Give the Big Three another chance

By Daniel Arturo Heller  |  April 23, 2009

MANY IN AMERICA consider saving the Big Three a lost cause. Are the Detroit automakers really as bad as people say?

In retrospect, management at General Motors, Ford, and Chrysler certainly should have been quicker to bolster their smaller-car and hybrid-vehicle lineups. But the Big Three were not the only ones fixated on large SUVs and full-size pickups. Throughout the 1990s and early 2000s, American consumers were buying up these vehicles at a torrid pace, while Detroit's Asian and European counterparts scrambled to get into these higher-profit segments. Shortsightedness was a problem all around.

Even as they gorged on SUVs, the Detroit Three did make steady improvements in the overall quality of their vehicles and the number of labor-hours required to assemble them, as is shown by two annual industry benchmarks, J.D. Power and Associates (quality) and The Harbour Reports (assembly efficiency).

Product lines for the most part contain attractive and well-made vehicles, with fuel efficiencies that are on par with the rest of the industry (contrary to the perceptions of many). The competitiveness of GM vehicles, for example, is shown by sustained sales growth in overseas markets. Even as domestic market share has fallen over the years, the large segment of the American public that remains loyal to GM, Ford, and Chrysler has had good reason to do so. In addition, over the last few years the traditionally sour relations between the Big Three and the United Auto Workers have improved dramatically, as both sides have finally begun to work together instead of against each other.

So what has been holding Detroit back?

One problem is that the automakers have been aiming at a moving target. It is hard to catch up when your rivals keep running faster. Prolonged economic sluggishness in Japan since the early 1990s has pushed the Japanese to develop vehicles ever more efficiently and assemble them in increasingly nimble factories that add low-cost flexibility and smooth flow of materials to lower labor-hours per vehicle. The Koreans have been adept at following closely behind the Japanese, while the Europeans remain relentless in their pursuit of strong brands backed by well-engineered vehicles. Detroit has had to redouble its efforts just to keep pace.

Another problem, one that Big Three management often cites, is the heavy burden of healthcare obligations to retired workers. The lack of national health insurance in the United States makes this "legacy cost" very real, even if labor and management partially created the problem with overly generous contracts. Nevertheless, one could argue that the greatest legacy problem lies elsewhere - namely, in the minds of the American public.

A large percentage of Americans (J.D. Power and Associates has estimated it to be about one-third) does not even consider a Detroit Three product when buying a vehicle. Do the math. If one-third of Americans aren't even looking at Detroit's offerings, and 10 to 12 million new vehicles will be sold in this country in 2009, that's 3 to 4 million fewer potential sales. While much of this ill will was earned by the shoddy quality of some cars (the Chevy Cavalier, Dodge Shadow, and older Ford Taurus come quickly to mind), the vehicles rolling out of the development pipeline today are much better, as Consumer Reports attests (for example, the Chevy Malibu, Dodge Ram Truck, and Ford Flex.)

Going forward, creative government policy initiatives are needed to avoid the negative impact on workers and communities that would occur if one or more of the Big Three were to disappear, and to maintain the positive effects of the cutting-edge research and development the Big Three do together with their suppliers. However, any additional bailout money should come only in exchange for preferred equity shares. In addition, Congress should pass legislation that phases in federally funded incentives to consumers who buy domestically assembled fuel-efficient cars, under the principle the higher the miles per gallon, the larger the incentive. Such government money would help preserve domestic jobs while helping shift demand toward vehicles that emit lower amounts of greenhouse gases.

But putting aside for a moment the issue of further government intervention, the greatest help could come directly from the general public. If more people would give Detroit's cars and trucks a second chance by going to showrooms and taking test drives, they might like what they see - from fuel-efficient engines to new safety and convenience features to comfortable interiors. While it may be unrealistic in the current economic slump to expect the Big Three's vehicle sales to suddenly increase by the millions, even a few hundred thousand more sales would be enough to save an assembly plant or two. It would also go a long way toward reviving the sagging fortunes - and public perceptions - of GM, Ford, and Chrysler.

Daniel Arturo Heller is a visiting scholar at Harvard Business School.