Reckoning

by David Halberstam

  53. THE RECKONING

  STARTING IN 1983, THERE WAS in the auto industry a kind of euphoria. American cars were selling again, interest rates were down, the price of oil was beginning to go down. The advertising campaigns seemed to reflect it. America was coming back. We might have made some mistakes in the past, but we had learned our lesson. Quality was job one. Even the beer commercials seemed to get into the swing of it, and there suddenly seemed to be an onslaught of commercials showing good hardworking blue-collar Americans putting in a long hard day, good guys who got along with their foremen as long as the foremen were square about things, drinking a well-earned beer that was brewed the American (not the foreign) way. As with many things in America the trend was celebrated by Madison Avenue and turned into videotaped myth before it was fact. Within the industry itself there was a sense of celebration and a belief that the customers had returned, that the bad days were over and the industry had righted itself.

  Wall Street analysts and others, however, took a colder look at the sudden bonanza. They judged the temporary wall against the Japanese to be of critical importance. It was hard to estimate something like this exactly, the dollar benefit to Detroit of the temporary restraint—just as it was hard to estimate how much of an advantage the Japanese had in the production of a car—but shrewd analysts who knew something about Detroit’s cost and price structure put it near $1000 per car, an almost sure difference between red ink and black. In effect the great lever that Detroit had had before the Japanese onslaught—the ability of GM to set the price and of the other companies to stay in the lee of GM—had momentarily returned, with the Japanese, now able to charge even more for a car, among the principal beneficiaries. For conservative economists, free traders who believed that protection created inflation, the jiggling with the prices of American and Japanese cars in that period seemed to be perfect proof of their arguments.

  Ford was a good example of what had happened. In 1979, the last good year, the one before the crunch, it had made a profit of $1.2 billion on sales of 4.7 million cars while employing a work force of about 500,000 people worldwide; in 1983, the year of the company’s first turnaround (after some $2.4 billion in losses over three years), it made $1.1 billion on sales of only 3.6 million cars (more than a million fewer) with a work force of 380,000. The comeback, some skeptics sensed, was not an industrial resurgence but rather a skilled financial rearrangement. The essential problems remained. It was an industry desperately trying to improve itself. But to take a giant industry, one that had grown careless and sloppy over more than twenty-five years of virtual domestic monopoly, and restructure it under combat conditions was not easily accomplished.

  At Ford, Don Petersen pushed a serious new quality-control program. He had brought in Edwards Deming, the quality expert the American auto people had once scorned and the Japanese had taken so seriously, and he had placed some Deming disciples in key positions. In 1984, in what was a gratifying victory for Deming, the Society of Automotive Engineers asked him to address its convention in Detroit. He accepted on the condition that the presidents of both GM and Ford sit with him on the platform, and they did. He was now officially a prophet with honor in his own country. Ford even made a training film in which a Ford executive held up a part from a transmission made by Mazda, its Japanese sister company, and said, “We thought our part was good, and it is, but theirs is damn good.” Some of the Deming people privately complained that it was hard to push the essentially egalitarian Deming principles in large corporations like GM and Ford, which gave million-dollar bonuses to their highest executives. Still, there was no doubt that quality was receiving more than mere lip service and that American cars, particularly Fords, were getting better.

  The problem was that the Japanese were not standing still. Pushed by their own demonic need for excellence and their own fierce domestic competition, pushed as well by the vision of an ascending Korea, pushed by the fear of a resurgent America—the battle of Midway all over again—pushed above all by a cultural spirit that made them more comfortable in adversity than in success, they were getting better at a striking rate. A number of studies by professional organizations showed that despite the improvements by the Americans, the Japanese were significantly ahead in quality. “The Japanese,” said Keith Crain of Automotive News, “remind me of a racecar driver who’s five laps ahead but doesn’t know it and keeps driving as if he’s five laps behind.” Certainly many American executives were stunned with the ferocity with which the Japanese auto makers decided to thrust ahead once the voluntary trade restrictions ended in 1985. The Americans had expected a gradual assault, but the Japanese, fearing each other, the Koreans, and the Americans, had been ruthless. Some Americans thought that they would only go to 2.1 million cars in the first year, but they went instead to 2.3, and there were internal Japanese projections that went as high as 3 million. The Americans were stunned; they had no idea that the Japanese would push their advantage so openly. The figure was actually closer to 2.4 million, which meant an increase of more than 25 percent.

