Six Myths about the Big Three

Includes: F, GM
by: Rick Newman

Memo to CEOs: Ask for a bailout, and your company will be reduced to a caricature.

Recent congressional hearings on the plight of GM (NYSE:GM), Ford (NYSE:F), and Chrysler have illuminated a few important issues - like how the Detroit executives travel when on business. Populist politicians and gotcha journalists delighted at the prospect of rich CEOs riding corporate jets to ask for taxpayer money. There was a little talk about jobs and cars and the foundering economy, too. But you might have missed that part, or gotten confused by a welter of misperceptions that emerged from the spectacle of supplicant CEOs trying last-ditch tactics to save their companies.

As the automakers careen toward bankruptcy, here are some of the myths complicating the debate over the future of the Detroit Three:

They don't build small cars. The Detroit Three build plenty of small cars - they're just not very good. In the U.S.News rankings of affordable small cars, for instance, seven out of 34 models are domestics. But the highest ranked - the Chevrolet Cobalt - lands at No. 20, while the top three are all Hondas (NYSE:HMC). So, CEO Rick Wagoner is telling the truth when he says that in 2009 GM will offer 20 models (including a few mid-sized cars, a couple small sports cars, and a few others) that will get 30 mpg on the highway. The question is whether anybody will want to buy them - and if not, is it the government's job to subsidize uncompetitive products.

They don't build any desirable cars. A few recent Detroit models have been hits, like the Ford Fusion, Chevrolet Malibu, Cadillac CTS, and Saturn Outlook. And even Consumer Reports, which has mercilessly trashed Detroit's shoddier vehicles, recently issued a statement saying, "We've seen some progress among the domestic automakers lately, with improved reliability and performance in certain models."

The problem is that the domestics are strong in a few segments, while weak - or nonexistent - in many others. So when soaring gas prices and a stumbling economy torpedoed their flagship vehicles - trucks and SUVs - there wasn't much else to balance out the portfolio. Neither GM nor Ford offers a competitive minivan, for instance. Their small crossovers and SUVs haven't kept pace with the best offerings from Honda and Toyota (NYSE:TM). And a puny "B car" that's actually fun, like the Mini Cooper or Honda Fit? Does not compute. And it's pretty hard to survive as a global car company when you simply write off a big chunk of the market.

The same guys asking for handouts are the ones who caused the problems. Not really. Chrysler CEO Bob Nardelli and Ford CEO Alan Mulally are new arrivals recruited from outside the auto industry. Their boards offered them a lot of money because of their expertise on fixing huge, messed-up organizations. Wagoner has been on the job longer, and he bears more responsibility for some of GM's problems. But he wasn't in charge in the 1980s and 1990s, when GM built sprawling factories that are approaching obsolescence, let quality slip, and short-shrifted cars in favor of SUVs. And since becoming CEO in 2000, Wagoner has overseen many improvements at GM, like an improved car lineup, more efficient factories, and success in China and other overseas markets. He may still get the boot, but he's probably done more to fix GM than the three or four CEOs who preceded him.

The CEOs should fly coach. At about the same time the Detroit Three CEOs were boarding corporate jets to head to Washington for recent congressional hearings, Northwest Flight 234 (on-time percentage: 77 percent) was backing away from the gate at Detroit Metro, headed for Reagan National Airport, across the river from the Capitol building. Obviously, the CEOs should have been on that flight instead of a Gulfstream, relaxing with some free coffee and reading the morning paper before huddling with aides (please remain seated, with your seatbelts fastened) to discuss emergency measures like which division to sell off or which supplier to stop paying. They'd have to speak in whispers, since a couple dozen reporters looking for a scoop would no doubt be sitting in nearby rows - but at least that way nobody would disturb other passengers trying to catch a nap. And if there were any urgent calls from outposts in Shanghai or Dubai, United Arab Emirates, or São Paolo, Brazil, somebody back at HQ with a reliable phone connection could just handle it.

Sure, these are complex global companies with command decisions that need to be made every hour. But if the CEOs are going to ask for the people's money, they should take the people's transportation! Come to think of it, instead of flying, they should have pooled their money and chartered a bus for the trip to Washington.

It's all the unions' fault. Generous union protections clearly pumped up Detroit's costs in the past and added to bloat, but recent concessions have solved many of those problems. Many other factors now weigh more heavily on Detroit: Soaring healthcare costs, especially for retirees the automakers are still responsible for; poor strategic planning; and buyers who can't get loans. The biggest problem with the unions might be unrealistic expectations fostered by leaders like Ron Gettelfinger - because many of the job and wage protections of the past are no longer there.

They've done nothing to help themselves. All three Detroit automakers have slashed costs and closed factories over the past few years, in aggressive but methodical efforts to become profitable once again. If we still had the 2006 economy, they might make it by 2010 or 2012. But obviously we don't. What the Detroit Three haven't done is something dramatic that would send the silverware flying, like killing off overlapping divisions such as Mercury, Pontiac, and Saturn, closing redundant dealerships, or demanding universal healthcare to help manage soaring medical costs. If the government coughs up some "bridge" money to tide them over for a few months, there's no reason to think much would change. But if the automakers land in bankruptcy, plenty will change - and self-help will no longer be an option.