The Great Auto Crash

End of a Dream or The Great Auto Crash
An Inside Story
BOOKS
The Great Auto Crash. Copyright 2009 by William B. Z. Vukson All rights reserved. Printed in Canada. No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews. Published by G7 Books First printing 2009
Books by Vukson, William B. Z., 1962Canadian Dollar Chaos 2001 Political Structural and Technological Change 2001 The Pound Sterling Chronicals 2001 The Regal Dollar 2001 The Yen Mystery 2001 ISBN: 1-894611-77-2
Toronto, Fairfax, Buffalo, g7research@eol..ca
G7 Books
Table of Contents
Warning Part I iii v
Preface vii Forward ix Technology and Trade at the Peril of the Auto Industry 1
Part II
5 The Inside Story Behind the Analysis of the Auto Industry 7 Nixon and OPEC 10 Gerald Ford - Short Tenure Long Impact 15 Carter and the Second Oil Shock 18 Reagan and the Rise of Toyota 22 A Case Study of Japanese Auto Manufacturers in the 1980s 31 Bush I and the Fall of the Wall 35 Clinton and Globalization 39 Bush II and the Great Depression of 2008 44 Obama and the end of Sustainability 48 Japans Contribution to Sustainability 52 Japanese Initiatives to Sustainability in Production and Employment in the U.S. 56 Explaining the Decline of General Motors 58 The Rise of Financial Warfare 62 Geo Auto-Politics 65 Yen - Dollar Yearly Averages 69 Deutsche Mark Politics 68 Deutsche mark - Dollar Yearly Averages 72 Major Auto Transforming Events over the Past Half Century 74 89 90 95 98 101
Addendum
European Sustainability Renault and Daimler in Action Index Bibliography
The Great Auto Crash

An Inside Story
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WARNING This book takes as its reference point the interests of the manufacturing sector. More specifically, it presents a commentary and analysis from the perspective of a key sector to most advanced industrial societies- the automotive sector. It also presents a commentary from the perspective of the U.S. automotive system and how it relates to other regions of the world as well as its own government. The auto industry is much more complex than it appears on the surface. There is literally an army of analysts and journalists that devote most of their time in trying to understand the direction, risks, opportunities and new trends in automotive. The factors that affect the health of the domestic auto sector are numerous, but The Great Auto Crash tries to isolate some of these factors that are normally neglected by the media. Factors such as access to consumer finance, the rapidity of technological change, global geo-politics and trade policy, iii

currency market politics, and perhaps most importantly the inconsistencies ingrained in monetary and fiscal policies over time in the U.S.; are just as important, or perhaps even more so, than high oil prices! The year 2009 will become significant in the changes that have occurred in this key sector. The big question will remain whether a constructive debate can address these more remote factors to the health of this industry over the longer term and whether we are prepared to act on any constructive suggestions that may surface in the aftermath? Over the last 40 years, the US has become a services oriented economy at the expense of traditional manufacturing. What is good for one sectors interests may not be good for the other, and vice-versa. We have seen domestic manufacturing pressed and pushed to its limits with policies that have been much friendlier to financial and service sector interests. Is the Obama team about to turn this system of preferences around so that some form of balance between the interests of these two broad sectors can once again co-exist?
iv
Part I
One of The Cars at Cadillac Ranch in Amarillo Texas
vi
Lori Martin
Preface
he auto industry occupies a vital role in both advanced industrial and developing countries. In many instances, it and its spin-off industries are major employers and income generators. Only the housing and real estate sector reigns equivalent in terms of economic activity. Both of these sectors; housing and automotive, are the basis for two of the biggest decisions that any consumer can make in terms of purchasing major ticket items in any household budget.
A vibrant and growing auto industry is the cornerstone and goal of every government policy around the world. A healthy auto sector is capable of generating sustainable production, which in turn sustains high levels of employment, creating a basis for sustainable wages, incomes and wealth creation. The key to this value proposition is the entire concept of sustainability in the auto industry. This book tracks the evolution of the auto industry from 1970 to its present vulnerability and chaos that is omnipresent. This modern history shows how the industry has been used for political leverage by leaders, and how reactionary, small-minded and expedient policies have by trial and error created what exists today. Was the outcome that vii

we see today ever planned or foreseeable by anyone? Has there ever been any kind of consistent strategy articulated by policy makers that would ensure sustainability and not just trial and error that was often a desperate reaction to random geo-political events? This book attempts to conceptualize and place into context major economic and political inflection points that were key turning points to the auto industry. Some such events are well recognized in recent history, but this book interprets them from the perspective of maintaining sustainability in this most vital sector, which is arguably one of the most important pillars to our modern economic system today.
viii
Foreword
ormer Federal Reserve Chairman, Allan Greenspans seemingly spotless central banking record, has come under a considerable amount of scrutiny and investigation as of late. In a series of books released both after his resignation in 2006, and accelerated since the crash and burn of Wall Street and Americas banking system since the second quarter of 2008, the thesis holds his Fed mainly responsible for the thrashing of U.S. wealth; mainly through the collapse of nominal house prices.
A consensus has been building that his preemptive strikes on now well-known recent historical financial crises; the 1987 stock market crash; Mexican Peso Crisis; Asian Currency Crisis; Russian Rouble Crisis; Long Term Capital Management (LTCM) bailout, and more recently, the reaction to the catastrophic events shortly after the September 11, 2001 attack on the World Trade Centre and the new millenniums hollowing out of the US manufacturing sector; can be directly blamed for the 2008 Credit Crisis and the Great Auto Crash of 2009, which has not only brought down nominal housing wealth, but can also be directly traced to the demise of the once mighty General Motors Corporation. ix

