Crash Course

by Paul Ingrassia

  In 1975 Congress passed the first Corporate Average Fuel Economy (CAFE) law, which required automakers to reach a “fleet-wide average,” among all the cars they sold, of 27.5 miles a gallon by 1985 (about double the average mileage cars were getting in 1975), with interim increases along the way. The automakers protested, not only because the mileage target seemed to them too ambitious but also because of the politically convoluted way in which the law was structured.

  Leonard Woodcock & Co. had foreseen that the easiest way for the Big Three to meet a single fuel-economy standard would be to import more small cars from overseas factories, which were non-UAW factories, where lower labor costs could compensate for smaller profit margins. So, at the insistence of the UAW, the CAFE law required Detroit’s automakers to meet separate fuel-economy targets for cars built in the United States and cars imported from overseas, such as Chrysler’s Dodge Colt.

  By setting separate standards for imported and domestic cars, the new law required GM, Ford, and Chrysler to build most of their small cars in America, despite meager profits on them. It was the only way they could avoid paying fines on the higher-priced big cars that actually made money. And because of the ever-sweeter contracts that the UAW was winning, Detroit’s profits on small cars were moving from meager to nonexistent. The Big Three were being squeezed in a vise between Washington’s regulations and their own labor contracts, which were getting richer and richer.

  Woodcock and the union had followed their gains in the 1970 strike with another bravura performance in 1973. After a two-day strike at Chrysler, the UAW won significant wage increases, a family dental plan, better benefits for retirees, seven additional paid holidays over the three-year life of the contract, and, to top it off, the right to retire at any age with full benefits after thirty years on the job. The new pattern deal was dutifully accepted by GM and Ford. The result was that a man or woman could start on the assembly line at age eighteen, right after high school; get full retirement benefits at age forty-eight; and then pursue a life of leisure or take a second job. If the retiree lived to be seventy-nine or older, he or she would spend more years drawing a full pension than actually working.

  And more and more retired workers were living to seventy-nine or beyond, thanks to continuing advances in healthcare—which UAW members could consume without regard to cost. Their contract spared them from having to pay the co-payments and deductibles that most other Americans paid for doctor visits. As a result, UAW members and retirees had little incentive to spend the company’s healthcare dollars wisely. And union members who chose early retirement got extra pension pay to compensate them until Social Security kicked in.

  By 1975 GM’s pension costs for UAW members had jumped to 83 cents an hour, up from just 43 cents an hour three years earlier. “Pension costs have substantially exceeded estimates,” a senior UAW staffer wrote in a memo to Woodcock. In April 1977 UAW vice president Irving Bluestone conceded he was “flabbergasted” that 29 percent of GM’s hourly employees who had chosen to retire the previous year were under fifty-five. “We were aware that the trend to early retirement was escalating,” Bluestone declared. “But this is astounding.”

  Even Woodcock was frightened by the success of his union, from which he retired in 1977 to become U.S. envoy (and later ambassador) to China. On a return visit to Detroit, in a conversation with an old friend, Woodcock confided, “Our members have the best contract that people with their skills and education could ever hope to get. But we’ve convinced them that with every new contract, they’re entitled to more.” Having served up the gravy train, UAW leaders were now powerless to jump off.

  Management’s resistance to union gains that outstripped productivity improvements was always tempered by a salient dynamic: improvements in workers’ pay or benefits would “trickle up” to managers too. The reason: the car companies were determined to keep pay spreads between managers and workers “appropriate.” And they weren’t about to let managers make do on benefits inferior to those enjoyed by their blue-collar masses. It wasn’t quite collusion, but it sure was cozy. What was happening at the Big Three, in effect, was a sweeping transfer of wealth from shareholders to employees, blue-collar and white-collar alike. In Detroit, GM was gratefully nicknamed “Generous Motors” or “Mother Motors.”

  Somebody had to pay for it all, and that would be the hapless consumer. Between 1971 and 1974 the price of a typical Vega jumped nearly 20 percent, to more than $2,500. Just when Detroit needed to boost sales to pay for soaring wages and benefits for its employees, its price increases gave consumers a strong incentive to try a foreign car.

