SEVEN
“CAR JESUS” AND THE RISE OF THE SUV
National cultures can be opaque to outsiders. Most Americans probably never figured that their national sport, baseball, would be embraced enthusiastically by the Japanese, complete with professional teams called the Kintetsu Buffalo, the Yakult Swallows, and the Hiroshima Carp. Then again, the Japanese didn’t foresee that the inscrutable Americans would start paying premium prices for off-road sport-utility vehicles with little intention of taking them off-road. Or that towns named Naperville, Irvine, and Ho-Ho-Kus would spawn “suburban cowboys” behind the wheels of big, brawny pickup trucks—whose following previously was limited to farmers, contractors, and other guys who hauled plywood to make a living, as opposed to, like, show off.
The trend was so illogical, it was little wonder that the Japanese missed it. So did, initially, The Wall Street Journal, which refused to include SUVs and pickup trucks in its regular reports of U.S. car sales until the late 1980s. The newspaper viewed car sales as an indicator of consumer spending, and heck, everyone knew that most SUVs and pickups were really commercial vehicles. Which was absolutely true … until it wasn’t.
The change started, as did so many automotive trends of the time, with Lee Iacocca. The surprising success of Chrysler’s minivans suggested to him that many Americans aspired to “active” lifestyles that required vehicles more versatile than ordinary sedans or station wagons. That insight had prompted him to buy American Motors and thereby acquire its Jeep brand. Jeeps were perfect for hauling the kids to school Monday through Friday, then for trekking off into the woods for a weekend of mountain biking, trail hiking, and campfire building. Of course, such weekends in the woods, minus hot showers and indoor toilets, meant stinky kids, creeping spiders, and mosquito bites, which weren’t what the well-heeled suburbanites who used invisible-glide deodorant envisioned as their lifestyle.
So they bought Jeeps and other sport-utility vehicles but then rarely, if ever, ventured off a paved highway, where they might encounter something icky or gooey. A rugged-looking Jeep SUV or a brawny Chevy Silverado pickup became the perfect complement to a Patagonia windbreaker: a fashion statement, the sports car substitute for soccer moms.
At first Toyota, Honda, and Nissan missed the trend, and after that they refused to believe it would last. Honda executives told each other that SUVs were just a fad that they would be foolish to chase. Anyway, Toyota, Honda, and Nissan were preoccupied with launching their luxury divisions. Their new marques were aimed at Mercedes-Benz and BMW instead of Cadillac or Lincoln, which sold mainly on the north side of the generation gap. Subaru did make all-wheel-drive vehicles, but they weren’t tough-looking trucks, and Subaru had little presence outside New England and the Rocky Mountain states.
The bottom line was that the truck boom made the car business resemble the 1960s: hardly any Japanese vehicles in an exploding new segment of the market that the Big Three thus had virtually to themselves. So SUVs and pickup trucks commanded premium prices, helped along by the EPA, which classified SUVs, pickups, and mini-vans as “light trucks,” giving them a lower fuel-economy standard than cars. The heavy four-wheel-drive apparatus that underpinned most pickups and SUVs made them proverbial gas hogs, but who really cared? Gas was cheap in the 1990s, and seemed destined to stay that way. In the mid-1990s SUVs and pickups were like a powerful shot of adrenaline delivered straight into the hardening arteries of Chrysler, Ford, and General Motors.
By 1990, pickup trucks had been around for decades. Dust-bowl Okies had used them to trek westward to California on Route 66. Farm families stuck with either Ford or Chevy pickups from generation to generation, demonstrating fierce brand loyalty, in contrast to the fickle habits of ordinary car buyers. Jeeps, for their part, had been the staple of GI transport during World War II, when they were made by Willys-Overland, one of the companies that had merged to form American Motors. From the end of the war until the mid-1980s, Jeeps had limped along as niche vehicles for the Coleman stove set. AMC, meanwhile, came under the control of Renault in 1980. The French automaker tried to use the AMC dealer network to sell its cars in America, mostly in vain.
