The late Sen. Daniel Patrick Moynihan used the term "defining deviancy
down" to describe the acceptance of behavior that was once deemed
intolerable. Now Detroit's car companies are defining disaster down.
In 1991, General Motors posted a then-amazing, full-year loss of $4.45
billion, and 10 months later CEO Robert Stempel was out. Last week, GM
reported a $15.5 billion loss for just one quarter, and GM's board this
week reaffirmed its support for CEO Rick Wagoner. GM's loss easily
eclipsed the quarterly loss of $8.7 billion announced by Ford just a
week earlier. As for Chrysler, pick a number. The company is owned by
private-equity firm Cerberus Capital Management, and thus its results
aren't public.
Whether all, or even any, of the three companies can survive has become
a legitimate question. In truth, no one knows for sure. But other
questions can be addressed with more certainty:
Should Detroit have seen this disaster coming? Yes. Gasoline prices
have been climbing steadily for more than three years now. The
Bush-Bernanke debasement of the dollar didn't do Detroit any favors,
because the dollar's collapse has contributed mightily to the soaring
price of crude oil.
But the Detroit Three stuck with a business model based on leasing SUVs
for way too long. The two things wrong with that model were, well,
leasing and SUVs.
The residual values on which SUV lease payments are based turned out to
be enormously inflated. With gas around $4 a gallon, the auto makers
can't resell leased SUVs, after they are returned by customers, for
anywhere near the price that the companies had assumed. Big write-downs
to reflect this "impairment" contributed to the recent
multibillion-dollar quarterly losses at Ford and GM, prompting the
Detroit Three to curtail or cease their leasing programs. Japanese and
European car companies are suffering leasing losses too, but they are
much less dependent on SUV leases than Detroit.
All this said, let's acknowledge that it's human nature to resist
changing behavior that has been successful, as SUVs were for two
decades. If Detroit is Exhibit A, then Exhibit B surely must be the
newspaper and magazine industry. It has been equally clear for most of
this decade that the business models of print publications, which are
based on selling advertising, were becoming as obsolete as big SUVs,
because advertising is shifting to the Internet.
Not many journalists saw this sea change coming, much less acted on it,
in their own business. The stock of McClatchy, one of the nation's
largest newspaper chains, has plunged from nearly $75 a share to around
$4 a share in the last three years, a 94% collapse that exceeds even
the 89% nosedive in GM's stock since the beginning of this decade. The
prices of other newspaper stocks have performed much the same.
Which one of the Detroit Three has the best chance of survival? My
assessment is Ford. Certainly the company's serial abuse of its Lincoln
brand contrasts sharply, and most unfavorably, with GM's progress in
reviving Cadillac. And Ford, like GM, must revamp its product lineup
quickly to emphasize smaller cars instead of trucks and SUVs. But
Ford's plan to transfer to the U.S. the fuel-efficient cars it has
developed overseas makes sense.
Meanwhile, GM has enormous structural challenges that Ford doesn't
face. The tab to assist the bankruptcy restructuring of Delphi, GM's
automotive components spinoff, continues to rise. GM added another $2.8
billion in Delphi-related charges in the second quarter, on top of $7.5
billion in Delphi charges taken already.
Meanwhile, GM'S financial services company, GMAC, continues to rack up
huge losses -- $1.86 billion in the latest quarter -- from its foray
into residential mortgages a few years back. The only silver lining
here for GM is that GMAC is now 51% owned by the unfortunate Cerberus,
so only about half of the losses hit GM's books.
Ford has moved more quickly to shed its money-losing minor brands,
Jaguar and Land Rover. But GM only recently -- and belatedly --
announced plans to explore selling Hummer. And it has a confusing
plethora of eight domestic brands, a relic from its glory days. While
the company has some very good cars, trying to market everything means
effectively marketing nothing.
Meanwhile, GM is burning through $1 billion of cash each month,
prompting the company's current scramble to raise $15 billion by
cutting more costs, selling assets or attracting new investment. This
capital has to be raised within months.
As for much-weakened Chrysler, the only questions are who will buy it, when and how.
- Should the federal government bail out Detroit? No. The recent
commitments of taxpayer dollars to lubricate the sale of Bear Stearns
and keep Freddie Mac and Fannie Mae afloat are bad enough -- especially
because Freddie and Fannie are being allowed to keep their bumbling
boards and management teams intact. But at least it could be argued
that a collapse of those companies would pose a broad risk to the
entire U.S. financial system. The risk that Americans would be
consigned to driving Hondas or Hyundais seems less threatening.
One suspects, though, that if Barack Obama wins the White House, a
Detroit bailout plan will get serious consideration. If so, the
Chrysler bailout plan of a quarter-century ago provides a useful model.
In return for guaranteeing loans to Chrysler by banks and private
lenders, the government -- i.e., taxpayers -- got low-priced warrants
to buy Chrysler stock.
As events unfolded, Chrysler recovered, no loan-guarantee payments were
made, and the government made some $400 million on the warrants. In
other words, we taxpayers were rewarded for taking a risk.
Detroit's fight for survival doesn't threaten economic doomsday for
America, but it's incredibly sad nonetheless. The three companies, and
General Motors especially, once symbolized the bedrock strength of
American capitalism. If they can restructure and recover, as must be
fervently hoped, they will symbolize the potential for renewal.
Meanwhile, Motor City residents must be regretting the message on a
T-shirt popular in their town for years -- "Detroit. Where the Weak are
Killed and Eaten." Let's hope it wasn't a prophecy about General
Motors, Ford and Chrysler.
Mr. Ingrassia, a former Dow
Jones executive and Detroit bureau chief for this newspaper, is writing
a book on America's car culture.