  Customers had other incentives too. In early 1977 an Oldsmobile owner in Chicago was surprised to find that the engine in his new car wasn’t the vaunted Olds Rocket V8 but a Chevrolet engine of similar dimensions. General Motors, it turned out, had run short of Oldsmobile engines and simply had used Chevy engines in some Oldsmobiles instead. The Olds owner complained to the Illinois attorney general’s office, spawning nearly 250 state and private lawsuits against GM. The company insisted that it had done nothing wrong because both V8 engines were 350 cubic inches and produced an identical 170 horsepower.

  But the whole point was that Oldsmobile had advertised its Rocket V8 engine as something better than the plain-vanilla Chevy V8 and indeed had charged a premium price for it. A year later GM agreed to pay Olds owners $40 million in compensation. It was a pittance for a company that earned billions of dollars a year, but the public-perception damage was enormous. The Rocket engine affair seemed yet another example of Detroit breaking its bond with car buyers.

  So did the continued deterioration in the quality of Detroit’s cars. As the 1970s unfolded, Detroit’s engineers—by and large a talented and dedicated bunch—scrambled not only to adjust to new regulatory requirements but also to adopt front-wheel drive to boost fuel efficiency. In its June 1978 issue, Consumer Reports tested a Dodge Omni, a new front-wheel-drive subcompact billed as an import-fighter, built in the Belvidere factory where Fred Young worked. The magazine reported what Young and his co-workers knew but had little means or motivation to address because the plant’s management wasn’t about to listen to workers back then: the Omni was rife with problems.

  Consumer Reports found thirty-seven defects. The fuel tank had been pierced by carpet tacks. The right rear tire was a different size from the other three. And a wiring short circuit caused the car’s horn to blow whenever the steering wheel was turned. The findings might have been fodder for a comedy skit, except nobody was laughing. Besides, those flaws were mere nuisances compared to the problems with the Ford Pinto.

  It’s fair to say that some owners of the Ford Pinto—indeed, like some Vega owners—really did like their car. One, happily named Edward Pinto, graduated from the University of Illinois in Champaign, where he had been student body president, in 1971. Before he headed off to Indiana University Law School that fall, his parents bought him a new Pinto because of, well, its name. Young Ed drove it for 100,000 miles with nary a problem, before selling the car a decade later. During that time he and his girlfriend befriended another couple and often double-dated in the Pinto. Their friends had such fond memories of scrunching together in the car’s tiny backseat that when they were married, they asked to be driven from the reception in Ed Pinto’s Pinto.

  It was the sort of charming car memory that Americans loved, evidence that their love affair with their cars wasn’t limited to Corvettes or muscle machines. But the Pinto story that made national headlines was anything but charming. Instead it was tragic, even deadly.

  On a humid summer night in August 1978 three young Indiana women—two sisters and a cousin—were driving to a preseason basketball game near Elkhart. Their 1973 Ford Pinto was struck from behind by a speeding van. “It was like a large napalm bomb going up,” an eyewitness later would recall. Horribly, all three girls were burned to death.

  A month later an Indiana grand jury invoked a year-old state law that made corporations,
as well as individuals, subject to criminal prosecution. It indicted the Ford Motor Company for “reckless homicide.” No individual Ford executives were named in the indictment, which carried a maximum potential penalty, oddly, of just $30,000—mere pennies to a company the size of Ford. From a purely financial standpoint, the company might have just pleaded guilty and cut its losses. But that wasn’t about to happen. At stake wasn’t just $30,000 but Ford’s reputation.

  Unfortunately, however, company officials could hardly claim ignorance of the Pinto problem. Almost a full year earlier, in September 1977, a little-known magazine named Mother Jones had published the results of its six-month investigation into why Pintos were prone to burn when struck from the rear. The car’s gas tank was mounted behind the rear axle instead of on top of the axle, the magazine pointed out, the latter being a safer design that Ford itself had patented. Should a Pinto get rear-ended at only thirty miles an hour, it explained, “the tube leading to the gas-tank cap would be ripped away from the tank itself, and gas would immediately begin sloshing onto the road.”