When Chrysler bought AMC in 1987, the most powerful engine in the Jeep Cherokee was an anemic 135-horsepower V6 that made merging onto a freeway an act of courage. Chrysler quickly installed a new 177-horsepower in-line six-cylinder engine that improved the Cherokee’s acceleration from nonexistent to acceptable. Chrysler also created a gussied-up version called the Cherokee Limited with leather seats, gold-paint body stripes, and gold-tinted aluminum wheels. It looked like a tarted-up tin can, but the combination of more horsepower and a bit of bling proved to be a winner. Dealers around the country begged for increased allocations, especially of the four-door version, as opposed to the two-door models that had been Jeep’s staple for decades. Four years after hitting a home run with the minivan, Chrysler was doing it again, amazingly, with a reconfigured relic of World War II.
Cherokee sales jumped 33 percent in 1988 and rose another 5 percent in 1989, to more than 156,000 vehicles. It was a rare bright spot for Chrysler, which dipped into the red that year as it paid the price for Iacocca’s diversification detour. Having been caught flat-footed by the minivan’s success, Ford was quicker to respond this time. In the spring of 1990 it replaced its aging and uncomfortable Bronco II with a new four-door SUV called the Explorer, outfitted with power leather seats and other creature comforts more attuned to the lure of the shopping mall than to the call of the wild. The Explorer “has given Jeep’s renowned Cherokee a good whacking,” wrote USA Today. Indeed, in its first year the new Explorer actually outsold the Cherokee.
Even as Ford mounted a bumper-to-bumper challenge to Chrysler with the Explorer, it accelerated its running war against GM with pickup trucks. For years it had consisted mostly of rural battles, fought beyond the notice of the news media in little towns such as Paxton and Piper City, Illinois—both of which happened to be located in rural Ford County, about 120 miles south of Chicago.
Ford County was a place where, some clever researchers at a GM ad agency discovered, Chevy pickups outsold Ford’s. So the agency dispatched a crew to Ford County to film real-life residents—at least those who owned Silverados—talking about their trucks. “I love the horses,” as in horsepower, declared a ninety-one-year-old woman named Agnes, a Silverado driver who was filmed stitching quilts with her friends. (More pickup drivers were hunters than quilters, but shooting a deer wouldn’t have looked good on TV.) Agnes added: “That Chevy really hauls.” As the camera panned to a Silverado standing strong on a rural, windswept landscape, the commercial’s narrator delivered the punch line: “People from Ford prefer Chevy trucks.”
Ford quickly cried foul, claiming its numbers showed that the F-series (a lineup that extended from the basic F-150 to the enormous F-350) really outsold the Silverado in Ford County, as it did all over America. Chevy retorted that Ford was counting certain types of medium- and heavy-duty trucks that Chevrolet didn’t even make. Both companies probably were right, but that didn’t matter. Sales of pickup trucks, like those of SUVs, were going mainstream. With sales surging and the stakes getting higher, new rules of combat were emerging. It was a crosstown contest that Detroit loved because it didn’t involve the Japanese, who hadn’t suited up for the game.
The bottom line was that in the mid-1990s GM, Ford, and Chrysler were handed a golden opportunity to rebuild their balance sheets, regain market share, and return to something approaching dominance in their home market. The truck boom wasn’t the only reason. During these years, much to Detroit’s delight, Japan’s car companies hit some unaccustomed speed bumps of their own.
Greed and hubris in the auto industry weren’t limited to people who worked for General Motors, Ford, and Chrysler. One prospective Honda dealer learned that firsthand in the late 1970s, when he was trying to get a dealership in Georgia. The would-be dealer was waiting to finalize the paperwork when he got a visit from John “Jack�
�� Billmyer, Honda’s district manager and a rising star in the company’s sales hierarchy. Billmyer explained that Honda sales managers really didn’t make much money, then added, “Nobody really loves you but your momma, and everybody else got to pay a little cash up front.”
A Honda dealership was valuable, he then explained, worth at least $20,000 and the title to a new car. The prospective dealer knew a shakedown when he saw one. He threw Billmyer out and a few weeks later learned that his application for a dealership had been denied. One of the largest commercial bribery scandals in the history of the United States was beginning to unfold, right in the heart of Honda. It would be given impetus, ironically, by government actions designed to help Detroit.