To propose such a scenario elevates the role of monetary policy to a position where it is expected to counter severe bouts of structural economic change. Many contemporary analysts that have had a sound grounding in monetarist free market training in the nations leading business schools view the economic system in such a fluid way that financial policies can be held responsible for massive dislocation in the real economic system over the past several decades. To extend this analysis further and use the argument made popular by Economics Nobel Laureate Robert Lucas; it is mainly policy errors by governments and central banks, which create behavioral changes leading to unexpected real outcomes in the economy and the financial system that seemingly mirrors it. In other words, government institutions such as the Federal Reserve and the Treasury can never do any good to the economic system and anything that they attempt to fine-tune within the economy will result in both unexpected and undesirable outcomes over the medium to longer term horizons. In essence, the late US Representative Jack Kemp, successfully applied this critique early to the Treasurys role in the economy by aligning his views with the general deregulatory trend as symbolized through the politics of the late 1970s with the ascent of the Reagan and Thatcher eras. Its interesting to note that some thirty years thereafter, have only now critics of the Fed surfaced under the current financial crisis. What Lucas attempted to show in the early 1980s, was how futile it was for monetary policy and central banking to influence some kind of activist agenda on the real side of the economy. His theorizing impacted monetary policy thinking to such an extent that the realignment of the mandates of European Central Banks laid the foundation for the single European currency in 1999, as well as todays forerunner of the German Bundesbank; the European Central Bank or ECB. x
Forward
To propose that policy had limits in Central Banking was Lucas lasting legacy which we should perhaps ironically revisit and reflect on under todays crisis. The single minded determination for Central Bankers in the 1990s to focus on inflation formed the basis for the European Currency Union, and the wholehearted support of the German government was granted conditionally. This event was contrary to the actions of the Greenspan Fed throughout the 1990s. As detailed above, a series of financial crises has prompted a pre-emptive strike by the Greenspan Fed in direct contravention to the conservatively minded Lucas critique, as well as the intellectual basis for monetary developments in the European Union. The role under which the Greenspan Fed modeled itself, was consistent with the conflicting constitutional mandate that the Fed carried from the early days of its foundation. This paradox was to foster both low inflation as well as growth and employment opportunity in the US economy. To be watchful over inflation, in many times may be inconsistent with the goals of assisting aggregate demand and growth. Conversely, to craft a growth friendly policy, would be contrary to the goals of stable prices in the economyespecially under full employment in certain sectors. The German Bundesbank and its forerunner, the European Central Bank, never had to contend with this contradiction in terms. Its single mandate, was simply to watch over inflation and prices in the Euro zone. Moreover, a legacy from the Bundesbank was one that the ECB was to target money supply growth, specifically the broader M3 type of money supply growth that included long term savings. This, again, a contradiction to how the Fed ran its monetary policy, after briefly experimenting with the management of money supply under Paul Volcker in 1979, it quickly abandoned this game plan by 1982, when it became evident that record high real short term interest rates were beginning to affect the industrial base of the US. xi

In many ways, the abandonment of the monetary experiment under Volcker foreshadowed the 25 year struggle of the domestic three auto producers in the US. In many ways, this was the policy event that led to their long term decline into bankruptcy. An overvalued dollar more than anything spurred a growth in Japanese auto imports that had a lasting effect on the trade-investment trade-off in the U.S. Why then, you may ask is this story relevant to the state of the auto industry? What can we discern from these policy events? Why is Greenspans Fed now under scrutiny as much as the bankruptcies of GM and Chrysler are by most everyone these days? The critique of Greenspan and his tenure at the Fed is dished out by naive commentators who still believe that the US housing crisis was aggravated mainly by unscrupulous mortgage brokers, mainly based in California, Florida and perhaps Arizona, who are wholly to blame for the downfall of the US banking and economic system over the past two years? Similarly, the problems that stem from a singular behavioral problem that is true anti-market behavior by mortgage brokers, can also be pinned on the management of the Fed by Greenspan. This has recently been upheld by some of the more finance-centric academic economists such as Robert Barro of Harvard University, who has come out attacking the former Fed Chairman for not showing enough of an aptitude for economic abstraction. I guess in Barros mind, a sound Fed Chairman must have his views affirmed by like-minded peers in such notable abstractions as the American Economic Review and the Quarterly Journal of Economics Marginalized as these may be to a select elite of a few hundred readers, the Greenspan record at the Fed is now upheld as being the singular action that could have saved the life of the US economy; prevented the credit crisis; saved the LIBOR market; saved Chrysler and GM. xii
Forward
The Greenspan Fed, it is now argued in retrospect, had the opportunity to offset via interest rate policy the crisis that has brought down the banking, hence the automotive sectors. By maintaining rates far too low and underpinning their justification on a constantly improving productivity based economic system inspired by technological process and information Technological changes, the Greenspan Fed severely misread the diagnosis of irrational exuberance. It was not the irrational exuberance that was witnessed on stock markets, but more seriously and ultimately more fatally, it was the irrational exuberance that befelled the housing market in the US. The over-reliance on rates that were just too low, in order to pre-empt the effect of technology and the externalities omnipresent from September 11 on the economy, resulted in the unprecedented collapse of the housing bubble in 2007, which in turn short-circuited Bear Stearns, Lehman Brothers and now, chronologically, the auto sector. In essence, the domino effect began with the Greenspan Feds misinterpretation of productivity gains in the economy over the late 1990s; then leading to its activist based overshooting on interest rates which were deemed to be negative between 2001 and 2004; then leading to the housing bubble, with the final implosion in the banking system and now the auto sectors Big 3 becoming the Bankrupt 3. This is the common wisdom that has propelled Alan Greenspan as the villain to many finance-centric commentators to this day. However, I would argue in defense of the former Chairman of the Governors of the Federal Reserve System. To these short sighted commentators, the Fed is the be all and end all in the US and global economy. To them, the Fed can do wonders at the control of a few magical switches. Although taking on the role of activist institution to offset economic fall-out and risks to the US economy throughout xiii