  At the same time, the Japanese were opening factories in America, first Honda, then Nissan, then Mazda, then Toyota and, planned for the future, a joint deal between Fuji Motors (Subaru) and Isuzu. More often than not these new factories were located in the South, outside the reach of the UAW; that meant that the Japanese could come to America and retain some of their cost advantages. For the Japanese, building an American factory was a way of fending off future trade restrictions. It allowed them to make small cars in America (and eventually, if they wanted, to move into the coveted middle and upper levels of the market), and it allowed them incidentally to pick up increasing American political support, for when they came to a new area, its congressmen, newspaper editors, and workers immediately became more sympathetic to the Japanese industrial vision. Some of the Japanese suppliers followed the Japanese auto companies to America, confident that they had a guaranteed relationship with Honda or Nissan and eager to sell to the American assemblers as well.

  In this new phase of the drive on the American market, thought Maryann Keller, the Japanese had an advantage: They had so many companies, and such intense domestic competition. It meant that their quality was always high. It also meant that if one or two of them came out with weak models, there was nonetheless always going to be another manufacturer who had the right car for that season. A related advantage was that the Japanese did not need the scale that the Americans depended upon. To Detroit a car was not a success unless the company could run some 500,000 pieces over the cycle of a few years. But the Japanese were accustomed to different scales, their increments of everything were smaller, and they could make a profit on much lower numbers. One Japanese manufacturer, she noted, was coming up with a miniature four-wheel-drive vehicle. Though a car like that might capture a rather limited market by American standards, it might be extremely profitable for a small Japanese company. By contrast, she noted, all the new money being spent in Detroit was for giant, old-fashioned production lines, what she called dinosaur lines.

  All of that new competition made the future look grim. In the bad times between 1980 and 1983, six American assembly plants had been closed. Now, with the obvious jump in foreign production in North America, some experts predicted that the Big Three would have to close no fewer than six and perhaps as many as twelve assembly plants in the next few years. A cloud of desperation hovered over workers about the future of their jobs, as the personnel office of Mazda in Flat Rock, Michigan, could testify: The new Mazda plant in construction there would not open until September 1987, but some twenty months beforehand, there were some ninety-one thousand applications for the thirty-one hundred jobs.

  In the early eighties, American executives, because of joint production deals, were often visiting Japanese factories, and they were finding out how good the Japanese were, especially at the basics. One executive who had made that trip and reached that conclusion a decade earlier was Hal Sperlich, then of Ford. Touring a Japa
nese auto factory in the early seventies, he had noticed that there were no repair bays alongside the line, areas into which defective cars in the process of assembly were pulled for fixing.

  “Where do you repair your cars?” Sperlich asked the engineer with him.

  “We don’t have to repair our cars,” the engineer answered.

  “Well, then,” Sperlich asked, “where are your inspectors?”

  “The workers are the inspectors,” his guide answered.

  Sperlich left that factory somewhat shaken: In America, he thought, we have repair bins the size of football fields.

  In 1985, Sperlich, by then at Chrysler, was talking about what he called “nonconformance.” That was the difference in what it cost to do a car right the first time and what it cost to do it wrong and then have to compensate—the money spent on the scrap metal, the manpower wasted on repair, the problems on the warranties, the insidious costs spread throughout the company associated with paying attention to something that you should not have to pay attention to. By Sperlich’s estimates the cost of nonconformance for an American auto company was some 20 to 40 percent of revenues. That, in turn, he thought, meant that if you did the car perfectly, if all the parts came in right and everything was done correctly the first time, not only would the cars be better and the company’s reputation better, but you could reduce your costs by, say, 25 percent, or finally about $2500 a car, which was close to the Japanese price advantage.

