Final Inspection

Detroit’s Worst Mistake Ever

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Detroit auto makers wasted at least $50 billion during the past two decades in failed efforts to impress Wall Street and raise their stock prices.

I recently blogged about some of the auto industry’s biggest boondoggles of the last 25 years and asked readers to contribute their thoughts.

My email bulged with suggestions, especially related to the Detroit Three.

Many mentioned General Motors’ misguided attempt to reinvent itself with Saturn and ill-advised investments in Fiat and Saab. Plus, there were vehicles such as the infamous Pontiac Aztek and the entire Hummer brand. Others mentioned questionable adventures at Ford, such as its purchase of Jaguar and Volvo, and numerous bad cars going back to the 1970s including the Pinto subcompact and Mustang II.

Readers also pointed to head scratchers at Chrysler such as the TC by Maserati, a gussied up K-car with a Maserati badge; the odd-looking Plymouth Prowler; and the disastrous “partnership” with Daimler that ended in divorce.

But to ferret out the absolute worst mistakes Detroit has made in recent history, I look to professional automotive observer and author Maryann Keller. She has been enormously influential since the early 1980s. After a 28-year career as one of Wall Street’s top auto analysts she now runs her own company, Maryann Keller & Associates. She is as tough and insightful as ever.

During a recent speech to the Society of Auto Analysts, Keller unleashes her own list of auto industry blunders, and her choices make most of the items above look like minor glitches.

Detroit auto makers wasted at least $50 billion during the past two decades in failed efforts to impress Wall Street and raise their stock prices, she says.

That incredible figure includes stock buybacks, excessive dividends and diversification efforts, all of which could have been spent making better products. GM alone doled out $20 billion from 1986 to 2000 on stock buybacks and actually borrowed money it did not have to pay dividends from 2005 to 2008.

Ford kissed off half the cash it had on hand in 2000 creating a special dividend of $10 per share, Keller says.

GM and Ford also wasted billions buying rental-car companies that hid excess production capacity and threw away billions more for e-commerce efforts that looked sexy during the Internet bubble economy but ultimately yielded zip in revenue and profits. Also on her list are the names of financial-services companies, vehicle retailers, recyclers, junkyards and mortgage companies. All were purchased in an effort to add glamour and growth to auto maker bottom lines, but they did neither.

Of course, these strategies did not look quite so boneheaded at the time. In the late 1990s, auto companies were considered old-fashioned. No matter how many vehicles they sold and how much cash they raked in, their stock prices looked weak compared with the soaring value of technology and Internet stocks.

So auto makers tried to redefine themselves as something other than companies that built and sold cars and trucks.

And this was the Detroit Three’s biggest mistake ever: They tried to be something other than vehicle manufacturing companies. When they focused on being banks and mortgage lenders and impressing Wall Street, they took their eye off the ball of their core business. Design faltered, quality slipped and market share skidded. Disaster ensued.

Ford was first to see the error of its ways and avoided bankruptcy. GM and Chrysler were not so lucky.

But as Keller points out, “Wall Street didn’t make these decisions; the CEOs did.”

I currently am testing vehicles for Ward’s 10 Best Engines and as a judge for the North American Car and Truck of the Year awards. Detroit’s new products such as the Cadillac ATS, Ford Fusion and Dodge Dart are terrific. Detroit auto makers clearly have their eye back on the ball. It shows in vehicle sales numbers, on their bottom line and their stock price. Let’s hope they never again try to be something they are not.

dwinter@wardsauto.com

Discuss this Blog Entry 19

on Nov 8, 2012

I've always maintained that one of the biggest mistakes was when Ford eliminated the use of their 300 straight-six from the F150.

on Nov 8, 2012

You'd take that over the previous Triton V-8, the new 5.0 or even the EcoBoost V-6? Wow, tough crowd.

on Nov 8, 2012

Yes Tom, I would take the 300 straight-six over the Triton (mighty as they were) any and all day. The 300 wasn't meant to pull the most or be the fastest. It was meant to run like a tank. Sure, it might not have breathed real well after 4k rpms, but it was darn near indestructible. There are 6 cavemen inside and all they require is an oil/filter change every 3k and will pound the cylinders forever. View any truck forum, Ford or not, and it will get praise from even Chevy or Dodge fans. You recall the dealerships having to "destroy" the engines from the clunkers program? I have stories first hand that after putting in glass into the intake manifold (and subsequent liquifying), radiator blown and still running for 30 minutes at near full throttle before they died.

