“You can call me Alicia or Lady Stingray. I answer to both.” Tall and slender, in a minidress that could have been designed by Miuccia Prada for Marvel Comics (DIS), Lady Stingray towers over her lord, the 2014 Chevrolet Corvette Stingray. Both are being ogled. It’s the opening day of this year’s New York International Auto Show, which runs through April 7. Lady Stingray circles the sports car, trailing one hand along it, talking about extruded aluminum and paddle shifters and carbon fiber. The crowd that forms around the car pays close and silent attention. A middle-aged man in a cloth cap asks how much the car will cost: less than $60,000, comes the answer. When the presentation is over, a young man wearing sunglasses and large white headphones sidles up to Lady Stingray and asks in a low voice if she could open the trunk for him. The request sounds disconcertingly intimate in a conference hall with thousands of people.
General Motors (GM) is hoping the Corvette’s sex appeal draws in a whole new sort of buyer, the kind that currently prowls the roadways in an Audi (NSU:GR) or a BMW (BMW:GR). More important, GM is looking to the car to lend its Chevrolet brand a touch of élan, helping to erase the public’s perception of General Motors as a stodgy industrial behemoth that made good trucks but lousy cars. If it succeeds, the Corvette could well become a symbol of a new era, not only at GM, but also for the American auto industry. A better symbol, though, is something less glamorous: a compact like the Chevy Cruze.
Four years ago, GM and Chrysler had to go through bankruptcy, and the federal government was in the process of pouring $80 billion into the industry. Ford Motor (F), which managed to survive without bailout funds, had asked Congress the year before for an emergency $9 billion credit line. Today, all three boast healthy bottom lines. GM reported record profits of $9.19 billion in 2011, and Ford hit its own third-quarter record last year. In March all three had particularly strong sales—Ford and Chrysler reported their best numbers since before the recession. On one level, the recipe has been simple: They’ve gotten their labor costs down, and they’re building cars people want to buy. After lagging for decades, American cars have closed the gap with their Japanese rivals in quality ratings. And Detroit has become competitive—and profitable—in the small and midsize car market, a segment it used to concede to the competition.
It’s been a very good run for three companies that only a few years ago were famed for hubris and mismanagement. As well as they’ve played their cards, they’ve been lucky, too, benefiting from government aid, a (slowly) growing economy, and trouble, self-inflicted and otherwise, at Japan’s automakers. The durability of the American car resurgence is an open question. And for a variety of reasons, this year is when it will start to be answered in earnest.
In 1925 a former star executive from GM named Walter Chrysler founded his own car company. Three years later, after he bought Dodge Brothers, the Automotive Daily News coined the term “the Big Three” to describe the dominant troika that Chrysler formed with GM and Ford. In 2006, however, Toyota Motor (TM) displaced Chrysler as third in U.S. auto sales, and two years later Toyota took the title of the world’s largest automaker from GM. These days people in the auto industry don’t talk about the Big Three; they talk about the Detroit Three. The new moniker strips away the American automakers’ aura of globe-straddling dominance and makes them sound like defendants in a high-profile trial.
Because the broader economic meltdown of 2008 struck suddenly, it can be easy to forget that American automakers were troubled well before the housing bubble. True, they were the undisputed market leaders in light trucks and SUVs, and the popularity and high margins of Chevy Silverados, Ford Explorers, and Jeep Grand Cherokees helped them regain some of the U.S. market share that the Japanese had taken in the 1980s and early 1990s. The rest of their offerings, however, were another story: Cars like the Chevy Prizm, the Chrysler Sebring, and the briefly revived Ford Thunderbird were uninspired, unreliable, and underperforming on the road and in showrooms. Others, like the Pontiac Aztek, a midsize crossover, generated a rare form of unanimity: Everyone thought they were ugly.