the late 1990s, even Chicago School Nobel Laureate, Robert Lucas, has always recognized that monetary policy should be restricted to singularly managing the rate of change in the price level, or the rate of inflationary expectations. I am certain that within their thesis, many monetary theorists never intended the Fed to offset bouts of negative inflation in such a radical way. Having said this, Lucas theory of rational expectations was penned in an era when spectacular gains in IT and globalization have not yet emerged. Even under Lucas theory, the Fed could manage inflation actively as long as all other things were being kept equal. Meaning that the US continue to be the worlds leader; that the US continue to be a mixed economy in scope; that the US continue to be regulated according to Glass-Steagall; where the two distinct cultures of investment and commercial banking remain separated, and that financial innovation not grow at exponential rates. In addition, this theory was also influential when some twothirds of the global economy was still under a managed or command type of system, especially in a China and Russia which were closed to a global market. In short, the Fed was not ever in a position to effect changes of a structuralist type, which has been the economic story of the last decade. What do we mean by structural changes? These are exactly the types of changes noted above in the form of radical deregulation in the asset and financial markets; radical deregulation in product and services markets such as the type that globalization has exacted with the emergence of China as a production location for the worlds economy; and finally, the severe technological changes that have effectively wiped out sectors such as the publishing, printing and automotive sectors. Although severe technological changes create some opportunity, they also lead to massive dislocation and xiv
Forward
destruction of processes and industries, leading to inevitable re-allocations of property rights among special interests in bankruptcy courts. This is exactly where we find ourselves currently with both Newspaper Publishing and Automotive production. In short, the Fed can not manage these types of changes in a rapidly changing economic system. Greenspan had to make due, and I am certain that he realized this, with the hand that he was being given both by the Executive Branch and Congressional legislators when it came to global trade policy; and more significantly, when he commented on how rapid technology was affecting the productivity of the US economic system. Granted, he may have been somewhat over-zealous in promoting financial market deregulation, but this can only be one element among a number of arguments that have led to the massive dislocations that are being witnessed in the automotive sector today. Would lower than normal Fed funds rates effect trade and globalization agreements? The changing economic systems around the world, and of course, rapid technology that has empowered consumer borrowers in an unprecedented way via the internet? No. Yet these are precisely the reasons why the housing sector became the first domino in the overall implosion of credit. To what extent did the bubble create itself based on technological offerings to consumers? Or the fact that banks were no longer dealing with a mixed economy and that bankers have to a large extent lost their touch and skills in granting expansion credits to small and medium enterprises in manufacturing and a broader mixed economic base? When you lose as much of an industrial base to China as the US has in the last decade, then risk-aversion in bank Credit Divisions dictates that you make the most prudent loans to bricks and mortar, or comfort industries such as housing and real estate. Also, the fact that financial innovation was never xv

believed to have reached its limits from a quantitative perspective, allowed the innovation to be democratized to the most marginal borrower possible in this uni-dimensional housing sector. Furthermore, given that the average life span of a car was around fifteen years; how was it possible to make such a sector sustainable in production of newer and newer products the way the model operated in the 1950s, 60s and 70s? By pumping up housing due to the absence of a balanced and mixed economy, consumers were ultimately able to churn newer and newer vehicles in the process. Also, by providing innovative leasing alternatives and financing, consumers were also able to allow the auto sector to be artificially sustainable in production from the 1980s to the spring of 2008. As long as housing combined with innovation and singularity in comfort lending by banks kept rolling, so would production keep its momentum. It is my contention, then, that as in the case of the unscrupulous mortgage brokers that still dominate the minds of commentators as the singular cause advanced for the meltdown of the housing market; Alan Greenspan can not be blamed for pre-emptively attempting to offset an economic downturn over the medium to longer term by using the Fed Funds rate policy instrument from 1995 until his departure from the Federal Reserve in 2006. Greenspan was fighting structural changes that were a result of commercial policy in the US and among the G7 grouping of advanced economies since the ReaganThatcher years of the early 1980s. Likewise, in terms of rapid hyper-technological changes, there was very little that the Fed could work with from a singular policy perspective; which was its singular reliance on the Fed Funds rate as the sole policy variable. xvi
Forward
On the one hand, Greenspan was fighting decades of legislation in favor of freer global markets for products and services, and on the other the rapid changes in quality and processes made possible by advances in science.
Gustavo Fadel
Geneva 2009
xviii
Technology and Trade at the Peril of the Auto Industry
imilar to the battles that the Greenspan Fed has undertaken in trying to understand where the economic system was heading from 1995 to 2006, the automotive industrys reaction to these two factors seems to outweigh any impact that the OPEC cartel may have had on sales patterns throughout the 1990s and into the new millennium. This is a very controversial statement to make. The demise of Chrysler and GM must have had something to do with them not engineering appropriately their product mix to the sudden surge in gas prices at the pump? A quick glance at fuel economy data may indicate otherwise, since if one compares the average expenditure per annum on the average small vehicle, which is somewhere around $1,800, a large luxury sedan or SUV does not push this annual expenditure on fuel too far beyond the marginal threshold of $2,000 additional dollars. If a Ford Escape or Chevy Equinox requires an additional expenditure of a few thousand dollars on average per annum, would this be enough of an impact to deter the consumer from purchasing these kinds of vehicles should the price of fuel double? Triple? Quadruple? Perhaps it would if the price quadruples for the marginally stretched consumers? 1

