by Lee Iacocca
Off the top, Jaguar’s got to go. Ford has poured over $5 billion into Jaguar, and it’s still in the red. Another money loser is Land Rover. Finally—and this is the hardest—you need to evaluate whether Mercury can be profitable and have some identity in the market.
Follow the market
During my years in the car industry, we hit two out of the ballpark—the Mustang at Ford and the minivan at Chrysler. The formula for their success was a departure from the original Sloan model of a car for every purse. These vehicles were built for lifestyles.
The Mustang was a big success because it was a lifestyle car for baby boomers. In 1964 they were teenagers with their first driver’s licenses. They craved mobility. And they (or I should say their parents) had the disposable income to afford it. They responded to the Mustang because it was a beauty, it had power, and it had an identity. It became a cult car. To this day, when I go to the classic Mustang shows, those now-aging baby boomers treat me like a rock star. That car meant something to them.
In the 1980s, our big success was the minivan. We’d followed the baby boomers, and they’d grown up, married, moved to the suburbs, and acquired a couple of kids and a dog. The minivan spoke to that lifestyle—and, by the way, it still does. Twenty-two years later, with not much competition, Chrysler is still selling 30,000 minivans a month. I guess soccer moms are still alive and kicking.
You cannot lose if you follow the market.
For much of its history the American auto industry took an ass-backward approach to the market. They basically said, “We’ll decide which cars to build, and then we’ll try to convince people that they want and need them.” Then someone came up with a bright idea: “Why don’t we find out what kind of cars the customers want and need, and then build them?” It’s still a bright idea.
The best situation in the world is when dealers are beating down your doors for a car because their customers are beating down their doors for a car. You don’t just roll them off the line and hope you can find a way to get rid of them.
Lighten up
It’s about time we stopped promoting the fiction that bigger, heavier vehicles deliver more safety on the road. America went crazy over the SUV because people believed all that iron protected them. Here’s the truth: You don’t make cars safer by just adding weight. Study after study has shown that weight alone doesn’t protect drivers.
When I bought Jeep, I predicted a market for SUVs of about half a million vehicles. I thought it might be a niche market, or even a fad. I didn’t realize it was the start of something big—a whole new class of vehicles. If you’d told me that in just twenty years about every brand in the world would need an SUV, and that annual sales would get to the five million mark, I would have said you were crazy. But the SUV is a phenomenon.
The question is, why has the SUV been such a success? What is its purpose in life? Very few people go off-road, so it’s not because they need a rugged all-terrain vehicle. The SUV doesn’t have the passenger or storage capacity of a minivan, or the good ride and handling of a car.
So, what is the motivation for buying an SUV? Why are we lugging around all that extra weight? Bigger engines (usually V-8s) are not known for fuel economy and low emissions.
I think the SUV feeds a strong desire for security and control on the road. In this day and age, people want to put as much steel and iron around them as they can. They equate weight with safety. It’s a factor, but in no way compares to solid structural design and the use of multiple air bags. I think people are looking for a competitive edge on the freeway and they like riding high in a command position behind the wheel. With thousands of other SUVs speeding past them, not to mention eighteen-wheelers and cement mixers, drivers just feel more secure. It’s a perception and Detroit promoted it. One SUV brand advertised itself with the headline, “Look upon it as a 4,000-pound security blanket.”
It might be kind of a macho thing, too. The introduction of the 1990 Jeep Grand Cherokee kick-started the whole market and coincided with Desert Storm and those huge wartime Humvees. They evolved into Hummers for home consumption. Hummers are the ultimate example of the bigger-is-safer mentality: If you want guaranteed safety on the road, why not drive a tank!
The oil crisis of the 1970s was a wake-up call: Start to build smaller cars, or die. Well, we got a late start on that, behind our Japanese competitors, but once we started to build smaller cars, we got pretty good at it. Eventually, gas prices leveled off, and we started forgetting the pain of the long gas lines of the 1970s. Maybe we thought gas prices would stay low forever. We began building bigger, heavier vehicles. Today we’ve reached another period of instability with energy prices, and we’ve got to get smarter this time around.
The market imperative is so clear you’d have to be blind not to see it. We need to build more small cars. Right now, none of the smallest cars are built by Detroit.
We need to spend more R&D on hybrids. And we need to do it aggressively. I’m not talking about sticking a toe in the water with the development of crossover vehicles. What the hell is a crossover vehicle? It’s an SUV on a car chassis that will probably never go off-road. It’s smaller than a minivan. Well, let me see…that would be a…CAR! Stop building models that people don’t need, and concentrate on a lean, strong product program.
Detroit has been shamefully late getting into hybrid development. The excuse: Hybrids are not yet as fuel efficient as they should be, and they’re expensive to build. We need to exert some creativity here, or we’ll be ceding the future market to Honda and Toyota.