  Ford engineers had known about this when the car was launched, the magazine wrote. But the company’s cost-benefit analysis determined that the number of lives that might be saved weren’t worth the additional cost of $5 a car required to strengthen the design. “Burning Pintos have become such an embarrassment to Ford,” the article added, that the company “dropped a line from the end of a radio spot that read, ‘Pinto leaves you with that warm feeling.’ ”

  The Mother Jones piece caused a furor, and mainstream publications, including The New York Times, wrote articles about the article. Within weeks the Transportation Department launched an investigation. In June 1978 a California jury awarded $128 million to a boy badly burned in a Pinto accident. Soon afterward Ford said it would recall the 1.5 million Pintos built between 1971 and 1976 to fix the problem. But the letter notifying Pinto owners was delayed a few months until the repair parts were produced. The notification came too late for the three Indiana girls.

  When the trial began in January 1980, the prosecutor told the jury that Ford “deliberately chose profit over human life.” He tried to enter as evidence more than two hundred Ford internal documents that, he contended, showed what Mother Jones had concluded: that Ford had known about the Pinto problem all along and could have chosen to avoid it. The company’s defense lawyers, however, convinced the judge to exclude all but a couple dozen documents by re-focusing the trial from the Pinto’s design to the specific circumstances of the accident.

  The van that had hit the girls’ car, noted Ford attorneys, had failed a state safety inspection. The van’s driver had a record of repeated traffic violations and had admitted that he wasn’t watching the road. Most important, the defense argued, the van was going so fast that almost any car, even one with a different gas tank design, would have burned from the collision. On March 13, after a two-month trial, the jury bought Ford’s arguments and found the company not guilty.

  The “not guilty” headlines were a mixed blessing for Ford. Being acquitted clearly was better than the alternative, but the trial publicity had cost the company inestimable damage in the court of public opinion. It was another affront, on top of the Vega’s quality woes, the Olds Rocket engine flap, and the individual car breakdowns suffered by tens of thousands of Detroit customers. The reputations of GM, Ford, and Chrysler were undergoing a dramatic shift. After being regarded for decades as symbols of America’s pride and prosperity, the companies were coming to be derided as callous corporations that had contempt for their customers. What had started with the Corvair scandal in 1965 came to full fruition with the Pinto trial.

  Ironically, two months after the Indiana trial ended, Ford won a $19.2 million federal contract to provide 4,994 Pintos to the U.S. Postal Service. The company, after all, had submitted the low bid.

  In the months leading up to the Pinto trial, Detroit was moving into crisis mode on another front. In early 1979, just as Americans had begun returning to bigger cars that were more profitable for Detroit, the Iranian Revolution created the decade’s second oil shock and sent gasoline prices soaring again. The economy plunged into recession, car sales tumbled, and Chrysler posted a record $207 million loss for the second quarter of the year. It was a short-lived record, however, because the third quarter’s loss was a stunning (well, for its time) $460 million.

  By then CEO John Riccardo had been negotiating for months to get up to $1 billion in assistance from the federal government—a request that initially was met with almost universal skepticism. “The conventional case for a bailout is to preserve jobs,” editorialized The Washington Post. “But preserving jobs merely to preserve jobs is dangerous.” President Jimmy Carter balked at Chrysler’s request, as did Congress. The prestigious Business Roundtable, composed of top executives at America’s blue-chip companies, declared its opposition to a bailout.

  So did General Motors CEO Tom Murphy, who scarcely could have imagined that one of his successors would beg for a much bigger bailout thirty years later. But it all would be repeated: a reluctant president. A skeptical Congress. Plunging sales. An alienated press and public. Except that the price tag in 2009 would be fifty times as high.

