From The New York Times -- August 13, 2010:
Detroit Goes From Gloom to Economic Bright Spot
By BILL VLASIC
DETROIT — After a dismal period of huge losses and deep cuts that culminated in the Obama administration’s bailout of General Motors and Chrysler, the gloom over the American auto industry is starting to lift.
Jobs are growing. Factory workers are anticipating their first healthy profit-sharing checks in years. Sales are rebounding, with the Commerce Department reporting Friday that automobiles were a bright spot in July’s mostly disappointing retail sales.
The nascent comeback is far from a finished product. Foreign competitors are leaner and stronger, accounting for more than half of all car sales in this country. The sputtering economic rebound is spooking investors and consumers alike, threatening to derail some of Detroit’s gains. And talks next year on a new contract with the United Automobile Workers could revive old hostilities.
Still, the improving mood here reflects real changes in how Detroit is doing business — and a growing sense that the changes are turning the Big Three around, according to industry executives and analysts tracking the recovery.
Ford made more money in the first six months of this year than in the previous five years combined. G.M. is profitable and preparing for one of the biggest public stock offerings in American history. Even Chrysler, the automaker thought least likely to survive the recession, is hiring new workers.
Many of the excesses of the past — overproduction, bloated vehicle lineups, expensive rebates — are gone. All three carmakers have shed workers, plants and brands. And a new breed of top management — the three chief executives are outsiders to Detroit, as is the newly named G.M. chief executive — says it is determined to keep the Big Three lean, agile and focused on building better cars that earn a profit.
“What we’ve come out of this with,” said Sergio Marchionne, who runs both Chrysler and its Italian owner Fiat, “are much more rational, more grounded players making moves for the long term.”
The proof is emerging in dealer showrooms, where customers are buying more of Detroit’s cars and paying higher prices. In July, G.M., Ford and Chrysler sold their vehicles at an average price of $30,400 — $1,350 more than a year ago and higher than an overall industry gain of $1,100, according to the auto research Web site Edmunds.com.
With fewer factories churning out products, inventories are smaller and sales incentives like rebates and low-interest financing are gradually declining. “They were nibbling at these issues before, a little bit here and a little bit there,” said Jeremy Anwyl, Edmund’s chief executive. “It’s just different now that they are in fighting shape.”
Detroit has vowed to change before, slimming down when sales slumped or pouring resources into vehicle quality to catch up to foreign competitors. Those efforts stalled or failed. But many auto analysts say the current makeover has a more permanent feel, largely because of the presence of the outsiders at the top and the lessons learned from the near-death experience of last year’s bankruptcies at G.M. and Chrysler.
Ford’s chief executive, Alan R. Mulally, broke the mold four years ago when he came from Boeing and set out to streamline Ford’s bureaucracy and integrate its worldwide operations. At G.M., Edward E. Whitacre Jr., a former AT&T chief, has replaced dozens of top officials with outsiders and younger executives, and driven the company to make decisions faster. Those efforts are likely to be accelerated under Daniel F. Akerson, who was named on Thursday to succeed Mr. Whitacre as chief executive in September.
And at Chrysler, Mr. Marchionne, an Italian raised in Canada who is both a lawyer and an accountant, is systematically upgrading the carmaker’s aged product lineup and revamping its plants in Fiat’s image.
“Fundamentally this thing has been reshaped, resized and rethought,” Mr. Marchionne said of Detroit. The biggest difference, he said, is that the Big Three have finally broken the habit of reflexively raising incentives to increase sales volumes.
“We’re not trying to kill each other for this month’s market share,” he said. “Those days are over. We’re not offering $7,000 checks to try to sell a car.”
Wave after wave of plant closings and worker buyouts in recent years has brought Detroit’s production more in line with the demand for its vehicles. Since 2000, the number of Big Three assembly plants in North America has dropped to 40, from 66, according to the consulting firm Oliver Wyman. In turn, overall capacity has shrunk to about eight million vehicles a year, from 13.7 million.
That still may be too much. After several years of sales topping 16 million vehicles, the industry nosedived to 10.4 million last year — the lowest since 1982. At current levels, sales are projected to edge up to about 12 million this year, with Detroit’s share running at 46 percent.
“They carved out a lot of capacity, but I’m not sure it was enough,” said Peter Morici, an economist at the University of Maryland. “There’s still an excess.”
Even under the most hopeful assumptions, a resuscitated United States auto industry in the end would account for less than 3.5 percent of the country’s economic output, economists estimate, compared to 4.6 percent in the late 1970s. But the Obama administration, which argues that the comeback is long-term and sustainable, contends that the Big Three have downsized enough to be profitable with fewer sales.
“They were just barely making money or breaking even in a market of 16 to 17 million a year,” said Brian Deese, a member of President Obama’s auto task force. “The companies are positioned now to move forward in an environment of 11 to 12 million in sales.”
Some Republicans and other critics of the administration are less bullish, and suggest it is too early to know if the restructuring will stick or how much credit the federal assistance is due. That debate will likely play out in the November midterm elections, but in the meantime some of the raw numbers are falling Detroit’s way.
The bankruptcies at G.M. and Chrysler slashed debt, jobs and labor costs, and revised union contracts have brought manufacturing expenses more in line with factories in this country operated by Toyota and other foreign automakers.
The average production worker at G.M. earns $57 an hour in wages and benefits, compared to $51 at Toyota, according to a study by the Center for Automotive Research in Ann Arbor, Mich.
Those costs should continue to fall as the companies hire new workers at lower pay grades agreed to by the U.A.W.
“What’s come out of this crisis is a realization that the interests of both sides are aligned,” Harley Shaiken, a labor professor at the University of California, Berkeley, said of workers and management.
That alignment could be tested next year when the Detroit companies negotiate a new contract with the U.A.W. The union’s president, Bob King, has vowed to get back some of the concessions made in the bankruptcies.
For now, though, the industry is adding jobs for the first time in a decade. More than 330,000 jobs were lost by the American automakers and their suppliers in 2008, White House officials said, while 55,000 jobs have been added since Chrysler and G.M. emerged from bankruptcy in the summer of 2009.
Chrysler, which cut more than half its work force since 2005, has added 3,100 jobs this year, including white-collar jobs at its headquarters in suburban Detroit. The company is recruiting again on college campuses and bringing in entry-level engineers and managers.
One of the first new hires was James Kim, an electrical engineer who recently graduated from the University of Michigan. Mr. Kim also had job offers from Verizon and other companies.
“I saw an opportunity to get into a company that was rebuilding itself from the ground up,” said Mr. Kim. “It’s almost like going to a start-up business.”
Another new white-collar worker, Davida Redmond, joined Chrysler after taking a buyout from Caterpillar. “I felt like the worst was over in Detroit,” she said. “The storm is behind us.”
But for the recovery to last, some economists say, several things need to happen, including continued improvements in quality, a relentless focus on cutting costs — and some luck on the economy’s overall strength.
“Their recovery is not sustainable yet,” said Mr. Morici, the economist. “They need to reduce their costs more if they’re going to be competitive in the long term with the Japanese, the Koreans and ultimately the Chinese.”
Top management says it is well aware of the rough patches ahead. “We still have important work to do,” said Mr. Akerson, the incoming G.M. boss.
Even so, optimism is building in the offices and plants and engineering labs of the Detroit companies, employees say. And promising new electrified vehicles like the Chevrolet Volt and small cars like the Ford Fiesta are slowly changing consumer perceptions that the Big Three are behind the times.
“It wasn’t long ago that people had just written them off,” said Mr. Shaiken, the labor professor. “But they live to fight another day.”