MotorWorld by Alex Taylor III Column archive

Problems remain for Detroit Three

New labor agreements will help, but U.S. automakers face other obstacles in their struggle to survive, says Fortune's Alex Taylor III.

By Alex Taylor III, Fortune senior editor

NEW YORK (Fortune) -- More and more these days, you hear that the public's patience with Detroit has run out. The recently negotiated labor agreements at General Motors and Chrysler, the argument goes, relieve a big chunk of their health care burden and give them more flexibility in manning plants and planning production.

With their cost disadvantage vis-à-vis the Japanese greatly reduced, American automakers now have to build cars and trucks that Americans actually want to buy. In other words, it is time to put up or shut up.

Detroil automakers like Chrysler have a lot of obstacles to overcome. Will new CEO Nardelli be up to the task?

It is an appealing argument - but it is wrong. Sure, the Detroit Three have made some boneheaded decisions in the past and run their companies by looking in the rear-view mirror for far too long. But some of their biggest problems are not of their own making and solving them is out of their control.

So what's holding the Detroit Three back now?

  • The dealers. Franchise laws in most states make it almost impossible for a manufacturer to revoke its agreement with a dealer. As a result, bad dealers can stay in business almost indefinitely.

    Meanwhile, automakers face great difficulties in moving dealers out of decaying urban areas, where some have been for half a century or more, and relocating them to areas of growing population in the suburbs.

  • The brands. Despite the best efforts, old brands eventually lose their luster, which explains why we're not drinking as much Pabst Blue Ribbon beer or Vat 69 scotch as we used to. Marketing vehicles with names like Buick, Pontiac, Lincoln, Mercury, Dodge, and Chrysler is a real challenge that all the savvy and spending in the world isn't going to solve.

  • The competition. There are now more than 40 makes of cars and trucks sold in the U.S. with more than 300 nameplates. As the most open big market anywhere, the U.S. continues to attract automakers from all over the world. As a result, it continues to splinter, and the Chinese haven't even gotten here yet. To expect Detroit to gain back more than a smidgen of its lost market share is naïve.

  • The lack of white space. Minivans and Jeeps saved Chrysler in the 1980s and sport utility vehicles like the Tahoe and Explorer generated lush profits for GM (Charts, Fortune 500) and Ford (Charts, Fortune 500) in the 1990s. Where are the new product opportunities today? The crossover category is rapidly becoming overpopulated, and the next big opportunity - hybrids - are expensive to make and aren't likely to generate much in the way of returns.

Probably the smartest thing to do now is to stop thinking about a Detroit Three altogether. Their fortunes have been diverging for several years and are on the cusp of real change. Under the steady leadership of Rick Wagoner, GM has remade itself into a truly global company that has made a big bet on future technology.

Ford, meanwhile, has hocked itself to its eyeballs as it tries to figure out what it wants to be when it grows up. And the shades have been drawn under private ownership at Chrysler, while CEO Bob Nardelli figures out how to get the place ready for a sale or an IPO in three or four years.

Frankly, I'd be satisfied just to see all three companies get through the next two years in reasonable financial condition.

Despite the rosy GDP numbers for the second quarter, the economic headwinds are stiff. Thanks to the subprime mortgage crisis, consumers can't use their houses as piggybanks any longer. Filling up at the pump is becoming increasingly painful with oil at $95 a barrel. And the combination of high government deficits, a growing current account deficit, and the weak dollar don't bode well for the future.

So don't expect life to be getting significantly better for the U.S. auto industry anytime soon. But you can count on one thing: It will be different. Top of page