However, under normal times, the availability of finance and credit would have more than offset these price increases. If there were no collapse in banking and credit, then it may be argued that the risk of rising fuel would have been mitigated to the point where the impact on GM and Chrysler would have been offset to enough of an extent that they would still be intact today as going concerns and not mired in the bankruptcy process. In essence, credit supercedes ! On the flipside, it can be argued if you push the envelope far enough and accept some of the historical arguments presented earlier herein, that the credit crisis and collapse of banking may have to a large extent have been mitigated, if a more sensible long term approach to trade and investment agreements would have been put in place. This is not to say that manufacturers should have been prevented from moving production to China or India, but more from the structural adjustment process within the U.S. economy that may have prevented the banking system from defensively seeking to dominate the safest lending opportunities to brick and mortar industries for consumers or by what I call comfort lending. By quickly losing a mixed economy domestically in favor of some sort of mercantilism that only favored the lowest prices that were made available to consumers in the US, has to a large extent also contributed to the imbalance in the credit markets where they still struggle to this day in reasserting some form of normality among the G7. By forcing the domestic financial system to lend to the most marginal borrower by virtue of the absence of a mixed economic system, and to exacerbate this outcome when the system was pushed to bubble formation boom conditions, became very detrimental in retrospect to churning car leases. The loss of this magical financial mechanism in the US unisectoral economy more than offset the negatives that a doubling or tripling of oil prices may have caused to Chrysler and GM. 2
Technology and Trade at the Peril of the Auto Industry

In that respect, free trade came full circle and affected the credit markets indirectly, thereby impacting the financial mechanism that car sales became to rely on over the past decade. Although it created plenty of new opportunities for GM in countries like China and Russia, its overall impact is to be deemed to have been a negative and a cause for its entry into Chapter 11 status in the Spring of 2009. On the whole issue of hyper-technological change; the advances in science and their impact on society were never really part of the public debate, and certainly never questions raised by the political parties. Just as technology creates a new opportunity frontier, so it also destroys a large number of jobs and way of life for many. The gimmick that was used to offset this impact against the auto industry was the magic of financial innovations and leasing made possible by technological change in the financial services sector. This, combined with advertising, encouraged consumers to change their cars often. Lease rates were for an average of three years, and so consumers came to behave in a way that created an entrenched model for product planners to frequently fuel this desire for newer and better products. The increase in durability and quality became most noticeable in the 1990s, where vehicles made by most of the large manufacturers, foreign and domestic, were very good and not susceptible to frequent breakdowns. The lifespan of the vehicle increased from a range of three to five years in the 1970s; to currently, where it is very likely that cars can last in excess of fifteen years and for a range of more than 300,000 kilometers on average. In short, technological processes made cars three times better within the span of just two decades. How could production be sustained and employment be sustained under such conditions? Sustainability in this key strategic sector was always taken for granted by the politics of the time. 3

The short to medium term response to the sustainable production question was via leasing and adopting the latest financial industry innovation. Only recently, were consumers allowed to tap the equity in their homes in order to fuel car sales at the dealer level. As China and India rose to prominence in the world economic system, it was inevitable that American living standards would begin to be affected adversely. The increasing ratification of the new world order by both technological advances in communications, and then, an explosion of new trade agreements that began with the Free Trade Agreement (FTA) in 1988 between the US and Canada, and thereafter spread rapidly around the world during the Clinton Administration; hollowed out the American industrial landscape, leaving a uni-dimensional carcass which was its housing and real estate sector, together with the promise of a higher value-added service sector. This move to affirm the existence of a uni-dimensional housing sector during the George W. Bush years, helped exacerbate the growth of consumer credit through borrowing instruments that were property based. It singularly drove financial innovations in this direction for many years, thus helping to support the badly needed sustainable production and sustainable employment in the automotive sector within the Americas. In conclusion, there is very little that can be blamed here on the activist Federal Reserve of Allan Greenspan. The Fed can only do so much in offsetting likely hazards to the US and industrialized nation communities. A globalization ratified by free trade deals and rapid technological change were perhaps more than sufficient in offsetting price changes than were the policy instruments of the Federal Reserve over the past few decades!
PartII
Richard Thornton
The Inside Story Behind the Analysis of the Auto Industry
any auto analysts track production figures and sell their forecasts to various types of clientele. Very few offer a service where prices are forecast of individual models and across all categories of vehicle. Forecasting production figures is a far easier process because factors such as economic growth can be tied directly to changes in GDP. There are also those factors that are specific to the sector or industry itself, and these are such factors as scrappage rates or how consumers react to new product and how long they keep their older cars and trucks.
Scrappage may be affected by broad economic conditions such as GDP growth prospects, taxes on income and foreign trade effects that affect the retail prices of cars. However, this is also a cultural or behavioral trait that is specific to certain regions and countries. For example, Canadians keep their cars and trucks much longer than Americans. Likewise, Russians like to change their trucks far more frequently than Germans, Belgians and the Dutch. 7

