400 when Chrysler went bankrupt, and production has more than quintupled to 325,000 models this year, from 60,584 four years ago. It spits out Jeeps 20 hours a day, seven days a week and still can’t keep up with demand for the Grand Cherokee.
Sales soared 21 percent for the hot model last year and are up 15 percent more this year through November.
Redesigned during the crisis into a lithe, fuel-efficient SUV, the Grand Cherokee is made only at Jefferson North, which exports it to 126 countries, including China, where a fully loaded model sells for $250,000. Analysts estimate Chrysler earns an average of $10,000 on each one, making Jefferson North possibly the single most profitable auto factory in the world.
The plant’s prosperity is built upon a virtuous confluence of low labor costs, high productivity and a luxurious model that can command prices north of $60,000.
9 profitable quarters
The success of that facility is a key reason Chrysler has had nine profitable quarters in a row and 44 consecutive monthly sales gains in the United States, where deliveries rose 16 percent in November and are up 9 percent through this year’s first 11 months.
Chrysler said it expects to make as much as $2.2 billion this year.
"Any car company in the world would be happy to have that vehicle," said Scott Garberding, Chrysler’s top manufacturing executive until parent Fiat S.p.A. promoted him to purchasing chief in September, "and to have that plant."
How did Jefferson North, and the Detroit Three, come back so quickly? Look closely and you find it’s not about George W. Bush, Barack Obama or any CEO. It’s about Richard Owusu, Jason Ryska, Tyyonna Clark and Napoleon Wright. This is their story.
The Detroit 3’s fatter profits these days are coming from leaner companies that radically restructured, reducing debts and employees, while paying their newest workers half of what veterans traditionally received.
Photo credit: BLOOMBERG
Buckle up: The Potholes stay where they are
On a brisk January day in 1992, Chrysler’s then-President Bob Lutz slid into the driver’s seat of the first Jeep Grand Cherokee to roll off the assembly line at the new Jefferson North factory.
Riding shotgun was Detroit’s colorful and cantankerous mayor, Coleman A. Young. They were on their way to make a showstopping introduction at the Detroit auto show, but it would not be a smooth ride.
As they turned onto potholed Jefferson Avenue, Lutz said: "You know, some of these streets really need attention, your honor."
Young laughed and said, "What, you don’t like them potholes?"
As Lutz struck another road divot, he responded, "Who would?"
Young laughed again, Lutz recalled, and said, "Well, you better learn to love ’em, because they’re staying right where they are."
Chrysler had hit a few potholes itself on the way to this triumphant moment. After a controversial government bailout in 1980, Chrysler was the feel-good corporate turnaround of the decade.
Lee Iacocca, now 89, became a folk hero by paying off those U.S.-backed loans early and for his brash TV commercials pitching Chrysler’s K-cars and minivans. "If you can find a better car," Iacocca would bark, "buy it."
Chrysler Chairman and CEO Lee Iacocca first appeared in a commercial for the automaker in 1979 and often compared the company’s cars directly with Japanese automakers. "If you find a better car," Iacocca was fond of saying, "buy it."
Photo credit: CHRYSLER
Then its $1.52 billion acquisition of American Motors in 1987 almost bankrupted the company because that big purchase came before the stock market crashed.
By 1991, the U.S. economy had tumbled into recession, Chrysler’s operating losses reached almost $2 billion and the company ran so low on cash it had to sell a special issue of stock at the meager price of $10 a share to keep the lights on.
For Iacocca, the Grand Cherokee had been the secret prize inside AMC. Already under development then, Iacocca could see the Grand Cherokee’s potential to be a huge moneymaker and turn around Chrysler’s fading fortunes.
AMC had designed it to be a replacement for the small and boxy Jeep Cherokee, which was still selling well.
Chrysler changed course and decided to keep building the old Cherokee and make the new Grand Cherokee more luxurious and high-priced to take on Ford’s hot-selling new Explorer SUV.
Instead of equipping the Grand Cherokee with a sensible six-cylinder engine as AMC intended, Chrysler found a way to stuff a brawny V-8 under the hood. With gasoline selling for little more than $1 a gallon, all that power "made the thing unbelievably desirable," Lutz said.
‘Golden Goose egg’
The record profits that followed made Detroit drunk and dependent on big gas guzzlers.
"SUVs, in particular, and pickup trucks became the golden goose egg for the automotive industry in the U.S.," said Hoffecker of AlixPartners. "There was lots of money to be made, but the challenge you could see underneath the water was that the money was being made on a very small set of products."
