The Overhaul of the Domestic Auto Industry and Its Parallels with the Republicans' Problem

With President Barack Obama's announcement later this morning, the current debate over whether to save our domestic auto industry has revealed some starkly different views about the future of manufacturing in America among economists, elected officials and corporate executives. There are many disagreements about solutions to the Big Three's current financial difficulties, but the more fundamental debate is whether the industry should bend to the will of the government's and taxpayers' priorities or serve only the needs of the companies' customers and their shareholders.

Detroit had an opportunity -- nearly 10 years ago to the date -- to change. To understand the globalizing world around it, to understand that consumers' priorities and values -- especially those of the rising Millennial Generation -- were changing drastically. While some may think it's a leap to compare an overhaul of Detroit with an overhaul of the discredited Republican Party, the similarities are there:

But when the government becomes a major stockholder in private enterprises, the brand becomes political. And as General Motors learned to its regret, when a company's brand is as damaged as badly as the Republican Party's is now, the chances of it prevailing in any debate about the automotive industry's future is greatly diminished. Very aware of the public tsunami of anger over AIG bonuses, Wall Street excesses and public perception of corruption and lack of accountability, President Obama is not in a forgiving mood. He has made clear the domestic automobile industry has to be seen as a contributor in ending America's dependence on foreign oil and improving our environment to secure his support. Almost exactly ten years since the debate at the Detroit airport, as a price for its financial support, the federal government will in fact be telling at least General Motors which vehicles to produce for its customers. Given that arrangement, both parties to this newest partnership need to find "win-win" solutions for the industry's future that match the optimism and civic spirit of the Millennial generation who will have to pay for the results of their decisions.

The last time the industry seriously engaged in such a debate was during the Clinton Administration and the companies' failure to effectively respond to Vice President Al Gore's offer to partner with them in producing more environmentally sensitive products gives substance to President Obama's charge last week that their current difficulties were caused by executive "mismanagement" in the past.

Attempts to nudge Detroit into producing more fuel-efficient vehicles have been going on since the 1973-4 Arab Oil embargo, which led Congress to establish Corporate Average Fuel Efficiency (CAFÉ) standards for cars and light trucks. The original fuel efficiency target was for cars to meet an average of 27.5 miles per gallon (mpg) by 1985. On Earth Day, 1992, candidate Bill Clinton proposed to raise that standard even further to 45 mpg if he were elected President.

When Al Gore was asked to join the ticket, auto industry executives, terrified at the prospect that the man who had called for the abolition of the internal combustion engine might become Vice President, implored the leadership of the United Automobile Workers (UAW) to meet with the candidates and bring them to their senses. The lobbying effort worked. Clinton agreed to delay the adoption of higher CAFÉ standards until it could be proven that such goals were attainable.

This formulation opened the door for what came to be known as the Partnership for a New Generation of Vehicles or PNGV. Reluctantly supported by the Big Three, PNGV provided approximately a quarter of a billion dollars in government research funds to demonstrate the feasibility of producing a midsize sedan that could get 80 mpg. Often called "the moon shot of the 90s," each car company was to make a prototype of such a vehicle by the politically convenient year of 2000 and begin mass production by 2004.

After a few years of technological research, the partnership settled on the combination of a hybrid gasoline and electric powered propulsion system as the most promising approach. But by 1997, the car companies began to resist expending their resources to develop even a prototype for such a vehicle. Vice President Gore, who had been in charge of the PNGV program since its inception, decided to meet with the Big Three CEOs to make sure they did not forget their past commitments. The answer from Detroit was emphatic: profits were coming from SUVs and heavy-duty trucks, not cars. Gore countered that argument by offering to trade the administration's support for tougher regulations on the permissible amount of sulfur content in the diesel fuels that would power some of the new hybrid SUVs, if the car companies would join in expanding the scope of the PNGV plan to include SUVs, the very product they said the marketplace was asking for. Gore suggested each company produce a concept SUV by 2002 and three production prototypes by 2006, capable of getting 80 mpg. He also suggested they advance the mass production goal for cars to 2002 by deploying a 60 mpg five passenger sedan in 2002 rather than waiting for an 80 mpg version in 2004.