Similarly, another cultural factor in determining demand for vehicles is whether families or individuals like to keep one car or more than one car and truck under their ownership. It is a well known statistic now, that American households throughout the 1990s and early in the new millennium owned more than one car per household. These factors have been remarkably consistent from 1990 to 2007 in the US and Canadian automotive markets and have been the basis to very consistent and stable modeling by most analysts within the profession. Needless to say, any sorts of geo-political and geoeconomic impacts such as the meltdown in financial leverage and credit in 2007 renders these traditional approaches all but useless, and this is where the state of the auto analyst reigns today. Recently, most automotive executives, when interviewed by the press, continuously state their belief and hope that they will be profitable hence commercial entities with sales in the US marketplace around ten million units. This is a major adjustment that was not expected by any quoted auto analyst ever over the last few years. When yearly production in the US averaged between fifteen and seventeen million units, the most pessimistic forecast of production barely scraped the low end of fifteen million. Once again, geo-political and geoeconomic forecasts were just not a part of the overall picture within the profession. Any voices that transcended the low end of fifteen million were at best just ignored. Where the auto analyst or automotive economist goes from here is anyones best guess. However, suffice it to say that there definitely will be a demand or a mandate for those that were ignored prior to the great crash of 2008. They may not be remunerated by private interests connected to the profession, but they definitely will find a following 8
The Inside Story Behind the Analysis

among public institutions who now control the destinies of so many domestic automotive producers.and will do so for a long period of time.
Nixon and OPEC
Nixon blames Fed Chairman William McChesney Martin for his defeat in 1960 due to tight credit and slow growth preparing Fed for the Burns appointment Nixon leads vendetta against Burns Fed during 1972 elections forcing high inflation and money growth Nixon attempts to control inflation with wage and price controls in 1973 Burns Fed agrees and does not believe that Fed should attempt to control inflation without wage and price controls Burns Fed legacy of average 9% inflation William E. Simon launches Federal Energy Administration on December 4, 1973 George Shultz appointed Treasury Secretary from June 1972 to May 1974 George Shultz lifts oil import price controls sending inflation into double digits 10
Hank Walker - Life Magazine
Nixon and OPEC Oil Prices under Nixon Nominal

1968 1969 1970 1971 1972 1973 1974 $3.18 3.32 3.39 3.60 3.60 4.75 9.35
Inflation Adjusted
$19.41 19.22 18.56 18.88 18.29 22.73 40.29
The Nixon era gave way to the muscle car. The OPEC oil embargo of 1973 was the first major external shock to the auto industry in America, sending oil prices up by a factor of four from October 17, 1973 to March 18, 1974. This brought the hegemony of the big, heavy and powerful automobile to a slowly winding end that came to define the transformation of the auto sector throughout the 1970s. Not only was the emergence of OPEC something to take note of geo-politically, but also the heightened state of the Cold War between the US and the former Soviet Union and red China combined with a Federal Reserve policy under the then Governor Arthur Burns, to re-affirm the existence of a steadily rising rate of inflation throughout this decade. Inflation was very friendly to the state of the American auto sector throughout the 1970s. A lax monetary policy by the Burns Fed laid a framework for continuing gains in nominal wages with the UAW. As long as the then Big 3 were able to hold onto their market shares, they were able to mitigate wage inflation with price increases at the dealer level. This tit-for-tat system came to define this era of strong union negotiating power, but also very strong pricing power by the auto producers. In essence, no one within the auto industry made any gains under the era of rapid inflationary pressures; not the unions and certainly not the producers. All parties remained in a 11

stalemate throughout the Nixon years in terms of dividing up the economic pie. Richard Nixon announced the implementation of Wage and Price controls, as did his Canadian counterpart, Pierre Trudeau shortly thereafter. Their concern was clearly not directed towards labor or management in the auto sector, but to mitigate the damages that this spiral was exacting on those workers and manufacturers that were not able to pass on price or wage increases in their respective industries. The wage-price laws were there to protect the real outsiders in this period of rapid price increases and accommodative policies at the Federal Reserve. The geo-politics of the Cold War era and the threat of a nuclear attack by the Soviet Union and China maintained a closed trade and investment environment worldwide. Nowhere in sight were terms such as globalization or emerging markets detected within this period. Countries were either open or closed to foreign investment and to trade. Based on the special relationship between the US and Japan, the acceleration of auto imports such as Toyota, Honda and Datsun; now Nissan, began to slowly emerge in the North American markets. This, however, was a real exception to the rule, and was more a reaction to the Cold War policies of China and the Soviets in the Sea of Japan that prompted the Nixon administration to appease commercial and trading interests within Japan and allow them access to the domestic market for their automotive products, which were not expected to appeal to the American consumer anyhow. Technological advances within this period were confined to increasing horsepower in the engine compartments of vehicles. Digital and software technology were still nowhere to be found among the offerings of the Big 3 auto producers within this era or in Japan. 12
Nixon and OPEC

