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Car Trouble

Is a bailout by Washington the answer to Detroit's problems?

By Patricia Smith

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Once upon a time, America and its autos reigned supreme. In the decades after World War II, the car industry boomed, and steady, high-paying, unionized jobs at Detroit's "Big Three"—General Motors, Ford, and Chrysler—helped millions of American workers move into the middle class.

Today, the Big Three are teetering on the edge of collapse. In the last two years alone, Detroit automakers have lost more than $80 billion and shed more than 119,000 workers. And now the economic crisis has pushed the companies into free fall: Tough times mean fewer people making big purchases like cars, and those who do want to buy are finding it harder to get car loans amid the current credit crunch.

Last month, the White House agreed to give G.M. and Chrysler $17 billion in emergency loans to keep them afloat for the next few months. (Ford said it did not need immediate help.) The fear is that the collapse of even one of the Big Three could have very negative ripple effects throughout the U.S. economy.

"We're on the brink with the U.S. auto manufacturing industry," Chrysler executive Jim Press told the Associated Press. "If we have a catastrophic failure of one of these car companies, in this tender environment for the economy, it's a huge blow. It could trigger a depression."

Just how did Detroit get into such a mess? And even with federal funds to tide them over, can the Big Three turn themselves around and become successful again?

Analysts say several strategic missteps have hurt Detroit. While foreign carmakers turned out smaller, fuel-efficient cars, Detroit continued over the last decade to focus on producing large pickup trucks and S.U.V.'s. When soaring gas prices and the sinking economy forced consumers to turn away from these models in droves, Detroit was poorly positioned to react.

Disappointed Customers

To make matters worse, for years, many of the cars made by the Big Three were simply not as reliable as their foreign competitors'. Though many analysts say Detroit is now producing excellent cars, it's hard to win back customers who've been burned by a disappointing purchase in the past.

Detroit's other major problem is that its labor costs are much higher than its foreign competitors'. When you add in the cost of pensions and health care, the Big Three's hourly labor costs average more than $70 per worker, compared with about $45 an hour at foreign-owned car factories in the U.S.

To understand why Detroit's labor costs are so much higher, you have to go back to the industry's heyday in the boom years following World War II. In the 1950s, G.M. was the world's largest corporation: It had 46 percent of the American auto market, versus about 20 percent today. At its peak, it employed more than 600,000 Americans.

The auto industry pioneered the American model for the social contract between workers and employers, offering health-care and pension benefits that became a mainstay of the growing middle class. In negotiating labor contracts, industry executives wanted, above all, to keep the United Auto Workers (U.A.W.) union happy and the assembly lines moving: With no Toyotas to worry about, there was little downside, at least in the short term, to the industry's expensive concessions.

"The workforces were young, the pension costs were low," says Gerald Meyers, a professor at the University of Michigan and the former chief executive of American Motors. Each union contract, he says, "added a little more and a little more and a little more."

And now the bills for those expensive contract provisions have come due. G.M.'s biggest cost problem today is the enormous sums it spends on health care for employees and hundreds of thousands of retirees: One analyst says G.M. is no longer a car company, but an "H.M.O. on wheels."

But not all carmakers in the United States are in trouble. Today, 54 percent of the "foreign" cars sold in America are actually made in the U.S. at factories in Alabama, California, Indiana, Kentucky, Mississippi, Ohio, and Tennessee. In fact, Japanese, German, and South Korean automakers currently employ 113,000 people in the U.S. (compared with 239,000 employed by the Big Three).

Foreign Equals Fuel-Efficient

The Japanese automakers broke into the American market in the 1970s by exporting small, high-quality, fuel-efficient vehicles during an earlier energy crisis. They began building factories in the U.S. in the 1980s.

Fuel-efficient vehicles are still the strength of the foreign automakers at a time when such vehicles are increasingly popular. The Big Three have not yet developed fuel-efficient cars as the mainstays of their fleets, and some in Washington want to insist they do so in exchange for federal assistance.

But if the current downturn is prolonged, it might be too late. Even if U.S. automakers launch appealing new models, car sales have plunged so sharply in the last few months that the companies may not be able to sell enough cars to recover.

That's bad news for thousands of autoworkers and their families. Ashley Meiser, 19, grew up in Flint, Michigan, in a family that has long depended on G.M. for its livelihood. Her grandfather worked for G.M. his whole career. Her father started working on a G.M. assembly line when he was 17, and has been there since.

But Meiser has opted not to follow in the family footsteps. She's a sophomore at Duquesne University in Pittsburgh, Pa., where she's studying to be a pharmacist.

"By the time I was in high school, G.M. was already in a downward spiral," Meiser says. "That's why I chose pharmacy. I don't want to have to be worried about job security like what my parents are going through right now."

Autoworkers like Meiser's dad might not all lose their jobs outright, but it seems inevitable in the current climate that some of their benefits will shrink, if not completely disappear.

"In many ways, it's the end of the dream of the post-World War II workforce," says David L. Gregory, a professor of labor studies at St. John's University in New York.

Even with the White House providing $17 billion, it's not clear whether the Big Three can turn themselves around. Indeed, some industry experts say that a full-scale reorganization of the industry could require as much as $125 billion, as well as completely rethinking the way Detroit does business.

Top-To-Bottom Cuts

"They're going to have to restructure," President-elect Obama said in a TV interview last month. "They do not have a sustainable business model right now, and if they expect taxpayers to help in that adjustment process, then they can't keep on putting off the kinds of changes that they, frankly, should have made 20 or 30 years ago."

The Detroit automakers are pledging to make top-to-bottom cuts in order to stem losses and focus their efforts on developing new products more in line with consumer demands—smaller cars, hybrids, plug-in hybrids, and electric cars.

G.M., once the world's largest automaker and now the company in the most dire financial straits, promises to slash jobs, factories, brands (like Saturn, Hummer, and Pontiac), and executive pay as part of its request for federal money. G.M. says it can be competitive on labor costs with Toyota by 2012. All of this restructuring will require massive concessions from the unions on top of those they have already made in the last few years, and the impact on workers could be severe.

But it may not be enough. Analysts note that a series of reorganizations and new products in recent years have failed to produce a lasting turnaround. On top of that, Detroit is struggling with huge bills: interest payments on massive amounts of debt, large contributions to health care for retired workers, and billions of dollars of expenses to meet stringent new fuel-economy standards.

"Even with the most generous assumptions as to operating results and carefully adhering to G.M.'s proposed restructuring, G.M. is still a highly distressed company and is likely to go bankrupt, probably within one year," says Edward I. Altman, a professor at the Stern School of Business at New York University.

For Ashley Meiser, the impact would be immediate and very personal. Her grandparents live off her grandfather's G.M. pension. Her father's salary from G.M. helps pay her college tuition.

"Honestly, it's really scary," she says. "My program is a six-year program, and I'm only in my second year. My tuition here is $35,000. If my dad loses his job, I might have to go home."

She pauses for a moment and then adds, "We always thought G.M. was going to be there. We took G.M. for granted."