Lock the Big Three in a room
By the “Big Three” I mean the companies, the union, and the government. There must be across-the-board collaboration to make this comeback work.
As this book goes to press, the UAW is gearing up for a major contract showdown in September 2007. There are a lot of big-ticket issues on the table, and this negotiation is going to require some major leadership.
Here’s the way I see it. There’s a lot of talk these days about whether we live in a faith-based world or a reality-based world. Well, I think this discussion is relevant for the unions. In a faith-based world, the UAW throws its hands to the heavens and says, “GM [or Ford or Chrysler] will provide.” In a reality-based world, the UAW understands that the burdens of legacy costs have the automakers fighting for their lives. In a reality-based world, the UAW sees that companies like Toyota are thriving by building nonunion factories. In a reality-based world, the UAW realizes that Ford and GM have already taken the first shots across their bows with massive employee buyout plans. More than 65,000 workers are taking the buyout money from these two companies and leaving the industry. Two great companies are being hollowed out of skilled workers. It’s madness. Where do you think those workers are going to go? They’re not all retiring. They might even take their skills to Toyota, which would be the ultimate irony.
As for the government, well, if the auto industry really is the heartbeat of America, someone had better warn the government that the old ticker is on life support. The lukewarm interest of the Bush administration has been demoralizing.
When Chrysler was sliding into bankruptcy, and I was trying to sell Washington on the idea of a loan, I raised this question with Congress: Would America be better off without Chrysler? Now, you’ve got to understand that there was huge resistance in Washington and on Wall Street to a bailout for Chrysler. All those free enterprise purists had their noses in the air. They defined free enterprise as survival of the fittest, as if we were playing some kind of ancient caveman’s game. I had to show them it was in their interest to keep Chrysler solvent.
I did it with numbers. The Treasury Department had estimated that if Chrysler collapsed it would cost the country $2.7 billion during the first year alone in unemployment insurance and welfare payments. I said to Congress, “You guys have a choice. Do you want to pay the $2.7 billion now, or do you want to guarantee loans of half that amount with a good chance of getting it all back? You c
an pay now or you can pay later.” That made people sit up and take notice.
Then, with the help of my friend Speaker of the House Tip O’Neill, I broke it down for each congressman. I think there were only two districts in America that didn’t have a Chrysler dealer or supplier providing jobs. So I put it to them in terms each representative could understand: If Chrysler went under, their district would lose jobs. And I told them just how many. It worked because they came to see a loan for Chrysler as a way to save jobs in their neighborhoods.
Maybe you’re thinking, There he goes again, angling for bailouts. I’m not talking about bailouts. I’m talking about the government understanding that it has a stake in the success of the auto industry. I’m talking about the government agreeing that it has an obligation to help level the playing field.
Look at it this way: The acronyms are killing us. There’s OPEC (the Organization of Petroleum Exporting Countries), which has been around for thirty-six years, controlling the oil spigot at the whim of the cartel. There’s MITI (Japan’s Ministry of International Trade and Industry), which has been around for sixty years, manipulating currency in a way that would be illegal if it were happening in America. And there’s UAW (United Auto Workers), which has been around for seventy-five years, playing the gimmie game with every new contract. Whenever you see an acronym, you know you’re in trouble. And isn’t it a bit much to expect one executive—or even three executives—to take on these long-established and entrenched organizations?
American carmakers have struggled to stay competitive in spite of being saddled with the kinds of burdens the foreign competition never has to worry about—such as skyrocketing pension and health care costs, intractable unions, government regulations, and a growing trade imbalance. All of these factors translate into brutal fixed costs on the production of cars, and a constant scramble for capital. Our Japanese and European competitors essentially have a blank check from either government-owned or highly regulated banks. (For years the going interest rate from the Bank of Japan has been 0–1 percent, if you can believe that!) Year after year our trade representatives sit around eating sushi and making nice with the Japanese, and never push for a level playing field. Meanwhile, our state governments treat the Japanese auto companies like conquering heroes.
Here’s an example. A newly built Toyota plant in San Antonio, Texas, has become the darling of the state. They’ve showered Toyota with millions of dollars of incentives, worth about $600 per car. And that’s not even the best part for Toyota. Its young workforce is nonunion. There is virtually no burden of pension and health care costs. Meanwhile, a couple hundred miles down the road, a thirty-year-old GM plant in Arlington—one of the company’s most successful—doesn’t get any of the red carpet treatment, but it gets all of the headaches. And the biggest headache of all is health care. GM pays $1,525 per vehicle for health care to Toyota’s $201.
Our government ignores the very real and looming crisis of legacy costs at its own risk. How about some incentives for the companies that are keeping retirees solvent? How about a health care plan that won’t bankrupt industry? General Motors is the largest private purchaser of health care in the United States, offering coverage to 1.1 million people. Twenty years ago at Chrysler, I was shocked to learn that Goodyear Tire and U.S. Steel weren’t our biggest suppliers—Blue Cross/Blue Shield was. Today it’s even worse. And it’s not just the auto industry that’s affected. Howard Schultz, the chairman of Starbucks, says his company spends more on health insurance than it spends on coffee beans! What do you think would happen if all of those people were suddenly uninsured? That is a question a responsible government needs to address.