While Detroit was distracted by the SUV craze it created, Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. expanded their North American manufacturing footprint to produce a parade of high-quality cars.
The new Japanese plants paid workers less than the Detroit Three and had the benefit of mostly young employees, who had lower health-care costs and smaller retirement expenses. That created a yawning cost gap between the American and Asian producers, giving the Japanese a $2,500 per car cost advantage.
With Detroit diverting development dollars into ever-larger SUVs and opulent pickups such as the $50,000 Lincoln Blackwood, domestic car offerings withered.
The finance staffs at the Detroit Three took a dim view of wasting money designing cars consumers didn’t want to buy.
The Ford Taurus, the best-selling car in the United States in the early ’90s, last topped the charts in 1995. No Detroit car has ranked No. 1 since.
"That’s when you saw the rise of the bean counters," Lutz said. "They quite naturally adopted the philosophy of, look, the Japanese produce way cheaper than we do. The only way to offset that is ever more radical cost reduction."
That led to some of the worst cars Detroit ever produced.
"There was a lack of exterior ornamentation, non-glossy paint jobs, poor fit and finish, depressing interiors, cheap cloth," Lutz said. "People would legitimately say, ‘Hey, I look at Japanese and European cars and they’re beautifully done. I open the door to an American car and it’s all crap. Why should I buy it?’"
Yet as long as gas prices remained low and SUV sales remained high, Detroit didn’t worry about its festering car problem.
When BusinessWeek magazine wrote a 1997 cover story on Detroit’s shrinking share of the car market and growing dependence on SUVs, GM Chairman Jack Smith told the authors: "That’s the worst story I’ve read all year."
By 1994, two years after the first model rolled off the line, Chrysler was adding a third shift of workers at Jefferson North so the plant could build Jeeps around the clock.
Mark Harrington, fresh out of high school and working as a cook at a cafeteria-style restaurant, got a call from his father, who worked at Jefferson North. Management had asked workers to make referrals on new hires. Did Mark want in?
"My dad had two cars and a house and, to me, he was making a good living," said Harrington, 37. "When he asked, I said, ‘Do I want a job making the same money as you? Hell, yeah!’"
Similar enthusiasm greeted Lutz and Coleman Young as they drove that fire-engine red Grand Cherokee up Jefferson Avenue in 1992. To pass the time between potholes, they swapped war stories.
Young, the gray and aging mayor who died five years later, had been one of the famous Tuskegee Airmen in World War II and Lutz, Hollywood handsome with a square jaw and silver shock of hair, had been a Marine fighter pilot in Europe during the Cold War. For fun on weekends, Lutz still flew a Czech-built Aero Vodochody L-39 Albatros fighter jet over the skies of Detroit.
‘Looking at the sky’
Finally, they reached the front steps of Cobo Hall, where a crowd of journalists and gawkers at the Detroit auto show awaited them. Lutz engaged the four-wheel drive, dropped into low gear and left the road to begin the climb up the stairway to the entrance.
"Pretty soon we’re at a 45-degree angle and looking at the sky," recalled Lutz, who compared the sensation to taking off in his fighter jet. "As we’re basically laying on our backs, going lump, lump, lump, one step at a time, hizzoner shouts, ‘Ho-ly s–t!’" A moment later, on cue, they smashed through a glass wall into the hall and Chrysler’s hot new Jeep had taken wing.
Off-road: The SUV’s ride from peak to valley
After soaring in the 1990s, the Grand Cherokee came crashing to earth in the new century. Car buyers began steering clear of SUVs as gasoline prices rose and Al Gore started sharing inconvenient truths about global warming.
Making matters worse, the Grand Cherokee drew the flinty attention of Chrysler’s finance people, who required each new model to be developed for 20 percent less than its predecessor to try to make money.
That left the early 21st century version with a hard-plastic interior, stripped of chrome and decidedly downscale. By 2005, as work began on a redesign, sales had collapsed for Chrysler’s franchise player. "We lost our way," said Ralph Gilles, now 43 and the company’s chief designer. "So we took that on the chin and said, ‘OK, scrap everything. Let’s wipe the slate clean.’"
Gilles was the man for the job. Suave, slim and stylish, the designer had the hot hand in Chrysler’s studio, having scored a hip-hop hit with the Chrysler 300C, a bold American car embraced by rapper 50 Cent and compared to Bentleys. If anyone could navigate the Grand Cherokee back to glory, Gilles could.
As his lieutenants, Gilles enlisted Jeep design veteran Mark Allen, now 50, to style the exterior and former Mercedes interior designer Klaus Busse to upgrade the cheapened cockpit.
