The forecasts for auto production in the coming year steadily diminished. No one had expected 1982 to be a really good year, not like the great ones when ten or eleven million cars were built, the factories ran at capacity, two and three shifts, the union men complained about too much overtime, and the top executives of the companies drew their handsome salaries and then three times as much as their salaries in bonuses. But at the beginning of the year the auto men had hoped for a mild recovery. Possibly, they said, the figure might go back up to eight million. There was a lot of confident talk about things getting better. “Listen, girlie,” said one of the executives of Cadillac, a particularly troubled company, to Maryann Keller, an astute and skeptical financial analyst on Wall Street, “it’s ready to turn around, and it’s going to be bigger than ever.” He and others were privy to demographic studies which showed a lot of loyal Americans out there driving old models, very old models, which they were soon going to have to turn in. Soon it would swing around. It was the American way to turn in a four- or five-year-old car.
That boomer spirit, the creed of a boomer’s city, where everything was going to get better because everything had in fact always gotten better, was needed more than ever because times were so mean. The huge Goodyear sign on I-94 on the way in from Metro Airport, which announced how many cars had been built that year, was flashing anemic numbers. The sign had symbolized the city’s power, energy, and immodesty, for the numbers increased even as the visitor drove by. It proclaimed the city’s strength and vitality, hundreds and thousands and millions of cars rolling down huge assembly lines, the sign saying, in effect, “Look at us, look at our muscle, look at what we are building even as you sit on your tail riding in a car.” It was easy to do the multiples: If the sign showed two million by the end of February, then a ten-million or eleven-million year was possible. But now the sign was a painful reproof. The numbers lagged farther and farther behind, reflecting the industry’s hard times, a symbol not of strength but of shame. Perhaps 1982 would not even be a six-million year. Each week the local newspapers told of a decision to close, at least temporarily, some Ford or GM plant. By the end of February the Detroit papers, reporting on one of the city’s most significant indexes, announced that the industry had a 107-day selling supply of new cars, twice the normal inventory. No one was buying. In many a town and small city, Ford, GM, and Chrysler dealers, normally pillars of their communities, were on the verge of closing down.
The entire American economy seemed out of whack. Interests rates were too high, fluctuating between 15 and 20 percent. Even the ordinary person now knew about interest rates and about money funds, and rather than pay 16 percent on an $8000 car, he was holding on to his car, patching here and there, and placing his money in an account where he could earn 12 percent. The difference between getting the interest instead of paying it might mean thousands of dollars a year for a family. What was truly worrying about Detroit’s plight was that many previously steadfast customers now believed that there had been a breach of faith. The early Japanese inroads into the American market had come because Japan had made smaller, cheaper cars, but the industry’s recent surveys were showing that many Americans now believed that the Japanese made better cars.
The Japanese, aided by the jump in the price of oil, had come in during the worst of times and captured 30 percent of the American market. That had stung not just the city’s economy but its pride, for the men of Detroit believed not only that their own cars were the best in the world but also that the Japanese made shoddy, tinny ones. Japanese goods rattled and fell apart. Scratch the bodies of their cars, went the standing Detroit joke (even when the Japanese had been producing the best steel in the world for more than ten years), and you could still see the Budweiser labels.
Because at first the Japanese success was attributed to the fact that Japan made smaller, less expensive cars that consumed less gas, Detroit had been sure that when it offered its own small, energy-efficient cars, its customers would return. But that had not proved to be true; the Japanese had generated a surprising degree of loyalty among their American customers, and they were proving a good deal more difficult to dislodge than anyone expected. Indeed, the Japanese were doing so well that in the spring of 1981, fearing a strong protectionist reaction, they had reluctantly but voluntarily imposed a ceiling on their exports to the United States—1.68 million cars a year. But even this restriction had not rescued Detroit. Americans had simply gone out and bought cars imported from other countries, most dispiriting of all, often favoring Volvos, Audis and BMWs to the traditional top-of-the-line American models.