The mediocrity of those models reflected complacency, as well as the warped economics of Detroit’s automakers. GM, Ford, and Chrysler were saddled with union contracts that had been made to preserve labor peace when revenues were far healthier, and were on the hook not only for generous salaries and benefits but retiree health care and pensions. The Center for Automotive Research has calculated that once all those costs were factored in, GM was spending $78 per hour on each worker. Japanese automakers were spending about $50 per hour at their U.S. factories. When that difference was coming out of the $40,000 price of a Chevy Suburban, there was plenty of profit left. But a $15,000 compact simply couldn’t make money with labor that expensive. In other words, the Detroit Three built bad small and midsize cars in part because they didn’t see it as worth their while to make them good. “They were basically offending new car buyers in the entry-level and ‘move-up’ segments,” says Kevin Tynan, an auto analyst at Bloomberg Industries. “They didn’t care because there was no margin there. They figured it was OK because when you were more affluent and it came time to buy a truck or SUV, they were the only game in town.”
Rather than continue to make unloved and low-margin small cars, one sensible option would have been to stop making them, or drastically scale back production and concentrate on higher-margin trucks and SUVs. Two obstacles prevented that. One was the Corporate Average Fuel Economy (CAFE) standard, which requires the average fuel efficiency of a carmaker’s fleet, weighted for sales, to be above a certain level; the Obama administration announced that by 2025 the standard will be 54.5 miles per gallon. If the Detroit Three had stopped making compacts and midsize cars, they would have had to pay hefty fines on their profitable pickups and SUVs.
Then there was the Jobs Bank, a concession wrung out of the three companies by the United Auto Workers union in the mid-1980s ensuring that, if laid off, workers were entitled to be paid 95 percent of their salary until a new job could be found for them. Scaling back production to meet demand meant the carmakers would have to pay workers nearly their full salary to sit idle, so instead the companies opted to keep churning out cars that customers didn’t want. To offload the vehicles, dealers had to offer deep discounts and rebates, further cutting into profitability. Or the cars were sold to rental companies, which would use them for a few years then dump them into the used-car market, depressing the cars’ resale values and further lessening their appeal. When gas prices shot up in the wake of Hurricane Katrina and buyers fell out of love with gas guzzlers, the Detroit Three’s chronic problems grew acute. With the financial crisis, they appeared fatal.
Each of the Detroit Three has followed a different path through the crisis. GM stood on its own, though only after a painful restructuring: The Obama administration fired its chief executive officer, Rick Wagoner, and forced GM to cut four brands (Pontiac, Hummer, Saturn, and Saab), close or idle 14 plants, and shed more than 1,000 dealers as it went through Chapter 11 bankruptcy. The administration brokered a deal in which Chrysler would also go through Chapter 11 and be sold to Italian carmaker Fiat (F:IM), with similar cuts. The outlier, Ford, didn’t require a bailout. In 2006 incoming CEO Alan Mulally had forced the company through a restructuring without bankruptcy, buying out tens of thousands of hourly workers, closing plants, and selling Land Rover and Jaguar to India’s Tata Motors (TTM). The company went to the capital markets and borrowed $23.4 billion, pledging real estate, factories, even the trademark to its famed blue oval logo as collateral. Although Ford was widely seen as in worse shape than GM at the time—it lost $12.6 billion in 2006—Mulally’s actions spared the company from bankruptcy. By the time GM and Chrysler turned to the banks to borrow, no one was lending.
Whatever form it took, near-death forced all three to do something that management had previously shied away from: renegotiate their labor contracts. In 2007, as the companies grew desperate but before the government stepped in, the UAW and the Detroit Three agreed to contracts creating two-tiered pay scales, with new workers earning half what longtime workers did. They also agreed to let the automakers offload their massive health-care obligations with a $54 billion payment into a trust fund that would be managed by the unions. After GM and Chrysler were forced to borrow from the government, the possibility that all three could go out of business forced the union to make another concession: phase out the Jobs Bank.
There have been other savings, too. GM and Ford had long allowed individual brands and divisions to function as fiefdoms, which created redundancies in everything from research and design to marketing. Now Ford, in particular, has moved toward building more of its cars using the same platforms, taking advantage of its size and globe-spanning reach in ways that companies such as Toyota and Hyundai Motor do. Such savings have allowed all three American automakers to pay attention to the small cars they’d once disdained. It’s an important segment: Entry-level cars are where Japanese models win over customers when they’re young and keep them as they trade up. Compacts are even more important now that no one expects dollar-a-gallon gas anymore. “It was unheard of, GM selling a $12,000 Chevy and making money on it,” says Adam Jonas, a Morgan Stanley (MS) auto analyst. “Now they can.”
