When Detroit Was Caught Flat-Footed

Wednesday, March 02, 2005

When Detroit Was Caught Flat-Footed

(Note: History provides many lessons -- it even refines the lessons that we've already embraced.)

Although U.S. automakers have recovered considerably from the dark days of the mid-1970's, those were the days when Toyota, Honda and other Asian auto companies were able to gain a crucial foothold in the American market.

Higher gas prices encouraged U.S. consumers to opt for smaller cars, and the Detroit automakers were caught unprepared. But exactly why were U.S. manufacturers so slow to respond? Conventional wisdom blamed three factors:

1) a gas shortage that few seemed to envision,
2) the hubris of U.S. auto executives, and
3) resistance by the United Auto Workers (UAW) union to producing smaller cars.

But is that last factor more myth than reality? The argument always seemed fairly logical -- profit margins are bigger on larger cars, meaning UAW felt its members would fare better at the negotiating table if the Big Three automakers kept turning out big cars, not diverting assembly lines for subcompacts.

Fifteen years ago, in June 1980, Time magazine ran an article (subscription req'd) in which it observed:
As car sales continue a yearlong slump and the auto industry faces its gravest crisis ever, an increasingly anxious public is asking: Why can't Detroit build more and better small cars?

... With Detroit-built small cars in short supply and considered by many to be of poor quality, Japan has happily filled the void. This year it will sell 2.2 million cars to U.S. drivers. The Japanese auto industry, which was only growing up a decade ago, will produce more automobiles this year than its American counterpart.

... For reasons of profit and tradition, GM, Ford and Chrysler for years could see little incentive to build small cars. In failing to do so, they ignored a market niche ...

In 1974 Ford seemed in the best position to ride out the fuel crisis ... (but the company's chairman) vetoed a decision to spend some $2 billion on a domestically built front-wheel-drive subcompact. Instead he opted to proceed with the less expensive downsizing of the Ford LTD and others.

The decision was disastrous. When LTD reruns arrived on the market in the fall of 1978, they sold poorly. Ford had no modern U.S.-built subcompacts for a market that would soon demand fuel-sipping models.
Nowhere in this article did Time lay blame at the feet of the UAW. Interesting. Then I stumbled on a fascinating passage from the transcripts of Lyndon Johnson's White House years. Michael Beschloss, who edited the transcripts, introduces a Jan. 25, 1964 conversation between LBJ and Defense Sec. Robert McNamara (former CEO at Ford Motor Co.):
Walter Reuther, president of the United Auto Workers union, has proposed to Johnson that the government help create a new American company to produce small cars, competing with Volkswagen ... (which) has enjoyed phenomenal success in the U.S. market ... Reuther suggested a joint venture by major U.S. auto manufacturers ... with the others pledging not to compete ... the Justice Department would have to suspend antitrust restrictions.
On that day, LBJ voices support for getting a company to "put this little car on the market," adding that "it'd be real novel."

McNamara worries that executives at the Big Three might "decide against it just because it's Reuther's idea." One wonders if that is what killed the project.

In any case, reading about this left me with mixed feelings. On the one hand, it's nice to know that the union's chief was ahead of the curve in thinking about the industry's competitive challenges. On the other hand, it's depressing to think that an idea like this, advanced in 1964, failed to gain traction or at least encourage U.S. auto executives to find other ways to enter the small car market sooner rather than later.

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