In 1980 the American and Japanese governments had agreed to “voluntary” restraints on Japan’s automotive exports to the United States, with the stated purpose of giving Detroit time to “adjust” to a new competitive landscape. Because the auto industry loomed large in America’s psyche as well as its economy, even the free-market Reagan administration didn’t want to watch it get run over by the Japanese. The “voluntary” limits started with about 1.7 million cars a year and would rise to more than 2 million annually by the mid-1980s; each Japanese car company would get a share of that quota. The fears that had prompted Honda to start building cars in America proved fully justified: while the deal mollified Detroit and satisfied both governments, it also imposed a de facto tax on Americans who wanted to buy Hondas. As demand outstripped supply, even after Honda’s U.S. production began, dealers found they could often add $2,000 to the sticker price of each car.
Honda dealers used various techniques, sometimes requiring customers to buy expensive floor mats, or sometimes brazenly adding a charge they labeled ADM, as in “additional dealer markup.” Many Americans paid the price, though grudgingly, because Honda’s cars were reliable, fuel efficient, and fun to drive. The profit potential sent car dealers around the country scrambling to add Honda franchises to their portfolios. Existing Honda dealers, meanwhile, were desperate to increase their allocations of cars from the factories, knowing that each extra car meant extra profit.
So began the process that some Honda dealers called “kissing the ring,” a term that conjured up images of Mafia-style payoffs, which wasn’t far from the truth. The operation was centered at the Los Angeles headquarters of American Honda, the company’s U.S. sales division, a separate entity from the manufacturing operations in Ohio. Billmyer had joined American Honda in 1970 as a district sales rep in the mid-Atlantic states and rose to become national sales manager in L.A. in 1980.
As his bribery-and-kickback scheme blossomed, Billmyer got a $10,000 Rolex from a dealer near Washington, D.C., in return for favorable allocations of cars. So many other Honda sales officials followed suit that company sales meetings became known as “Rolex conventions.” Other distinctive gratuities that Billmyer got from dealers included a helicopter tour of Hawaii, an all-expenses-paid shopping spree in Hong Kong, and regular Federal Express envelopes containing cash for “consulting fees.” He also got new cars, including several BMWs, as he ironically outgrew his taste for Hondas.
Throughout the 1970s and 1980s Honda cars were selling above their sticker prices even as dealers were being forced to discount the prices of Chevys, Fords, and Dodges. The American government’s effort to protect Detroit was backfiring, though nobody wanted to admit that publicly. And as events unfolded, Billmyer wouldn’t be just a single rogue executive.
The others at Honda who joined his hidden enterprise included Jim Cardiges, whose name (pronounced car-dee-jus) prompted Honda dealers to nickname him “Car Jesus.” It was an appropriate moniker, because Jim Cardiges could work all sorts of miracles. When an old friend wanted to land a couple of Honda franchises in Pennsylvania, Cardiges made it happen—collecting nearly $200,000 in cash in return. Another dealer who contributed to the Car Jesus collection plate financed a California home for Cardiges, then sent him monthly cash payments to cover the mortgage.
Most dealers weren’t in on the action, and some of them were afflicted with business problems that seemed hard to explain. One New England dealer collected $300,000 in new-car deposits from customers, who then became irate while they waited for months to get Hondas that never arrived. Finally the frustrated dealer sold out to a nearby rival, who seemed to have no trouble getting regular deliveries of his brand-new cars. But the lucrative kickback scheme was too widespread to remain unnoticed. In 1991 an uninvolved district sales manager blew the whistle to Honda’s higher-ups, and a few months later Cardiges resigned from the company by “mutual agreement.” Honda hoped its housecleaning would resolve the mess discreetly, but that wasn’t about to happen.
A New Hampshire Honda dealer who hadn’t been part of the scheme sued the company, claiming that Honda’s sleazy sales practices had cost him money. That brought in the FBI, which found that the scheme of bribery and kickbacks had spanned at least fifteen years and involved at least $15 million. In 1994 a federal grand jury handed up racketeering, conspiracy, and fraud indictments against Billmyer, Cardiges, and others. In the ensuing months nearly twenty Honda dealers and former executives pleaded guilty to various charges. And on the eve of his trial Cardiges himself agreed to provide state’s evidence.