Ralph Naders crusade against the Corvair of the 1960s made headlines in the 1970s and laid the first foundation for some form of regulatory scope in the auto industry in its twilight years. This lead to very preliminary experimentation on safety technology that today has come to be taken for granted, including such revelations as air bags and intermittent wipers in cars. In terms of production material engineering, there was still very little use of light weight composite materials in the framework of the cars and trucks of this era. A lack of flexible composite materials caused many domestic as well as foreign import brands to rust out prematurely. It was expected that a vehicle bought brand new in the 1970s would last an average of about four to five years, if not less. In other words, when cars were bad; the car industry overall was good! This is repeated by a number of auto analysts in private, but has never been a noticeable public stand by the forecasting industry. In summary, the Nixon years were closed from the perspective of trade and investment, with few emerging market economies to take advantage of any kind of environment of globalization whatsoever in retrospect. Any kinds of gestures to the Japanese and the Germans in terms of bringing in Toyota, Datsun and Honda; likewise, Mercedes Benz, BMW and Audi to the domestic US consumer, was purely done for geo-political reasons in order to maintain the balance of Cold War power against the Soviet Union and Communist China. In short, auto commercial policy was part and parcel of Cold War balance of power politics. Furthermore, these imports, especially from Japan, were not expected to succeed with the American consumer in any significant way. Japanese quality, in retrospect, gained the favor of consumers in the US and Canada, but those of Fiat, Renault and French made Renault and Peugeot did not. 13

It was always believed that the progress of the Japanese vehicles would go by way of the non-German European brands in this market. After all, US geo-political interests came to view these imports as an extension of US foreign policy, particularly at a sensitive juncture with the rise of the Red Brigades in Italy and the spread of revolutionary zeal throughout the traditional allied sphere of Western Europe.
14
Gerald Ford Short Tenure Long Impact
The Rise of Greenspan The end of Vietnam The Pardon and a New Era
Oil Prices under Gerald Ford Nominal Inflation Adjusted

1975 1976 1977 $12.21 $13.10 $14.40 $48.21 $48.91 $50.48
Gerald Fords Presidency was not considered to be very significant by most. However, it was very significant in that it introduced some of the most enduring political and policy figures that are still with us today. Politicians such as former Vice President Dick Cheney and Donald Rumsfeld; former long serving Fed Chairman Alan Greenspan; former Reagan Defense Secretary, Caspar Weinberger, not to mention former Treasury Secretary, George Shultz, all either began or significantly developed their White House tenure under Gerald Fords Administration. Ford did not have much of an influence on the accommodative policies of the Federal Reserve System 15

throughout these years, and inflation continued to accelerate from 1974 to 1976. What Ford was in politics was a transition Administration that took the US political stream from Republicanism to the Democrats under Jimmy Carter. The Ford Administration did have a calming affect on the major big story affecting consumer demand for automobiles during these years; the price of oil. It was under Gerald Fords Administration that the OPEC cartels pricing effects were held at bay; perhaps temporarily, but certainly under his tenure, the initial increases under the Nixon years seemed at this point to be an aberration to the muscle and power car producers in Detroit. In retrospect, these calming policies prior to the second round of major oil price shocks during the Carter years, actually were setbacks to the planning and progress of model design in Detroit. The false hope that a stabilization in oil prices created in Detroit was one of business as usual just when new models that were more fuel efficient from Japan were beginning to tempt the American consumer more and more. This false hope during the Ford years created a false sense of security in Detroit that set back the industry through another entire product cycle. The planning for new models was so behind that this false sense of stability in oil and gas prices resulted in a chaotic and sudden rush to downsize cars by consumers for when the second major oil shock arrived in 1979. This false sense of security in Detroit, together with the experimentation in monetary targeting by the Federal Reserve Chairman to be, Paul Volcker, created an unprecedented overshoot in interest rates in the US, leading to further instability in the trade profiles between the US and Japan (more about this in the next chapter). The typical automotive product planner from the mid 1970s, probably looked at the scenario like this: With the initial OPEC oil embargo shock behind us, we dont anticipate that this environment will return any time soon. This was a 16
Gerald Ford Short Tenure Long Impact

one time event that was made possible by conflicts in the Middle East, especially between Egypt and Israel, and also the heightened state of the Vietnam War resulted in a brutal shock to world oil supplies. We see these conflict zones cooling and with it a much more stable price at the pump. Also, a move towards arms control talks with the Soviet Union, also created a sense that Dtente would be progressing within this geo-political sphere, which was clearly a sign of the times then. Hope on the geo-political front will bring down tension and hence prices even further, rendering the increases during the oil embargo of the Nixon years a thing of the past. On this basis, connoisseurs of true American muscle cars, need not worry at all, and from the point of view of the next model planning cycle, we recommend that more of the same be designed and produced for the American consumer.
17
Carter and the Second Oil Shock
Oils Lasting Impact Chrysler Bail-out Iacoccas K The end of AMC George William Miller takes control of Fed from March 8, 1978 to August 6, 1979 George Miller becomes Treasury Secretary from August 6, 1979 to January 20, 1981 and works on the bail-out of Chrysler Miller best known for role on Chrysler Loan Guaranty Board and the $1.5 billion advanced to the auto maker Miller opposes any rate increases at Fed November 1979 dollar crisis plunges 34% vs. the Deutsche Mark and 42% vs. the Yen Carter forced to support dollar by emergency gold sales Paul Volcker appointed Fed Chairman in August 1979 Fed announces targeting of money supply in October 1979 Inflation peaks at 13.5% in 1981 Fed Funds rate peaks at 20% in June 1981 18

Prime lending rate peaks at 21.5% in 1981 Farmers drive tractors to DC in protest against Volckers high rates European Exchange Rate Mechanism (ERM) negotiated to reduce exchange rate risks in Euro zone
Oil Prices under Carter Nominal