Ford's Peter Pestillo and his UAW ally, Steve Yokich, quickly replied, "no way." Pestillo maintained, "We need much more time than that to make them cost competitive." Not all of the auto executives were blind to the challenge. General Motors' Vice-Chairman, Harry Pearce had been the driving force behind GM's ill-fated EV1 electric car experiment. And William Clay "Bill" Ford, Jr., great grandson of the company's founder and Chairman of its Board of Directors envisioned building a 21st century version of the Model T that would be environmentally friendly as well as inexpensive. Gore asked the companies to respond to his suggestions by September 1998, the fifth anniversary of PNGV.

But it wasn't until May of 1999, that the auto company CEOs joined the Vice President to settle the issue of SUVs and PNGV. Gore began the meeting, held in a back room at the Detroit airport, by suggesting that developing these products could enhance the industry's image as well as each company's individual brands. Ford's Pestillo asked for still more time to consider the idea: "While we love the progress we are making in PNGV as it's currently constituted, it's not yet clear to us that the technologies we have been working on apply to the design of an SUV." But Pearce used the platform (basic body design) issue raised by Ford to make Gore's point. He sketched a future auto industry where the line between cars and trucks would not be as clear, describing what we know today as "crossovers". It might therefore be wrong, he suggested, for PNGV to be limited to just one platform.

Gore took the opening and suggested the companies think about what such an announcement might mean to the industry's image and their individual brands. "It's not just the substance of the issue you need to consider. You also need to think about the symbolism of the decision. Putting SUVs into the PNGV project would change the public's perception of where you are going in the future." When Pestillo attempted to return to his original arguments, he was overridden on the spot. GM said, "If you will include lean burn technology (for diesel SUV's) into the project that might work." Gore responded, "Let's work on this as a package."

Recognizing the breakthrough they had just achieved, the participants began to think about what the future might look like if they formed a true partnership -- not too dissimilar from what is being contemplated now under the terms of the automotive industry loan. Gore said he would put his personal reputation behind such an agreement, which the press would think of as a "Nixon goes to China" event, garnering the auto industry a great deal of positive press.

But when it came time for the true test of their commitment to this new partnership, the autos blinked. The Vice President suggested they sign off on a press release, conveniently drawn up before the meeting started, announcing the inclusion of SUVs in an expanded PNGV project. The CEOs argued for a less definitive announcement stating that they would address the issue of highly fuel efficient SUVs within the context of the PNGV partnership, but not commit to any specific goals for their production. This less-than-definitive agreement barely made it to page B4 of the Wall Street Journal the next day and was generally ignored by the public the participants were hoping to impress.

Unfortunately for America, General Motors then decided to go in almost the opposite direction. Rick Wagoner, who became General Motors' CEO in June 2000, chose to pursue an SUV-centered strategy that won big profits for a brief period. Since then, however, GM stock has plunged 95%, from $60 per share to just under $4 today. General Motors, which has lost $70 billion since 2005, has seen its market share cut in half. Seven years after the fateful auto summit with Al Gore, when asked what decision he most regretted, Wagoner told Motor Trend magazine, "ending the EV1 electric car program and not putting the right resources into PNGV. It didn't affect profitability but it did affect image." [emphasis added].

His lack of commitment to the type of automobile industry that PNGV envisioned ultimately led to his downfall with the Obama Administration now demanding his resignation as part their plan to save GM.

The importance of a company's public image or brand value has never been greater than in this new civic era, where the lines between democratic decision-making and private sector planning are becoming increasingly blurred. The organizing cry of Boomer feminists was "the personal is political."

The paragraph from above bears repeating:

But when the government becomes a major stockholder in private enterprises, the brand becomes political. And as General Motors learned to its regret, when a company's brand is as damaged as badly as the Republican Party's is now, the chances of it prevailing in any debate about the automotive industry's future is greatly diminished. Very aware of the public tsunami of anger over AIG bonuses, Wall Street excesses and public perception of corruption and lack of accountability, President Obama is not in a forgiving mood. He has made clear the domestic automobile industry has to be seen as a contributor in ending America's dependence on foreign oil and improving our environment to secure his support. Almost exactly ten years since the debate at the Detroit airport, as a price for its financial support, the federal government will in fact be telling at least General Motors which vehicles to produce for its customers. Given that arrangement, both parties to this newest partnership need to find "win-win" solutions for the industry's future that match the optimism and civic spirit of the Millennial generation who will have to pay for the results of their decisions.

Cross-posted at the NDN Blog.