Fortunately for Honda, when the trial began in out-of-the-way Concord, New Hampshire, on February 7, 1995, media coverage was sporadic. Less fortunate for the company was that, from the very start, nobody really denied what had happened. Billmyer’s attorney argued rather that all the booty had just been favors among friends and that key Honda executives, including some Japanese, had just winked at the scheme. It was a variation of the “Everybody does it” argument that most people stop using at age twelve or so. And it worked just about as well as it did for most kids.
In May 1995, after a trial of some three months, the jury found Billmyer and another former Honda official guilty. The judge said that Honda itself “could well be accused of being negligent” for ignoring the warning signs so long. The remark provided ammunition to dealers who claimed they had been harmed by the company’s negligence. In July 1998 Honda agreed to pay those dealers nearly $330 million. Billmyer and others would continue their appeals even longer, without success.
The scandal, in a perverse way, provided evidence of Honda’s surging popularity in America. A similarly large-scale shakedown never could have happened at the Detroit companies because their cars weren’t nearly as popular as Honda’s, at least not in relation to the available supply. More important, the scandal proved a huge distraction to Honda executives just as their momentum in the U.S. market had seemed unstoppable. At the same time, the Japanese car companies suddenly found themselves facing a seismic shift in the global foreign-exchange market. The land of the rising sun had become the land of the rising yen.
In 1991, the same year Honda started coming to grips with its payola scandal, the company quietly cut 25,000 cars out of its first-quarter production plans. Within a month it rented a former army depot in Ohio to store two thousand cars that had been built but that dealers didn’t want to order. And shortly after that Honda gave its U.S. dealers an allowance of $900 a car to spur sagging sales.
The allowance was small potatoes by Detroit standards, where rebates were $2,000 or more. But it was a sea change for a company whose dealers, just a couple years earlier, had clamored for extra cars and in some cases paid bribes to get them. The problem, simply put, was that Honda had sharply raised its prices along with other Japanese car companies. In 1993 the price of a Toyota Corolla, once the quintessential inexpensive Japanese subcompact, soared to more than $17,000, about the same as a midsize Ford Taurus.
Toyota, Honda, and the others were raising prices to cope with the value of the Japanese yen, which had begun to soar in 1985. By 1993 the yen had more than doubled in value against the U.S. dollar, despite the onset of recession in Japan. The country’s bubble economy had burst in 1990 after the collapse of hyperinflated real estat
e prices that had been supported by a glut of bad loans. (Wouldn’t that sound familiar to Americans twenty years later?) Maybe it didn’t make sense for the yen to rise while Japan’s domestic economy tanked, but foreign-exchange markets can swing in directions that defy explanation.
For Japanese car companies, the effect of the strong yen was to pay twice as much for everything that they made in Japan and exported to America. And despite the growing number of transplants, exports still accounted for most of their U.S. sales.
As the yen caught the Japanese by surprise, so did something else: Detroit started making major quality and productivity gains. After years of delay and denial, the Big Three started adopting some of the manufacturing techniques and worker-involvement ideas developed by the Japanese. Detroit’s strategy had become “If you can’t beat ‘em, join ‘em,” and some of the results were palpable.
A newly retired Japanese executive who had become an automotive consultant visited a Chrysler plant in Canada that built the company’s new line of midsize cars. He was amazed to see an exhaust system that was designed to be attached to the car easily and seamlessly in a single piece, thus boosting both both quality and productivity. It was a page straight out of Japan’s playbook, along with just-in-time inventory, worker participation in quality circles, and a host of other innovations.
After fifteen years of explosive growth, the rising yen, recession in Japan, Detroit’s self-help program, and the payola scandal at Honda seemed to be bringing the Japanese automotive juggernaut to a halt. At a Japanese assembly plant in Indiana, some seven thousand vehicles sat in storage because buyers couldn’t be found. Mazda abruptly canceled plans to launch its own luxury division.
To everyone’s shock, in 1992 Honda announced it was pulling out of Formula One racing to save costs. Honda had just won its sixth straight world F1 championship. What’s more, ever since the days of Soichiro Honda, the company had used racing to test the capability of its cars and to test the mettle of the hotshot engineers at Honda R&D.
Crash Course Page 12