1978 1979 1980 1981 1982 $14.95 25.10 37.42 35.75 31.83
Inflation Adjusted
$48.71 73.44 97.47 83.54 70.07
The false geo-political hopes inherent in the Ford years caused Detroit to fall further behind the Japanese. It was not until the second major oil shock during the Carter years, that caused the Big 3 auto producers to start scrambling for an appropriate product mix to address the issues at the pumps. With Chrysler nearing its first bankruptcy and the subsequent bail-out from the Carter Administration, the required investment in product design and planning had to be rushed under an unmistakably changing environment. What the second oil shock did, was to shatter some of the complacency that the Big 3 had in their own beliefs that the first oil shock emanating from the oil embargo of 1973, was not just a geo-political aberration. An historical accident! The new higher cost environment as reflected through higher fuel prices led to a rush of new planning ideas that would counter what has now turned into the Japanese Import threat. Only five years ago, these cars that Toyota and Datsun (Nissan) were importing into the US were not to be taken seriously commercially, as they were perceived to be merely geo-political imports which served the interests of 19

the US state much more than they would ever have been able to serve or satisfy the US consumer; let alone become much of a threat to the powerful Detroit auto producers. In addition to the high price of oil and the growing unease at the fuel pumps across America, where lines of vehicles became a permanent feature of the US motoring landscape, was the unexpected outcome of the changing monetary policy environment at the Federal Reserve under the soon to be appointed Paul Volcker. Volckers Fed became known for its experiment in targeting money supply, or in technical jargon, the total of all short and longer term deposits in the banking system. As deposits in the system grew, so could the Federal Reserve counter with higher short term borrowing rates, hence choking off any further loans that the banks could make to their best customers. Volcker quickly found out that this new policy shift in favor of a more stable money supply needed to have far higher rates than what the economy could historically manage. Soon, based on the premise of a stable growth rate in money, rates were beginning to transcend the eighteen percent level. This action by the Fed not only choked off consumer demand for domestic cars, but it also made Japanese imports far more affordable to the US consumer, when high interest rates made the dollar appreciate against the Japanese yen. This monetary experimentation period also generated the first evidence of a growing trade friction between the Japanese and the US based on the growing imbalance in the auto trade. In fact, it would be the auto trade that spurs many policy initiatives over the next decade in order to address this changing balance of power globally. It not only results in the US leveraging Japanese Foreign Direct Investment (FDI) locally on political grounds; it also becomes the basis for trade policy as well as a number of Currency Pacts throughout the 1980s. 20

What began with a shock on the real side of the economy with both the first and second OPEC oil price increases of the 1970s, evolved to the shocks that emanated from the climate of economic policy experimentation in Washington in the 1980s.
21
Reagan and the Rise of Toyota
Japanese competition Plaza and Louvre Accords G7 presents common front Collapse of OPEC Power & the Myth of Oil Oil Collapses by 46% over 6 years Paul Volcker reappointed by Ronald Reagan for second term in 1983 Fed abandons money supply targeting Alan Greenspan appointed as Fed Chairman in August 1987 Focus on Fed Funds rate as main policy instrument in late 1980s to present Stock markets crash in October 1987 James Baker appointed Treasury Secretary from February 4, 1985 to August 17, 1988 Treasury Secretary Baker negotiates the Plaza Accord in September 22, 1985 to devalue the dollar against the Yen and Mark via co-ordinated intervention Dollar falls by 51% vs.Yen from 1985 to 1987 Louvre Accord signed in February 22 of 1987 to reverse decline of dollar by co-ordinated Intervention
22
Reagan and the Rise of Toyota Market Shares in the US (1980):

GM Ford Chrysler Honda Nissan Toyota 44.5%; 20.3%; 11.3%; 3.4%; 5.6%; 6.4%
Oil Prices under Reagan Nominal

1983 1984 1985 1986 1987 1988 $29.08 28.75 26.92 14.44 17.75 14.87
Inflation Adjusted
$62.02 58.78 53.15 27.99 33.19 26.70
Just as 1970s Cold War politics helped Japanese auto makers gain an easy access route to the American marketplace, the 1980s revealed the first cracks in this relationship. As the Cold War between the Soviet Union and the US entered its fourth decade, the open access that was granted to Toyota, Datsun and Honda in the 1970s, at the height of Cold War politics and the Vietnam war, began to shift in direction in the 1980s. The Carter Administration was just defeated after the second OPEC oil crisis reached astronomical proportions throughout the decade of the 1970s; inflation was pegged at being well above ten percent and a new Federal Reserve Chairman, Paul Volcker, heralded in the new decade of the 1980s. Although money supply targeting by the Volcker Fed was singularly designed to beat back price inflation, the outcome was in fact a major financial explosion in the ascent of Japans auto makers. Just as the then Big 3 Detroit based 23

producers mis-timed the two major oil shocks in the 1970s, there was nothing in their control when it came to the setback in which they were handed by the Volcker Federal Reserve. What Paul Volcker did in the early 1980s, added an extra policy based burden to the overall impact that the real economic effects of the oil embargo had by OPEC throughout the 1970s under both Presidents Nixon and Carter. With short term Fed Fund rates peaking to just over twenty percent from 1981 to 1983, and creating one of the worst economic downturns since the Great Depression of the 1930s, the financial shock to the balance of international automotive trade was via the exchange rate parity between the yen and the dollar. The dollar became severely overvalued during this period to the point where it made absolute sense for American consumers to begin experimenting with these import vehicles from Japan. Just as the Big 3 mistimed the second oil embargo, and were thus faced with backtracking to quickly produce smaller cars for a consumer that was fuel pump sticker shocked with their gas guzzlers; a financial shock like the over-valuation of the dollar set the early stages for the ascendancy of the Japanese three producers, lead by Toyota in the US. In short, this was a Washington manufactured policy shock! It was not necessarily a fact that the Japanese made more fuel efficient cars, hence the American consumer was focused on hedging the increasingly erratic prices at the pumps; but it was more a testament to the undervaluation of Japanese imports which was made possible by tight Fed money policies to the point where these vehicles were just too good to pass up or, at least experiment with. In essence, the great deal value to American buyers based on the overvalued dollar was such that it hedged any past, current and expected future erratic price changes to the cost of gas at the pump. 24