Detroit was mortified that large numbers of Americans believed Japanese cars were of higher quality, so suddenly quality became a hot topic. American universities offered seminars that explained the Japanese method of manufacturing and management. Books about the apparently harmonious state of worker-management relations in Japan became best-sellers. In Japan countless international symposia were held at which Japanese managers and workers dutifully explained to their now shaken Western colleagues how they had achieved such a high level of quality. (The Japanese pride in this, that the industrial world was coming their way, was evident; it prompted a number of jokes. In one, a Frenchman, an American, and a Japanese are captured by a hostile tribe. All three are to be killed but are granted one last wish. The Frenchman asks to sing the “Marseillaise,” and the Japanese asks to give his lecture on quality control one last time. It is the American’s turn. His request is to be shot before the Japanese, so he will not have to listen to any more Japanese lectures on quality.)
Madison Avenue responded, devoting millions of dollars to commercials extolling the rising quality of American cars. Almost all of Ford’s new advertising stressed quality—it was “Job One”—and for Chrysler there was Lee Iacocca himself saying that, well, yes, perhaps American cars might have slipped in quality in the past, but Detroit was rededicating itself to craftsmanship. Iacocca, heading Chrysler, now emerged into national prominence as both symbol and spokesman of the new Detroit, and thus of American’s industrial regeneration. He was a gifted sloganeer. If you can buy a better car than his new Chrysler, he said, then buy it.
Chrysler nonetheless was hovering near bankruptcy. Iacocca said repeatedly that interest rates would have to come down to 12 percent for the company to survive. Only a huge government bailout had saved Chrysler two years earlier. That had been painful enough for Detroit purists, who not only believed in free enterprise but even saw themselves as the very embodiment of it. The idea that one of their own, one of the Big Three, had been forced to go to the government for a glorified welfare dole had shaken them mightily. Nor was Ford much more secure than Chrysler. By 1982 it had lost more than $1 billion in each of two consecutive years, and the forecasts for 1982 were still grim. There were those who thought that the very act of bailing out Chrysler might seriously weaken Ford, since Chrysler now would enjoy financial and labor benefits unavailable to Ford, and since potentially every Chrysler purchased was a Ford unpurchased. Not even the mighty GM was free from the profound malaise that had settled over a once omnipotent industry.
The terms from the feds had been very tough on Chrysler. The government had even demanded that Iacocca give up his company jet. That hurt. In the upper stratum of American business, particularly in Detroit, the company jet was the mark of executive power. The feds had argued that it was unbecoming for Iacocca to fly around the country in his private jet while Chrysler was being subsidized by the tax dollars of ordinary Americans. Iacocca, who loved the perks of the office even more than most Detroit executives, the private plane above all, had grudgingly sold the Chrysler plane, but shortly thereafter he managed to work out a complicated lease deal, the net result of which was that there was always a chartered jet on hand for Chrysler’s top executives. Lee Iacocca was once again airborne. When a high Treasury official complained, saying that this was contrary to the spirit of the agreement and pointing out that the Secretary of the Treas
ury of the United States of America himself traveled by commercial jet, an Iacocca subordinate told the press that yes, it was all right for the Secretary to travel this way because he was not particularly well known, but Iacocca could not, since he had become such a public figure, a far greater public figure than the Secretary, certainly, and, given his fame, his security now demanded that he travel in a private plane. The jet stayed.
To the rage of most of the city’s auto executives, the most successful industrialist in Detroit that season was a young man named William Agee, who headed Bendix, one of the great old-line parts suppliers. Agee was at heart a finance man, not an industrialist in the traditional sense, and he had made Bendix prosper in a down industrial economy by shrewdly selling off certain of its ancillary companies and by playing the market right. He had taken the proceeds, put them into the most conservative of financial accounts, and, benefiting from the stagnant industrial climate, made some $900 million. Bill Agee, said an angry Lee Iacocca, struggling to keep Chrysler alive, was not a manufacturer but a portfolio manager. Iacocca’s anger at Agee was easy to understand. Chrysler remained afloat in 1980 and 1981, often meeting its payrolls by the barest of margins, in no small degree thanks to the force of Iacocca’s personality and his sheer professional strength. The ledgers began to look a little better, but the company, a true industrial giant, was still living a hand-to-mouth existence. Iacocca had gone on national television and remarked to Tom Brokaw of NBC on the irony of his position, that it was more profitable for him as the head of a great manufacturing company to make money off money—to have Chrysler become, in effect, a financial house—than it was for him to actually to produce something.