  A critical part of the answer, he believed, was to put far more pressure on supplier companies. What was startling about Detroit up until then was how casual the major companies had been about their suppliers. When he came to Chrysler he checked with his colleagues who dealt with the supplier companies, asking, What is our standard of purchasing? He was startled to find that there was none. That had been true, he was sure, at Ford as well. There was, in his phrase, no report card. One of the best things about the challenge from the Japanese was that this aspect of the business was changing and changing quickly. The suppliers were being pushed hard to improve quality.

  In 1985, very quietly, a symbolic event took place in the American automotive industry: Honda passed American Motors as the fourth-largest maker of cars in America. Honda, perhaps because it was the most entrepreneurial and the least bureaucratic of the Japanese companies, and the one most dependent upon its export market, had done everything right in this country. While the other Japanese companies dragged their feet on the issue of building factories in America, Honda in 1979, just when the American industry began to collapse, decided to build its Marysville, Ohio, factory; in December 1982, as the other Japanese companies struggled with import restrictions, Honda started American production. It managed to keep the UAW out—though that was a sore point, and there were constant struggles with union organizers. It pressured its American suppliers to raise their quality. By 1983 it was producing 50,000 cars a year, and by 1985 the total reached 150,000. (American Motors in the same period was falling from 200,000 to about 120,000.) With the 400,000 Honda was allowed to import, it was selling by the end of 1985 over 550,000 cars a year in America. More, though producing in a foreign country with foreign workers, it retained its mystique, as much from word of mouth as from advertising, that for the money Honda cars were the best-engineered and best-made in the world. In late 1985, badly shaken American manufacturers resorted to special promotional deals, including carefully adjusted credit rates, but Hondas were selling well above the sticker price throughout the country. Nor was Honda content to stand still. In 1986 it was planning to expand its facilities and make 300,000 cars at Marysville, and there were serious plans to build yet another factory, which would give Honda the capacity to sell a million cars a year in America by the end of the decade. At the same time, it was moving into the middle range as well, with a car called the Acura Legend, which sold for about $18,000.

  That was just Honda. In May 1985 the first passenger cars came down the line at Nissan’s Smyrna factory. That same year, Toyota, the dreaded Toyota—so skillful (some competitors would say brutal) in its industrial process and its capacity to pressure suppliers that it alone made a profit in the crowded Japanese domestic field; so deliberate in its corporate strategy that it was almost invariably the last of the Japanese companies to try a major move, such as locating in America—chose a site for its first factory in the mid-South. By 1985, Toyota was seeking nothing less than to replace General Motors as the foremost producer of autos in the world. It was likely, thought Maryann Keller, to become America’s low-cost producer, and it was clear to her that Toyota would not have come to America unless it was planning to make a million cars a year there eventually, many of them in the middle of the market.

  By 1985 it was apparent that the events of the past two years, especially the surge of profits, did not signify a true comeback and that the auto industry remained very vulnerable. The creation of all those new Japanese plants—and supplier plants—in America seemed to promise an even more difficult struggle in the years ahead. To many American executives surveying the battlefield, a real competition with the Japanese seemed unwinnable. More and more the Americans were turning toward cooperation with the Japanese, making deals in which small cars carrying American labels were produced by Japanese sister companies, or in which American labels went onto cars with an ever-higher percentage of Japanese component parts.