Ford enjoyed an advantage in that department, having traditionally been stronger in Europe, where high gas prices made small cars more popular. In 2012 the Ford Focus compact was the best-selling car in the world. In the U.S. in recent months, the midsize Fusion has been selling almost as many units as the longtime segment leaders, the Toyota Camry and Honda Accord. GM has also gotten in the game: The Chevy Cruze has been selling in the 15,000- to 25,000-a-month range and for a couple of stretches in 2011 and 2012 it was the best-selling compact in the country. Chrysler’s small cars (think Dodge Neon) have had a reputation as clunkers. Yet under Fiat the company revived the Dodge Dart last summer. The compact impressed the critics and, after a slow start, has caught on with buyers—a little more than 8,000 were sold in March.
The desirability of these models has allowed American automakers to address their addiction to discounts and rebates. Holding the line on prices means they make more money from each sale. Ford has been particularly disciplined. According to data compiled by Bloomberg, in February incentives were about 8.2 percent of Ford’s average vehicle sales price, compared with 11.4 percent for GM and 9.9 percent for Fiat Chrysler. (Toyota and Honda Motor (HMC) were at 5.6 percent and 3.3 percent, respectively.) At GM, the high incentives are partly because of the age of its fleet; Morgan Stanley’s Jonas says the average GM model has gone five years without a redesign, which makes them Methuselah-like in the car business. The true test of pricing backbone will come during the next three years as GM revamps almost its entire fleet and tries to increase market share.
Not all the Detroit Three’s recent success has been the result of small cars. The two best-selling vehicles in the country are pickup trucks: the Ford F-Series (67,500 sold in March) and the Chevy Silverado (39,600). But few in the industry expect truck sales to rebound to the numbers of 2004, when Americans bought 940,000 F-Series. Last year’s sales were two-thirds that. In addition, many drivers who bought SUVs to ferry the kids to and from school and soccer practice are turning to something called the crossover utility vehicle, part minivan, part SUV on a car chassis. A leader in the U.S. market is the Ford Explorer—once a best-selling SUV, it’s now built on the Ford Taurus platform.
To make up for lost revenue on trucks and the still-slim margins on smaller cars, GM and Ford are trying to get consumers to take a second look at the companies’ luxury brands. Cadillac has had some success luring drivers from Toyota’s Lexus and the German automakers, and its new ATS compact sedan—meant to compete with the BMW 3 series and the Mercedes C-Class—is selling briskly. In March, Cadillac sold 15,800 vehicles, up 50 percent from the previous year. Lincoln, however, is still struggling to generate much excitement despite high-profile redesigns. Sales have been anemic—6,800 last month. At the New York auto show, Lincoln hosted its share of the curious, but nothing like the aspirational throngs at the neighboring BMW and Audi exhibits.
Any further ground that the Detroit Three take won’t come easy. They’ve benefited from the misfortunes of competitors: The Japanese carmakers were kneecapped by the 2011 tsunami, and Toyota, legendary for its reliability, has had to issue a number of recalls in recent years. The Japanese have since gained back some of their market share, though, a process that the declining value of the yen will help. And much of the share they lost went not to American automakers but to South Korea’s Hyundai, which has transformed itself from a low-cost carmaker into a formidable rival in all price categories.
Just as it took time for Americans to give up on American cars, it will take time for them to covet a Lincoln or believe that Chrysler or GM can make a small car as well as Toyota. And the nature of the American car market is changing. Surveys of people in their late teens and early twenties suggest they are less interested in cars than their parents were. The University of Michigan’s Transportation Research Institute found that from 1983 to 2008 the percentage of 19-year-olds with a driver’s license fell from 87.3 percent to 75.5 percent. Two years later it hit 69.5 percent. Urbanization is partly to blame along with high gas prices and high youth unemployment. In an era of virtual connectivity, being able to drive somewhere doesn’t feel as necessary or as liberating as it once did. No one knows exactly what this means for the industry.
While the offerings from GM, Ford, and Chrysler have markedly improved over the past few years, so have everyone else’s. “Every year the bar gets set higher on quality metrics,” says John Hoffecker, a managing director at the consulting firm AlixPartners. “What you see is that almost everybody is better than the very best were five to 10 years ago.” The Detroit Three have caught their competition. Keeping pace will be just as tough.