Book Reviews:
The End of Detroit:

Michelle Maynard, The End of Detroit: How the Big Three Lost Their Grip on the American Car Market (New York; Doubleday; 2003) ; $24.95; 314 pps.

Reviewed by Jamie Smiles (Mr. Smiles is the auto analyst for Aladdin Capital Management LLC in Stamford, Connecticut).

Click here to purchase Michelle Maynard’s book, The End of Detroit: How the Big Three Lost Their Grip on the American Car Market (New York; Doubleday; 2003) ; $24.95; 314 pps.

Michell Maynard’s The End of Detroit is an account of the American loss of market share to Japanese and German automakers. The author is a reporter for the New York Times, who follows the airline and automobile industries. She has also written for Fortune, USA TODAY, Newsday, and U.S. News & World Report. Her book argues that GM, Ford, and Chrysler have lost their influence over American consumers because of a lack of quality, misunderstanding of customer needs, and a high cost structure. Ms. Maynard documents how Toyota and Honda grew from offering cheap, energy efficient cars in the 1970s to becoming full-line automobile manufacturers. Her writing style is readable, yet it lacks in-depth research as it pertains to the US automakers. Maynard may be correct in attributing significant market share losses to US hubris, but she fails to recognize Detroit’s history of financial and industrial innovation. The End of Detroit is a worthwhile read, but Ms. Maynard’s strong anti-US bias is underscored by the books title, and makes any reader question her objectivity.

Maynard’s anti-domestic bias is not subtle, and it detracts from the overall enjoyment of the book. She invites reader skepticism by mentioning that BMW's CEO served her chocolate cake and champagne in his hotel room, and that Japan's Big Three granted her top management interviews (in the case of Toyota, both CEO and COO, as well as top US officers). She criticizes Detroit as being unresponsive to globalization and changing trends, and presents a stark picture of the culture of arrogance and insularity that led American car manufacturers astray. Nor does she give any credit to prior American industrial or financial innovation.

Ms. Maynard’s case would have been bolstered had she focused more on the importance of legacy costs such as pension and health care retirement benefits and how these high costs are making the US uncompetitive. Recently, Gary Laepidus, a Goldman II ranked analyst was quoted as saying, “there is more health expense in an automobile than there is steel.” By not spending more time focusing on crucial non-operating expenses such as health care and pensions, Ms. Maynard detracts from the importance of the subject.

On the positive side, Ms. Maynard’s book does provide an overview of the last two decades, commenting on which vehicles have been top sellers and why. Her journalistic style makes it easy to track the transition from larger, gas-guzzling automobiles in the ‘70’s to the more energy efficient, compact cars of the mid-to-late eighties. It also provides other interesting facts. For instance, foreign-owned companies have built 17 plants in the United States and currently employ 85,000 people to produce cars and trucks many Americans assume to be "imports."

That the US has been losing market share for the last 10 years is a well-known fact. According to Ward’s Automotive, the US market share for the Big 3 in 1980 was 73%, vs. 57% last September. There is no denying that loss of market share is a serious issue for the US automobile manufacturers. The growing number of vehicles sold in the US, however, has significantly mitigated its effect on the Big 3’s profitability. In 2002, there were 15.8mm cars sold in the US, far more than the 9.8mm that were sold in 1980. Analysts are expecting 16.8mm in ’03 and 17.2mm in ’04. Also, Ms. Maynard does not mention the awesome cash cushion the Big 3 have amassed in case the US faces a difficult recession. Combined, the Big 3 have on balance sheet cash positions of more than $35B, enabling them to endure several years of operating losses in excess of those experienced in the ‘90-91 recession.

Ms. Maynard provides impressive examples of Japanese innovation, but fails to mention past US successes. Toyota, for example, built car plants in the U.S. and trained local employees, including Spanish-speaking workers, who would later be able to work in Toyota plants in Mexico, South America and elsewhere. Yet there is no comment on the introduction of the SUV or the advent of the Ford Taurus, two important US innovations. Someone needs to remind Ms. Maynard that within two and half years of its introduction, the Taurus was the US’s best-selling vehicle and brought record profitability to the Ford Corporation. Also, the introduction of the minivan and the SUV revitalized the industry, leading to continued American dominance.

Many insiders believe the real battle in the future will revolve around technological innovation, and Ms. Maynard’s failure to cover this topic is a disappointment. Hybrids, electronic and fuel-efficient cars will be the key to winning future battles in Detroit, especially if the price of gasoline climbs above $2 a gallon. The players who can fully understand and exploit their full potential hold the key to long-term survival in the new paradigm. For this important future battle, Detroit is positioned well.

Her book does serve as an important reminder that American car manufacturers have seen their market share erode due to a ceaseless flood of import vehicles, mostly from Japan, Germany, and South Korea. At first, the Big 3 ignored the competitors, as they operated in what Detroit considered fringe markets (e.g. low-cost, high fuel mileage compacts and high end luxury models). The Big 3 mistakenly maintained a firm hold on the cars they considered most important, specifically the gas guzzling, V-8 powered, family car. But, Detroit has responded, announcing major restructurings that are likely to result in improved financial performance.

Maynard begrudgingly admits that there is still hope for American auto companies, but she refuses to discuss possibilities for American improvement. In the wake of 9/11 and unparalleled patriotic feelings, US consumers are likely to respond positively to reliable and inexpensive American products. The Big 3 have generated particularly strong loyalty among US construction workers. Building or renovation sites are full of GMC, FORD, and Dodge trucks, and US “light trucks” are generally considered to be more reliable than Asian imports. Importantly, these light trucks tend to be more profitable than regular cars, providing a benefit to Detroit’s profitability.

The End of Detroit is a worthwhile read for anyone who follows the auto industry closely. It is concise, journalistic, and full of amusing anecdotes. Unfortunately, Ms. Maynard’s anti-US bias is fully apparent, and her title choice immediately calls into question her objectivity. Indeed the US auto industry is challenged on many fronts. Its cost structure is far higher than its international competitors; non-operating costs, including pension and health expenses have grown rapidly; and a dearth of new products has resulted in a loss of market share. But the big three have faced adversity before, and foreign dominance in the US car market is not a foregone conclusion. Her method of extrapolating current conditions and predicting a financial restructuring by at least one of the Big 3 is naïve. US carmakers realize that regaining their customers will be a struggle, but they appear up to the challenge. In fact, it is quite possible that readers will look back on the publication date of this book with amusement. Since the publication of her book, the share prices Ford and GM have risen by 17% and 14% respectively, in anticipation of an improved earnings profile and innovative products.