• by Karl Greenberg , Staff Writer, November 11, 2008

There's something of Hurricane Katrina's nefarious influence on the Crescent City in the havoc the credit crisis is wreaking on Detroit. If we recall, the hurricane actually sideswiped New Orleans; the center passed to the east over Mississippi. Katrina was a category 3 storm. What caused the catastrophic flood was the surge caused by a failure along the levees protecting the city from the Mississippi River. Those fractured walls had needed fixing for years. Nobody had bothered. There were other things to do.

Detroit had its own levee problem and nobody bothered to fix it, either--not the unions, not the automakers--because the unions were too busy being inflexible, and the automakers were too busy making money on trucks. Ford, for example, made a mint in the 1990s with vehicles whose nameplates began with the letter "E" (Explorer, Expedition, Excursion). The Explorer was the top-selling SUV on Earth for 15 years until gasoline prices started their climb in 2006, and the bottom started to rot out of the utility market.

But even back in 2000, when I started covering the auto business, there was a market for a new kind of vehicle--the car-based SUV, or crossover. Toyota and Honda had been producing such vehicles--the Rav4 and the CR-V, respectively--since the mid-1990s. Ford got in the game in 2000 with its smallest "E" vehice, the Escape. A year later Pontiac tried to get a piece of the action with the Aztek, which sold poorly.

While Honda, in particular, focused its SUV aspirations on crossovers, built on flexible production lines next to cars with which they shared underpinnings, the domestics were still focused on expanding their ranges of body-on-frame vehicles--Chevy Avalanche, Jeep Grand Cherokee, Chevy Trailblazer, GMC Denali, etc. They sold and sold well because gas was cheap. Good thing, because they had no choice but to build and sell such vehicles.

Meanwhile, the domestics had all but lost the market for that other kind of vehicle, the car. It has been a long time since consistently best-selling cars came out of Detroit, Auburn Hills or Dearborn. Yes, vehicles like the Chevy Malibu, Saturn Aura, Ford Fusion and its stable-mates have gotten rave reviews, but consumers change their perception of these things in geologic time. Those well-reviewed cars have to be sold with cash on the hood to compete with vehicles that consumers believe are better.

After 9/11, the incentive wars in which the Big Three fought for share by offering 0% financing paired with legacy costs (union health care, pensions, etc.) meant they were losing money on every car they sold. Meanwhile, the imports were bringing on more flexible U.S.-based plants profitably making crossovers next to wagons, minivans and cars that could change mix at the drop of a hat. Although hybrids lost them money, they generated priceless PR value and loyalty. Imports could afford that writedown on Prius and the like because they were making money selling cars--money that wasn't going to legacy costs, but to R&D and new vehicles.

Three years ago, the domestic automakers began fixing their broken levees: haggling with the unions to reduce capacity, fixing vehicle quality, and retooling their massive organizations to develop, build and market crossovers and more efficient vehicles. In the best of circumstances, such changes need time to realize market potential. Yes, quality is more or less at parity now, but it's a long battle in the best of times to convince consumers to change their ideas about a brand. That battle has been lost.

So, with cash running out at GM, Chrysler and Ford, can the government allow domestic brands to fail? Yes. Should it? No. Certainly, Chrysler--at least as a tri-partite (Jeep, Chrysler, Dodge) company--is likely done. It is unlikely that a buyer will arrive in time to save Cerberus a trip to Delaware. But the government can't allow the other two to sink.

If the American populace can bail out an insurance company, we ought to deliver the $150 billion the domestic auto companies need to survive. You know the old saying about GM, so I won't repeat that. But here's a caveat: If we are going to help fix the Detroit levees, we should have some say in what we are saving from the flood. And UAW President Ron Gettelfinger should not be in a position to tell taxpayers what those terms will be.

Ford CEO Alan Mulally said about the company's meeting with Speaker of the House Nancy Pelosi and Majority Leader Harry Reid: "We are absolutely committed to delivering safe, affordable, quality, fuel-efficient vehicles that Americans want and value." Well, Ford has had the chance to do that. If the U.S. gives Ford the cash, the U.S. should have a major stakeholder's influence on the company's direction henceforth.