Busse, now 44, had most recently been crafting interiors for $100,000 Mercedes-Benz SL sports cars. He jumped to Chrysler in 2005 as part of an exchange with DaimlerChrysler AG, then the corporate parent of both Mercedes-Benz and Chrysler.
Chrysler’s uncertain parentage set a tense backdrop for the redesign of the Grand Cherokee. Daimler acquired Chrysler for $36 billion in 1998 and after nine tumultuous years of culture clash essentially paid Cerberus Capital Management LP $670 million in 2007 to take the American automaker off its hands.
As Chrysler descended into insolvency, Gilles attempted to keep designers focused. It wasn’t easy.
"All hell was breaking loose," he recalled.
Chrysler’s cavernous technical center in Auburn Hills, Mich., was emptying out.
More than half the workforce were either laid off or left. The building, which houses the design studios, took on an eerie quiet.
"It felt like an airport right before it closes at midnight," Gilles said.
The threat of Chrysler’s collapse was particularly painful for the Grand Cherokee designers because they’d come so far.
They had crafted a Jeep that looked like it had hit the gym, transformed into a trim, fit athlete. This lighter SUV was also better on the inside because Busse had won the battle with the suits to get more money — not less — to redecorate the interior.
The seats were trimmed with double-stitched leather, while the dashboard was wrapped in cowhide, a first for Chrysler.
That budget breakthrough came after a car reviewer compared the quality of Chrysler’s plastic dashboards to a cheap, Chinese-made water pistol. When Chrysler’s then-CEO Tom LaSorda read that, he told Gilles: "Go. Change the interiors."
Allen, a Jeep history buff, adorned the exterior with subtle references to the brand’s storied past, such as the outline of a World War II Jeep etched into the headlights.
‘Arsenal of democracy’
That olive-drab little Jeep remains an enduring symbol of the Good War. For Detroit, it is a touchstone in its hallowed role as the "Arsenal of Democracy," building tanks, bombers and Jeeps that helped win the war. Willys-Overland, later acquired by AMC, and Ford built 645,000 Jeeps for the U.S. Army during the war.
Official military contracts called it a general purpose vehicle, or GP, which was slurred together to create the name Jeep. The seven-slot grille and high wheel arches on the Grand Cherokee are an homage to the rugged roustabout.
"That original Jeep is the thing that replaced the horse," Allen said.
The thought of losing all that history — not to mention their jobs — had the designers despondent. "Every day, the headlines were worse," Allen said.
As the bailout debate raged in Washington and car sales collapsed, Gilles could see designers losing heart.
"We had kinda run out of money, run out of steam and started not believing in ourselves anymore," Gilles said.
By the time Chrysler tumbled into bankruptcy on April 30, 2009, Gilles and his designers had almost completed what they considered the best Grand Cherokee yet. Now its future was in doubt.
Tom LaSorda, vice chairman and president of Chrysler, left, and Robert Nardelli, incoming CEO of the company, right, with UAW President Ron Gettelfinger, center, during the "The New Chrysler: First Day" event at the company’s headquarters in Auburn Hills, Mich., on Aug. 6, 2007. Chrysler had just named Nardelli, former CEO of Home Depot, as its new CEO, demoting LaSorda, after new owner Cerberus took control of the automaker.
Photo credit: BLOOMBERG
Recalculating: Failed talks and an Italian wedding
By August 2008, the situation was getting desperate.
The Detroit 3 were burning through billions every month. GM and Chrysler were running out of time.
Chrysler’s new owner, Cerberus Capital Management, was a New York private-equity firm named for the three-headed hellhound in Greek mythology that guards the gates of the underworld.
In its first — and last — foray into automaking, Cerberus was feeling the heat of a hell of its own creation. It was looking for an exit strategy.
Chrysler President Tom LaSorda, an affable Canadian with an impish grin and a blue-collar background, was deputized to conduct "synergy studies" to find another company to pair up with the ailing automaker.
LaSorda had been Chrysler CEO in the waning days of Daimler ownership and his climb to the pinnacle of the company was a triumphant moment, if short-lived.
Seeking a savior
He grew up in a small house, one of nine siblings, across the Detroit River in Windsor, Ontario, where his father built minivans in the Chrysler factory that could be seen from his front porch.
Now LaSorda was second banana to Bob Nardelli, the well-dressed, smooth-talking former General Electric Co. and Home Depot Inc. executive Cerberus had installed as CEO in August 2007.
Nardelli, recognizing LaSorda knew the car business better than he did, asked him to find a savior for the automaker.