Note: Morley Winograd and Mike Hais, NDN Fellows, are co-authors of the critically acclaimed Millennial Makeover: MySpace, YouTube, & the Future of American Politics. Winograd and Hais also have a long history with Detroit and Michigan. Winograd lived there for 50 years and was Chairman of the Michigan Democratic Party from 1973 to 1979. Winograd later served in Washington, DC, as Senior Policy Advisor to Vice President Gore, during which time he witnessed the events described in the essay below. Prior to joining Frank N. Magid Associates in 1983, Hais was a political pollster for Democrats in Michigan and an Assistant Professor of Political Science at the University of Detroit.

Comments

[BBackSoon]

As a longtime gearhead it pains me to see the American Auto industry in such dire straights but I also see much of it as their own fault and maybe our fault as consumers.

For years we have been in love with large, powerful cars and Detroit has been more than happy to give us just what we wanted. But we all knew that fuel prices would one day go thru the roof but we still wanted and got SUV’s, 300 hp cars and full size trucks complete with big blocks. Try to buy a full size truck that get’s better than 20mpg.

In the past 30 years average mpg is about the same as it ever was.

We now have computer controlled port fuel injection, better flowing heads, vehicles built of lighter materials and still a 2 wheel drive full size V-8 truck cannot get better than 20 mpg?

Let us not forget that until the last couple of years Gasoline prices had stayed fairly constant for ever. I started driving in 1982 and until approx 2006 or so the price was between 99 cents and $1.65.

So it is a case of if you fail to plan, you plan to fail.

[zpolitics]

There are many reasons (other than some notable lemons) why the U.S. Auto Industry is in such trouble. Perception: along with their lemons, they also produce some of the best cars (performance, safety, economy, and cost), but the public perception is that they all stink - e.g. even when the interiors are made from the exact same material, from the exact same supplier, the U.S. cars are deemed inferior. Unfair trade: other countries close their markets or levy high import tariffs, subsidize their industries (MASSIVELY), and manipulate their currency to create an uncompetitive environment. Health care: other countries provide health care so that the cost is not born by industry. Our own Stupidity: Southern states give free property for foreign companies to build their plants; subsidize their construction; exempt them from local and state taxes; and declare themselves “right to work” states making it impossible to unionize. If America allows its manufacturing base to disappear, it will cease to be a world power. All other countries know this. It is why they protect their own manufacturing bases.

[KillTheMessenger]

"they also produce some of the best cars"

Name one.

"Unfair trade: other countries close their markets or levy high import tariffs, subsidize their industries (MASSIVELY)"

Lets hear concrete examples.

"other countries provide health care so that the cost is not born by industry"

Which countries would that be?

"Southern states give free property for foreign companies to build their plants"

There is nothing new about that. The US as a whole subsidizes the whole military industrial complex. That includes Boeing.

Just because the other team wins does not mean they aren't playing fair. Grow up.

[zpolitics]

Great cars: Cobalt, Corvette, Malibu, Yukon, Silvarado, CTS, G8, Mustang, F150

Trade: relative cost picked-up by parent county (Japan 4500 per car, Korea 7000 per car, Germany 2000-3000 per car). In Korea the legislature recently had fist fights over allowing U.S. cars to be sold; their were riots in the streets.

Health care: pretty much the entire G20 (what world do you live in?)

It's great to have theories regarding free trade and economics, but when they don't work you have to examine why. An analysis of performance versus theory is grown up - not the Monty Python like nay saying reflected in your response.

[zpolitics]

From fuel economy.gov:
2009 Chevrolet Malibu 2009 Toyota Camry 2009 Honda Accord
Regular Gasoline
Chevy Malibu (4 cyl, auto) Combined 26
Toyota Camry (4 cyl, auto) Combine 23
Honda Accord (4 cyl, auto) Combine 24

[zpolitics]

http://washingtonindependent.com/22236/cars

Yet this argument — that the government has no business interfering in free markets — ignores an increasingly frequent tradition among Southern states, which have fronted billions in local taxpayer dollars in the past two decades to attract foreign auto plants. Those incentives, arriving in the form of tax breaks, training for new employees and even land,

There are complicating factors that extend far beyond the union-vers­us-non-uni­on debate. Much of the labor costs paid out by the Big Three, for example, go to cover health and retirement expenses — a tab that’s largely picked up by the governments of the foreign transplants.

http://www.thenation.com/doc/20090420/hindery_riegle?rel=hp_picks

We also need to address immediately the decades of misguided trade policies that led to the transfer of millions of US workers from export industries into less productive and often lower-paying service jobs.