That seemed to sum up the dilemma of industrial America in the early 1980s. In the first half of this century America had been the most dynamic and productive society in the world. Now, in the latter part of the century, its strengths were diminished. Manufacturing something, actually producing something, had become costly and difficult. The definition of quality had eroded badly. Except in the world of high technology, where national scientific excellence and American venture-capital skills could be translated into small, highly successful companies (which often used foreign plants for a good deal of the manufacturing), the actual making of goods had become a burden. Labor costs were high. Management had become bloated. Few of the men running industrial companies had spent very much time in the pit, working in factories, learning the process of manufacturing. The industrial base itself—America’s machines and productive facilities-—had gotten older. Nations just emerging into the industrial sphere, particularly those in Asia, were proving fierce and unrelenting competitors. Nor did American capitalism show its own much mercy. Profit margins in what were called mature companies were now predictably slim, when they existed at all, so Wall Street, wanting faster and bigger returns, sought them elsewhere, in new, more exciting companies—anywhere but in the old core American economy, the foundry that had once made America strong. Money could still be made there, but it was harder and harder to make it being productive in the classic sense. Rather, money shrewdly applied, money leveraged, could be used to beget money. Money could be put into money funds where it sat, making more money than could be earned if put into the blue-chip industrial stocks of yore.
The most successful people on Wall Street now were those called the arbs, from “arbitrage,” the rapid-fire buying and selling of stocks in order to profit from price differences. A smart arb, working just ahead of a big merger, making the right call on who would be the winner, could in a matter of minutes make millions of dollars in an economy like this one, where production was less and less valuable. In a 1981 merger battle, DuPont took over Conoco, and roughly $7 billion changed hands among arbs, stockholders, lawyers, and security men. It was the famous instance, but there were a thousand smaller ones. Billions had been passed back and forth, the stock had gone up, millionaires had been made, but not a single extra barrel of oil had been produced. Soon the market became so volatile, the profits generated by raiders and merger hunters so great, that the tail on Wall Street was wagging the dog, and instead of arbs responding to mergers, some were actually initiating them, suggesting likely targets of opportunity to would-be raiders.
As a general rule, the people now making a lot of money were not producing things, and the people who were producing things were not making a lot of money. It was a dismaying equation for a nation once colossally productive, and a bitter pill for many companies, cut off from their past and unsure of their future. Some executives of big companies talked with excitement of America as the leader in the new service economy; others, from the industrial companies, were warier, and talked of the danger of an America that did laundry for the rest of the world, and where the main industry was the sale of franchised hamburgers. In Detroit that prophecy seemed real enough, for one measure of economic power was the ownership of sports teams—the Tigers had been owned by the Briggses, an old manufacturing family for whom the baseball park had been named, and the football team by William Clay Ford, Henry’s brother—and in the early eighties the two newest owners, of the Tigers and the hockey Redwings, were pizza franchisers.
The men at the top of the Ford Motor Company were grimly aware of the seriousness of the company’s position. The fall from grace had come so quickly and been so drastic they could hardly have ignored it. In the late seventies, Ford, as in the past, had been the second most powerful industrial company in the country. Then, in the treacherous new world economy, the Ford leadership had bet wrong, it had made some terrible decisions. On the eve of the second oil crisis, for example, it had chosen to make big cars instead of small ones, and thus had been caught going the wrong way in a market that was reversing itself. Finally, under the most difficult conditions, it had been forced to spend billions to retool itself for new, small, not particularly profitable cars in an absurdly inflated economy.