Initially, LaSorda sought out Nissan-Renault CEO Carlos Ghosn and Fiat’s Sergio Marchionne, two European car bosses looking to grow in the United States.
Talks petered out as the economy tanked and Chrysler’s needs grew more urgent and expensive.
So LaSorda turned to the company where he worked for 23 years before joining Chrysler in 2000: General Motors.
In late August, LaSorda convened a secret meeting with GM President Fritz Henderson to discuss a megamerger. Each company’s shrinking cash was already causing bankruptcy buzz.
Billions in savings
"The idea was how could we combine these two companies and create a big synergy," recalled LaSorda, now 59.
Joining forces could strengthen them and make them the largest auto company in the world — a title GM was losing to Toyota.
Bob Lutz, by then GM’s vice chairman and head of product development, worked with Henderson to identify how much money could be saved.
Said Lutz: "Fritz and I, being conservative, estimated at least $9 billion to $12 billion in savings in the first year."
The formula, as Lutz saw it, would be similar to the way Chrysler absorbed AMC back in 1987: take the best of what the smaller company has to offer and dump the rest.
At Chrysler, that meant keeping the Jeep line, the Dodge Ram pickup, the company’s top-selling minivans and its 300C large car.
"It would have meant making a lot of things go away," said Lutz, such as Chrysler’s vast Auburn Hills engineering center and its factories in the U.S. and Canada — and the workers inside them.
That wasn’t what LaSorda had in mind. He saw the companies remaining distinct and mostly intact, while saving billions by blending purchasing and back-office operations such as accounting.
These opposing viewpoints didn’t come into focus until news of the top-secret negotiations leaked in October, shortly after Lehman collapsed and the financial contagion was spreading.
With nothing left to hide, GM put its cards on the table. LaSorda was stunned. He saw thousands of factory workers like his father losing their jobs under GM’s Darwinian plan.
"They would have wiped out Chrysler," LaSorda said. "The only winners would have been General Motors and the banks. And the people at Chrysler would have lost. When it came to that, we just told them to get lost."
Lutz remains surprised at LaSorda’s rejection.
"Of course it would’ve become one automobile company. There’s no point in doing a merger and acquisition if you’re not going to consolidate, because you won’t save any money," Lutz said. "That’s how you make one successful automobile company out of two unsuccessful ones."
Instead, there were now three unsuccessful auto companies in Detroit, running out of ways to save themselves.
A month later, the CEOs of GM, Ford and Chrysler trooped to Washington to beg for a bailout.
They were ridiculed by congressional interrogators for everything from the gas guzzlers they produced to the corporate jets in which they flew down to request a government handout.
"Saturday Night Live" lampooned the hapless Detroit chieftains, with Darrell Hammond portraying Nardelli to peals of laughter when he had the CEO appear clueless in response to a question about how to produce fuel-efficient cars.
With Detroit a laughingstock, Fiat’s Marchionne quietly contacted LaSorda to renew talks.
Marchionne, now 61, was no longer interested in the small-scale deal they had discussed to sell Fiat 500 subcompacts in Chrysler’s U.S. showrooms.
Now he saw an opportunity to merge the companies and wanted to know how to proceed. LaSorda told him to send him a letter and he’d get it to the bosses at Cerberus.
On Dec. 28, 2008, Marchionne sent LaSorda a letter detailing "the terms by which we’d get engaged."
The offer came nine days after President Bush threw GM and Chrysler a $17.4 billion lifeline that would sustain them until President Obama expanded it to an $80 billion bailout.
For Chrysler, though, Obama had one big condition: It had to allow Fiat to take control in order to get its government-financed bankruptcy reorganization. The president was convinced Chrysler couldn’t survive on its own and Fiat was the only suitor.
Marchionne gained control of Chrysler without paying any money. Instead, he offered Fiat’s small-car technology and knowledge.
As LaSorda said, "You lose all kinds of leverage when the president of the United States of America says, ‘The only way you’re going to get money is if you find a partner who’s willing to step in.’ ”Sergio played that pretty nicely."
About this series:
Today: How U.S. workers rebuilt the U.S. auto industry
Wednesday: For Detroit 3, obstacles were closer than they appeared
Thursday: Recalled — insourcing workers from Detroit
Friday: Differential — the divide over wages and scenes of new life in Detroit
Analysts estimate Chrysler earns an average of $10,000 on each Jeep Grand Cherokee assembled at a Detroit plant, making it possibly the single most profitable auto factory in the world.
Photo credit: CHRYSLER
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