And without any meaningful reciprocal jobs creation here, we lost 4.5 million manufacturing and more than 2 million service jobs, most of them unfairly.

Immediate passage of the Employee Free Choice Act, which will allow workers to join unions without obstacles.

A very strong "Buy American" requirement related to all federal procurement, as Obama promised when he was campaigning.

As Obama also proclaimed during the campaign, American workers are entitled to trade agreements that have meaningful labor and environmental standards, that forbid illegal subsidies and currency manipulation, and that are rigorously enforced.

[zpolitics]

Final sign off:

Your response is reminiscent of global warming deniers: all attitude, demanding specifics while providing none of your own. Also, what the heck does military spending have to do with subsidizing commercial industries?

[hoopesaz]

GM didn't fail due to a lack of fuel efficient vehicles. If the GM lineup was hand picked from the very best cars Toyota and Honda have to offer, they would still be losing BILLIONS of dollars. A company cannot be profitable with the union contracts that have been negotiated. They can't pay pensions and healthcare for millions of retired workers. They can't pay healthcare for thousands of people who never worked for the companies (family of deceased employees). It's not affordable...Toyota would be failing if they had GM's costs.

Having crappy cars certainly doesn't help GM...don't get me wrong. But, having great cars wouldn't change the equation much.

[KillTheMessenger]

Toyota has the exact same costs in Japan.

GM didn't fail because of any of that. It's much more obvious and you can see the reason at their dealership: the "$2000 Sales Event!" sign goes up every other month, if it doesn't stay up all the time. You won't see Toyota doing such nonsense. GM dealers are used to clearing the lot by selling vehicles under cost. If you do that for ten year, you can not be anything else than bankrupt.

[ClarcKing]

Journalists and political leaders will admit their hatred for American industry and labor generally. Embedded in your lecture is the doctrine of Austerity from the Chicago School. The U.S. Auto Industry single-handedly created the middle class. So naturally it had to destroyed with the "slow disintegration of the U.S. economy" policy started in the 1970's. 40 years of Elitist's broadcasts abusing American products and labor. At the present moment no one is looking at the damage done by cheap labor, shareholder value, free-trade, demanded by globalization. In order to fix this economy, we will be looking at the structure/policies of the economy. The U.S. is in the middle of a monetary financial derivative debt based global economic collapse. The debt based global economic engine is accelerating the contraction of the population's capacity to sustain itself. Notice all the unemployment? This is the crisis. Usury in finance is the disease. There is not enough money in the world to satisfy the demands of usury. What we have now is an overflow of currency and yet institutions are insolvent due to usury. The speculators demand more money printing. None of this helps put food on the table for the population's physical economy. It is a threat to the population as all out war. If you have a forum to lecture get it right.

[GreatNews27]

Two words: Mass Transit.

[KillTheMessenger]

Doesn't work in the US in the short haul. First you need to change your zoning and rebuild dense inner city cores. McMansion subs and mass transit don't go together.

[johnnyrose]

I wrote a college paper about the PNGV program last year.. those cars were actually really cool looking and if mass-produced the prices would be similar to what people are paying for Prius and Civic hybrids, but they would get nearly 20 MPG more and the additional sticker cost could be offset by a tax rebate and savings at the pump.

The Detroit management is truly incompetent.

[KillTheMessenger]

You wrote a college paper about these concept cars? Is it available online?

The only production cars that ever came out of PNGV were the Prius and the original Insight as far as I can tell. The Insight bombed and one could probably derive from that that the GM Percept would have been a similar failure (too small). The Ford Prodigy looks like falls into the same category. The Chrysler ESX-3 looks like a diesel hybrid version of the Prius. Maybe Chrysler management and engineering weren't quite so dumb and they did understand the market. Maybe they were just lucky.

[2Dank2Hit]

Hu-freaking-zzah!

[flossophy]

Let the US auto industry go... it's nothing but a retirement home with a loss making auto manufacturing subsidiary.

It's impossible to compete with the union arrangements they currently have.

Toyota can manufacture in the south without unions... and all the non-union workers still have jobs.

[Georgiapundit]

Oh no, Obama is going to force us to drive tiny cars!