  But no one foresaw those events in November 1979, when Chrysler’s desperate board ousted Riccardo and replaced him with fifty-five-year-old Lee Iacocca, who had suffered a humiliating public firing from Ford the previous year. Iacocca had been second in command and heir apparent to Henry Ford II for more than a decade, but not even a company as big as Ford was big enough for those two egos.

  After being fired from Ford, Iacocca had signed on at Chrysler as Riccardo’s number two—a move he later said he never would have made had he known how bad things really were. Chrysler had some eighty thousand unsold cars parked around Detroit in the “sales bank,” which was a polite name for storage lots packed with orphan cars that had been built without orders from dealers. The company was a managerial disaster.

  If nothing else, the crisis finally created common ground between a car company and the UAW. They launched a joint lobbying effort, and in late December 1979 Congress reluctantly passed the Chrysler Loan Guarantee Act. The government agreed to guarantee up to $1.5 billion of loans to Chrysler from private lenders, but only if Chrysler could meet strict conditions. One was selling the corporate jets. (They were uniquely visible symbols of executive excess—a lesson the Big Three would forget, to their chagrin, thirty years later.) Chrysler also had to get significant concessions from the UAW, private banks, and others.

  The union agreed, though not without considerable grumbling from the rank and file. But the banks were even tougher. Getting them on board took six months of painstaking and desperate negotiations, during which Chrysler almost ran out of cash. On April 1, 1980, at a critical point in the negotiations, Chrysler’s young treasurer, Steve Miller, summoned bankers to his office to announce that Chrysler had filed for bankruptcy. As his guests gulped, Miller smiled and reminded them it was April Fool’s Day.

  Thanks to Iacocca’s sheer determination and to the chutzpah of his underlings, Chrysler got the concessions it needed, and America got its first automotive bailout. A folk music star named Tom Paxton memorialized the event with a song called “I’m Changing My Name to Chrysler,” which included the verse:

  I’m changing my name to Chrysler

  I’m going down to Washington D.C.

  I will tell some power broker

  What they did for Iacocca

  Will be perfectly acceptable to me.

  FIVE

  HONDA COMES TO THE CORNFIELDS

  Governor James A. Rhodes, a towering figure in Ohio, was an old-school politician who never met a big project he didn’t like. He once proposed building a bridge across Lake Erie from Cleveland to Canada to stimulate trade—one of his few ideas that never got off the ground. Throughout his political career he stuck with a single slogan: “Jobs and Progress.”

  On October 11, 1977, Rhodes c
onvened a press conference at the state capitol to announce that a foreign company was going to build a new factory that would bring jobs to Ohio, albeit fewer than one hundred at the outset. Honda Motor Company of Japan, the governor said, would open a motorcycle plant near Marysville, about thirty-five miles northwest of Columbus. With smiling Honda executives alongside him, Rhodes was asked whether Honda might one day expand beyond motorcycles and start making cars in Ohio. “I wouldn’t be surprised,” the garrulous governor replied. “You know, these Japs are pretty smart.” Everyone in the room gasped, but Rhodes immediately realized his faux pas and added, “Of course, you know that by Japs, I mean ‘Jobs and Progress’!” The attendees burst into a gratefully relieved laughter.

  Initially, luring Honda to Ohio was only a minor victory for Rhodes. The motorcycle factory was a small consolation prize for the state’s failure to land the big fish, the new Volkswagen auto-assembly plant in New Stanton, Pennsylvania, near Pittsburgh. The factory would employ 2,500 people when it started building the Volkswagen Rabbit, the successor car to the beloved but outdated Beetle.

  Honda, meanwhile, was enjoying success by exporting cars from Japan to America, where sales of its little subcompacts surged more than tenfold—from 20,000 to 220,000—between 1972 and 1977. As the company pondered the next step in its U.S. strategy, an unexpected opportunity arose: Ford expressed interest in buying four-cylinder engines from Honda to use in the next generation of Ford small cars. In 1974, after negotiations between the two companies began, Ford president Lee Iacocca even presented Honda’s founder and president, Soichiro Honda, with a new Ford Mustang as a goodwill gesture.