Car trouble: is a bailout by Washington the answer to Detroit's problems?

• Author: Smith, Patricia
• Position: NATIONAL

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Once upon a time, America and its autos reigned supreme. In the decades after World War II, the car industry boomed, and steady, high-paying, unionized jobs at Detroit's "Big Three"--General Motors, Ford, and Chrysler--helped millions of American workers move into the middle class.

Today, the Big Three are teetering on the edge of collapse. In the last two years alone, Detroit automakers have lost more than $80 billion and shed more than 119,000 workers. And now the economic crisis has pushed the companies into free fall: Tough times mean fewer people making big purchases like cars, and those who do want to buy are finding it harder to get car loans amid the current credit crunch.

Last month, the White House agreed to give G.M. and Chrysler $17 billion in emergency loans to keep them afloat for the next few months. (Ford said it did not need immediate help.) The fear is that the collapse of even one of the Big Three could have very negative tipple effects throughout the U.S. economy.

"We're on the brink with the U.S. auto manufacturing industry," Chrysler executive Jim Press told the Associated Press. "If we have a catastrophic failure of one of these car companies, in this tender environment for the economy, it's a huge blow. It could trigger a depression."

Just how did Detroit get into such a mess? And even with federal funds to tide them over, can the Big Three turn themselves around and become successful again?

Analysts say several strategic missteps have hurt Detroit. While foreign carmakers turned out smaller, fuel-efficient cars, Detroit continued over the last decade to focus on producing large pickup trucks and S.U.V.'s. When soaring gas prices and the sinking economy forced consumers to turn away from these models in droves, Detroit was poorly positioned to react.

DISAPPOINTED CUSTOMERS

To make matters worse, for years, many of the cars made by the Big Three were simply not as reliable as their foreign competitors'. Though many analysts say Detroit is now producing excellent cars, it's hard to win back customers who've been burned by a disappointing purchase in the past.

Detroit's other major problem is that its labor costs are much higher than its foreign competitors'. When you add in the cost of pensions and health care, the Big Three's hourly labor costs average more than $70 per worker, compared with about $45 an hour at foreign-owned car factories in the U.S.

To understand why Detroit's labor costs are so much higher, you have to go back to the industry's heyday in the boom years following World War II. In the 1950s, G.M. was the world's largest corporation: It had 46 percent of the American auto market, versus about 20 percent today. At its peak, it employed more than 600,000 Americans.

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The auto industry pioneered the American model for the social contract between workers and employers, offering healthcare and pension benefits that became a mainstay of the growing middle class (see timeline, p. 18). In negotiating labor contracts, industry executives wanted, above all, to keep the United Auto Workers (U.A.W.) union happy and the assembly lines moving: With no Toyotas to worry about, there was little downside, at least in the short term, to the industry's expensive concessions.

"The workforces were young, the pension costs were low," says Gerald Meyers, a professor at...