Leadership in the car industry means knowing when corporate policy ends and public policy begins. You see, companies are not separate entities from government. Everyone has a part to play in the recovery of our manufacturing sector. But it will take real leadership in the “Big Three” of corporation-union-government to get it done.
WHO WILL LEAD?
I’ve said before that leadership is born in times of crisis, and Detroit has got a hell of a crisis on its hands. The question is, What kind of leaders are emerging from this crisis?
Here, I have to say, the news is actually very good.
At GM, Rick Wagoner has exhibited amazing cool in the face of a serious arm-twisting by Kirk Kerkorian, Jerry York, and Carlos Ghosn. They pushed a merger with Renault-Nissan that would have solved exactly none of GM’s problems. Kerkorian and York, as I mentioned earlier, know how to play those high-stakes poker games, but Wagoner didn’t fold. Instead, in his low-key, under-the-radar way, he showed the merger specialists to the door, and has instituted a new drive for improved product design, with the help of a savvy veteran, Bob Lutz.
Chrysler’s Tom LaSorda may be just the guy the company needs for a back-to-basics drive to reverse its slump. As a former factory boss (and the son and grandson of labor leaders), LaSorda understands the nuts and bolts of the business. He also has the ability to inspire trust among the workers. When he says, “I know what you’re experiencing,” he means it.
It’s too early to know how Ford’s new chief, former Boeing executive Bill Mulally, will adapt to the car industry. Sometimes an outsider’s perspective can reenergize a tired business plan. I will say one thing about the leadership change. Bill Ford earns my admiration for stepping up and acknowledging the crisis—and admitting that maybe he was in a little over his head and needed help. His move took a lot of guts.
A leader in the auto industry has to have a passion for cars and an enthusiasm for innovation. The leader sets the tone for the entire company, and when I was CEO I always wanted my tone to communicate that we could do great things together. I hope the current leaders feel that way, too. Wouldn’t it be something if the best days of America’s arsenal of democracy were still ahead of us?
XV
Who will save the middle class?
I’ve been looking for the middle class, and I have to admit that I’m having a hard time finding it. No one seems to know how to define it. A lot of economists say that the middle class is a state of mind. Well, that doesn’t seem right. When I read the newspapers, they talk about the Middle Class Vote, and the Middle Class Financial Crunch, and the Middle Class Health Care Crisis. They talk about the Middle Class Losing Jobs to Globalization, and the Middle Class Tax Burden, and the Middle Class Credit Card Debt. That doesn’t sound like a state of mind to me. We’re talking about real people here. But who are they?
Even the middle class has trouble defining itself. When pollsters ask people if they consider themselves middle class, they get “yes” answers from those who have income levels anywhere between $20,000 and $100,000. Obviously, you can’t pin it down based solely on income. There are too many variables—like where you live, the size of your family, and whether or not your job has benefits.
When I think of the middle class, what comes to mind are the hardworking people I’ve known in my life who have dreams and aspirations for themselves and their children. I grew up in that kind of family. Like most immigrants, my parents believed in the American dream: Anything was possible if you worked hard and got a good education. They made sure our family always had a roof over its head and plenty of good home-cooked food on the table. My parents knew how to stretch a nickel, and we never wanted for the important things—even during the Depression. We always had everything we needed, and then some.
It never occurred to my dad that I wouldn’t do better than he did in life. He was always teaching me, always imparting lessons. He wasn’t surprised that I prospered. He expected it. When I became president of Ford, the first call I made was to my wife, and the second was to my father in Allentown, Pennsylvania. He was eighty years old, and he’d seen a lot in his life, but this was one of his high points.
It’s been a long time since I was a member of the middle class. I’m not going to pretend that I experience the stresses and strains or feel the pinch that is a way of life for most A
mericans. But I’ll tell you one thing. I’ve never stopped appreciating the hopes and aspirations of the middle class. That was my father’s legacy. I got where I am through the grace of God, a little talent, hard work, a lot of luck, and because I lived in the land of opportunity. And I’ve always wanted to see others have the same chance.
America needs the middle class. You can’t run a country with just the very rich and the very poor. The middle class keeps the economy rolling. As long as a family is making enough to meet its mortgage payments, eat fairly well, have two cars in the garage, send a kid to college, go out once a week for dinner and a movie, and have a little extra left over, they’re fairly content. We used to talk about “Joe Lunchbucket.” I guess now it’s Soccer Mom and NASCAR Dad. But the reality is the same.
The middle class has been called “the silent majority.” But it hasn’t been so silent lately, because people are scared. I have to say I’ve never before seen this level of anxiety from working people.