Great as the new 5-0 and EcoBoost are, you've got more moving parts, which means more potential stuff to fail (no matter the torture tests they do). The new Ford truck mills could not take the flogging the old pushrods could handle. You've got guys with the 300 straight-six's and 302's pushing 200k-300k+ miles. I'll change my mind when I see a non-test environment EcoBoost do that.

on Nov 8, 2012

That and 300/302's could actually be worked on. You know how difficult it was to try and change a sparkplug on those Tritons? You'd have to have a hoist in your garage to not throw your back out. So much space in the engine compartment w/the 300/302's. You could perform regular maintanence.

on Nov 12, 2012

Thanks for a stirring tribute to Ford's 3.0L inline-6. You've made a team of retired Ford powertrain engineers very happy, I'm sure. Although Ford may have abandoned OHV gasoline engines in the U.S., GM certainly makes a compelling case for pushrods with the new small-block.

on Nov 14, 2012

I tried Tom. By the way, the 300ci straight six was not a 3L, it was around 4.9L if my standard to metric conversion is correct

on Nov 8, 2012

There has been no shortage of mistakes in any era of the auto industry. I've learned a lot from readers the last couple of months. I'm looking forward to more comments.

on Nov 8, 2012

Ironically, many auto executives with Ivy League MBAs commited those game-losing financial flubs. Basic principles hold true in economics, the auto industry and life. A grounded high school teacher told me "Nothing is more uncommon than common sense."

on Nov 13, 2012

Here's a mistake in the vein of Maryann Keller's finance-oriented list: failing to consistently push for national healthcare. Back in the late 1940s large employers insisted that they and not unions / employees and not government at one or another level should provide healthcare. [The auto industry was not in the vanguard back then.] There were several opportunities along the way ... but the first real attempt to grapple with this was the 2007 VEBA, too little and too late.

As old-line industries with lots of retirees this was brutally expensive, surely coming to $250 billion over the past 25 years. Buying aerospace and car rental companies pales in comparison. Even buying banks (GMAC ==> Ally) turned out better.

on Nov 14, 2012

It may not be one of the biggest mistakes Detroit ever made, but in a symbolic way this issue may represent part of Detroits fall from power:
In the late 1970's the Big 3 simply "gave-up" when it came to trying to fight the EPA. The brand new EPA of the late 70's decided to squash all technical advancement in A/C design when CAFE tests were conducted w/o the A/C running. Detroit let it happen without a fight. It represented a wholesale surrender by Detroit to the pointless and counterproductive regulations dictated by EPA. Especially when EPA labs had proven big MPG improvements from a cost free improvement to A/C technology.In 1978 it was decided that advanced A/C compressor controls were to be integrated at no cost into the new EEC systems. This 1st appeared through Motorola engine control systems in the mid 80's. They were capable of reducing CAFE numbers by 4-6%. Load-Shedding parasitic loads is done during periods of accelerations. It is not rocket science but it results in a significant overall CAFE improvement. But EPA decided to run CAFE tests without operating the A/C compressor. When formally petitioned by Senators Goldwater and Garn to address the issue, the EPA replied in writing on three separate occasions that emissions was their focus and they had no intention of altering CAFE proceedures even when EPA Lab tests proved real-world improvement. A 4-6% CAFE improvement is a huge and costly accomplishment for the industry. But since EPA was now running the show technical advances began to take a back seat to EPA's power in dictating regulations. The formal responses from the EPA administrator to the senators are all quite shocking in their wording. In today's carbon focused environment their decision might be challenged, but in the 70's and 80's their word was law.
Granted: The Big 3 have made one bad decision after another in many areas over the years, but maybe the EPA should somehow have their feet held to the fire on this one.

on Feb 13, 2013

Mistakes in auto industry cannot be avoided but the worse part of it is that the consumers and car owner are the ones who discovers their mistakes or error.

on May 20, 2013

I tried Tom. By the way, the 300ci straight six was not a 3L, it was around 4.9L if my standard to metric conversion is correct.

on May 20, 2013

This new development in technology has reduced many hardships that were caused in its absence.

on May 20, 2013

You know how difficult it was to try and change a sparkplug on those Tritons?

on May 20, 2013

Good news is new sparkplugs no longer have to be changed regularly. Bad news is it can cost a fortune to have them changed when the time eventually comes.

on May 20, 2013

You're excatlly right. My dealer told me that replacement OEM plugs would be $16/each in addition to a good hour of labor. Absurd. Stick with inline engines. Much easier to do it yourself. If you want a six cylinder thouigh, I think you'd have to go to BMW's 3 series to find an inline-six. No Detroit Three offerings there. It's miserable to change plugs on a transverse mounted V-6.

on May 20, 2013

Cut-and-past link below for a great story on BMW's belief in the future of the inline 6 engine.
However, it has nothing to do with helping do-it-yourselfers. Those days are gone forever.
http://wardsauto.com/vehicles-amp-technology/ultimate-combustion-machine

on May 21, 2013

Sadly, I believe you are correct.

on Jul 25, 2013

Well, they should've keep an eye on their main business, not to those just a small bite of business. Look, what happened. Anyway, they must learn from their mistake and do it no more

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