It was a terrible time. Ford lost money not only if the inexpensive little cars did not sell but even when they did sell; by its own financial analyses, Ford lost perhaps as much as $400 a car for its Escorts. The cost of redoing nearly its entire line had hurt the company’s financial position, contributing enormously to those two successive $1 billion annual losses. The Ford stock, which had averaged around 32 on the Dow Jones in 1978, had begun to fall with the crisis in Iran. In 1981 it had dropped to 16. At the same time the company’s bank rating with both Moody’s and Standard & Poor’s declined. With Standard & Poor’s it fell from AAA to AA in April 1980; in October of 1980 it fell again, to an A; and then in March 1982, in another humiliation for so proud and powerful a company, it was reduced to BBB. The company, in the words of one executive, was hemorrhaging badly. It might have gone bankrupt, or perhaps have been forced to merge with a foreign auto company or a domestic energy company, except for its highly profitable operations overseas, which in both years had helped offset the losses in North America. “We are actually a very healthy company,” went the joke at Ford. “Most of our operations are doing quite well. We have only one little problem—North America.” In belated response to the crisis, Ford had cut back its executive rolls, closed factories, spent billions tooling up to make better, more energy-efficient smaller cars. Now it was waiting.
There were hopes that the market might begin to turn around for Ford in 1982, and whenever there was a slight blip on the radar—perhaps an upturn after a program of rebates—it was seized on as the sign that the big turnaround was finally taking place, that the hundreds of thousands of good Americans, Ford buyers in the past, sons and daughters of Ford buyers, were finally turning in the tired, overaged cars that everyone knew they were driving, and coming home. But it didn’t seem to be happening in 1982, and now the Ford people were talking about 1983 and some about 1984; those were the years when the company simply had to turn around, when the customers would reward Ford for the fortune it had spent on its new lines. The very survival of the Ford Motor Company was now at stake.
Keith
Crain, publisher of an automotive trade journal, liked to say that in 1945, Henry Ford II, at the age of twenty-eight, had taken over the company in order to save it. It was then losing $1 million a day. Save it he had, said Crain, and now, thirty-seven years later, it was losing $3 million a day. Henry Ford II was in partial retirement, by the end of 1979 no longer chief executive officer and by 1980 no longer chairman of the board, but still active in the company. It seemed a reflection of the modern era that he now spent a good deal of his time in real estate deals. He was downsizing there, too. Unable to sell his immense home in Grosse Pointe for the $2 million he wanted, he was busy getting a variance from the city council so that he could raze the famous house and build one-family cluster houses on the land. The seventy-six-room house had been built in 1927 by Roy Chapin, the president of Hudson Motors, and Ford had bought it in 1956 for $400,000. He had lived there through two marriages (Cristina, by the terms of the divorce, had been allotted one hundred days in which to vacate it), but his third wife, Kathy, was underwhelmed and spoke of it as a “place that gave you the feeling you had to dress up for breakfast.” The Grosse Pointe Farms council gave Ford its approval to build eighteen small houses on the eight acres, each to sell at about $300,000, a deal that might bring Ford some $3 million. At the same time he was also in the process of buying a house in Florida, because, he told friends, “I can’t afford to die in Michigan—the taxes are too high.”
He was still linked to the glory days by dint of his name and the fact that he owned his company and was not an employee. But he was worn out. He had been troubled by bad health, a messy divorce, and a bitter internal struggle with Iacocca, and was preparing to step aside. In 1982, Forbes magazine published a list of the country’s four hundred richest men. Seven from Michigan were listed, and although his brother, William Clay Ford, made the list (a richer wife, no expensive divorces), Henry Ford did not. His personal worth was valued at only $80 million, Forbes pointed out, mostly in badly depressed Ford stock, worth only $23 a share. Had the survey been done in 1973, before the energy crisis changed the economy and when the stock was worth $66 a share, he would have made the list handily. Just recently at a party in Grosse Pointe, Henry Ford had run into a man named Norman Krandall, an unusually blunt Ford executive who was highly critical of recent company policies. He was particularly incensed at Ford’s failure to reinvest in new products in the late seventies as the Japanese challenge had intensified. Krandall had recently done a paper entitled “The Decline of Ford’s Market Share,” a serious, pessimistic warning that he had reason to believe had never reached Henry Ford. So Krandall, who was thinking of retiring anyway, seized this opportunity to confront a boss he rather liked. The Ford Company, he told Ford, was not equipped to deal with the Japanese challenge. Not only was it doing poorly, he said, but it might not be able to hold its existing share in the future.
Reckoning Page 5