  In the fall of 1985, Lee Iacocca gave an interview to John Holusha of the New York Times in which he said that according to his projections, in two years the Japanese would have 50 percent of the American market, counting component parts, Japanese cars, and Japanese cars under American label. Some of his old colleagues in Detroit thought it was significant that in the same interview Iacocca managed to put the blame entirely on the federal government (which had just helped rescue Chrysler) for its tax policies and the way it valued the dollar. “That’s why I went to Japan,” he said. “I’ve got to build some of my stuff in yen and sell it for dollars. That’s the magic of it.” There were others who thought that the magic was a great deal more complicated, and that if there was a flaw in Iacocca it was his inability to admit his and the system’s culpability and the constant need to blame someone else.

  In early 1986, Don Frey, one of the fathers of the Mustang and now head of Bell & Howell, went back to Detroit to visit his brother Stu, a senior executive in Ford engineering. At one point they began talking about the Mustang, a subject close to Don Frey’s heart. He told his brother that he thought it was time for a new model. “The one you have now is getting a little long in the tooth,” he said.

  “I just signed off on the program for the new one,” Stu Frey said.

  “Tell me about it,” Don Frey said. “Who did it?”

  “Well,” said Stu Frey, “we’re doing the clay, which we’ll send to Mazda in Hiroshima, and they’ll do the body design and drive line on a Mazda chassis to be shipped to Mazda’s Flat Rock plant, where it will be assembled with a Ford engine.” Something hung in the air between them, so Stu Frey added, “We can’t make any money on it doing it here.”

  The Mustang, Don Frey had thought, my Mustang. The most American of cars. Now made by Mazda. He felt a special sadness for the car, for the company he knew and cared about, and finally for the country.

  All of this showed in 1985, as the barriers started falling, that the auto industry remained deeply troubled. But perhaps the most dramatic evidence, to people in the industry, was that in the summer of 1985, Maryann Keller, widely regarded as one of Wall Street’s most astute analysts of the industry, testified in Congress in favor of limited protectionism. In the world of auto men, that was a surprising development. As accurately as anyone else in her field, Keller had prophesied and tracked the rise of the Japanese industry, acquiring a considerable reputation on the Street, in the press, and in the industry internationally. So often was she painfully right that many American auto executives considered her anti-American and pro-Japanese. She was nothing of the sort. She was a
virtuoso analyst, the kind of person whom the CIA, when it is lucky, places in charge of a vitally important country, someone whose estimates are a shrewd blending of a deep and powerful knowledge of the area and very adept daily reporting based on impeccable sources. There were few if any journalists or auto executives who had contacts like hers in Japan. Her skepticism about most of Detroit’s managerial skills was legendary. Because she had understood the Japanese surge so early, she was highly esteemed in Japan, where executives and journalists took her assessments extremely seriously, and where she had, for an American and woman, remarkable access. There what she said was often front-page news. When in 1983 she was thinking of moving from Paine Webber to another firm, named Vilas-Fischer, that was major news in Japan, and one night, into the early hours, her phone rang off the hook as Japanese journalists called to ask if it was true.

  Thus her testimony on behalf of protection was important news in both countries. She so testified because she thought that with the Japanese in such a strong position and the Americans so weak, there was a significant danger of the entire American industry collapsing. While it was one thing, she thought, for a nation to lose its color-television industry, it was quite another thing to lose something so crucial to its industrial well-being and its potential national defense. She had regarded the American comeback of 1983 and 1984 a good deal more dubiously than had the men of Detroit. It was, she thought, a brief honeymoon in a very hard time. Far more important than the good balance sheets for those years, in her opinion, were two critical developments. The first was that the Japanese, faced with quota limitations, had quite predictably escalated the size and profitability of each car and were now beginning to do very nicely in the middle range, which had previously been the exclusive property of Detroit. We had, she thought, with the temporary quota, forced them to get better even faster. The other was that the Japanese had not only arrived on American shores but, because of the benefits bestowed on them by local politicians, had been able to transfer from Japan to America their ability to produce at low cost. That additional capacity to produce would surely come at the expense of the American companies that were already shaky.