What Paul Volckers Fed did to the demise of GM and Chrysler more than offset the negatives of the two oil embargoes during the Nixon and Carter Administrations. The fact that they mismanaged and mistimed the second oil crisis during the Carter era of the late 1970s, by rushing to design dubious models such as the K-car by Chryslers Lee Iacocca at the time, and Fords experimentation with a very mediocre Mustang, began to turn consumers off who were used to the magnificent designs and power of the muscle cars that were launched on the market just a decade ago. The legacy of these cars like GMs Chevelle, Chryslers Charger and Fords Mustang Shelby just could not offset the hastily contrived models of the late 1970s and early 1980s. Such notables as GMs Pontiac, Chryslers Cordoba and Fords Tempo and Topaz lines, were sufficiently inferior products when currency markets gave even more of an edge to Japans imports based on price. Not only were legacy factors working against the Big 3 at this point in time, but they were also spoiling any goodwill that this glorious legacy carried with it by forcibly designing these types of half-baked models to nervously address the oil shocks. The final blow came via the over-valued dollar and the Volker Feds policy shock. The election of the Reagan Administration in 1981 was based on a number of factors, many of which were considered of a financial nature and some on a geopolitical platform. Ronald Reagan campaigned for an across the board tax cut that was based on a new call to political action by a group of what was known as supplyside economists. They were lead by the likes of Arthur Laffer (the Laffer Curve), John Paul Roberts, David Stockman and a number of conservative think tanks and right leaning publications such as William F. Buckleys National Review. 25

The main purpose of the supply-side revolution was to reassert purchasing power to those that made above average incomes. It was the premise that those that would benefit the most would lead a program of trickle down which would positively affect the middle and lower income tiers via job creation that would be undertaken by the tax surplus which the upper tiers of income earners would then invest in the creation of jobs in America. This trickle down effect may have been implemented during the Reagan years, but it also unmistakably created a boom for luxury goods producers throughout the 1980s. Not only were Japanese imports on the rise, but luxury German nameplates such as Mercedes Benz, BMW and Audi did very well during the latter half of the 1980s via the effect of these tax cuts. Not only did the Big 3 lose out from the middle and lower tiered consumers during this time from the overvaluation of the dollar and undervalued Toyotas, Hondas and Nissans, but domestic luxury nameplates such as Cadillac, Lincoln and Buick were increasingly eclipsed by German imports spurned by the Reagan tax cut. By the time that the advisors from the Reagan Administration came to the realization that the domestics were severely under pressure, they moved to assert a changeover at the Federal Reserve. Paul Volcker was on his way out at the Fed by the middle years of the decade, and he would be subsequently replaced by Republican economist Alan Greenspan. Greenspans rise came during the Nixon and Ford Administrations, but he gained increasingly bi-partisan support in Washington, mainly due to his success on Wall Street with his own private practice through Townsend Greenspan, an economic consulting firm that he founded in the 1950s. The Greenspan appointment in 1987 was symbolic from the perspective that it signaled a fresh new era at the Federal 26

Reserve, and it affirmed a new financial context whereby the dollar as the pre-eminent reserve currency was slowly devalued over the longer term. Both Treasury Secretaries under the Reagan years, first Donald Regan and then James Baker moved to assist the newly appointed Fed Chairman by co-ordinating an assisted devaluation in the dollar which was then supported by the major industrialized trading countries in the mid to late 1980s. A change in direction to the fortunes of the Big 3 in Detroit had to be instituted at the international level by a general agreement that the dollar needed a devaluation of the type that would level the trade playing field and bring to an end the price competition to the Big 3 from Toyota, Nissan and Honda. Now that the collapse of the oil price and waning of OPEC power assisted the renaissance of the auto industry worldwide during the 1980s, the Big 3 were still being disadvantaged by an overvalued dollar, making imports much cheaper and way more competitive to consumers. The Reagan policy for the auto industry domestically was addressed on three fronts: first the low oil prices and the dismantling of OPEC power; secondly the revaluation of the yen and the Deutsche Mark and thirdly, by addressing the employment picture in the domestic auto industry by the policy of import substitution via direct investment in the US and Canada by Toyota, Honda and Nissan. These last two elements to auto recovery in the 1980s in the Americas were communicated forcefully through the G7 Finance Ministers meetings in 1985 first at the Plaza Hotel in New York and then adjusted and fine tuned effectively at the Louvre summit in the summer of 1987 in Paris. Then Treasury Secretary, James Baker, convinced his counterparts that a revaluation of the yen and the Deutsche mark were essential in order to address the growing structural 27

trade deficit in the US, with particular emphasis on the auto sector and its ups and downs over the past decade and a half. From that angle, the Finance Ministers of the seven major countries persuaded traders and major banks that the dollar needed to be debased, which was supported in Europe by the march towards the creation of the single currency, and all of the monetary politics that came to define the era of loose spending in Europe came to an end by the end of the decade of the 1980s. More significantly, these summits were also used by the US to forcefully lobby the Japanese first for restraint in exporting their vehicles to the US, but also to switch the production of these cars to the US and Canadian geographic spheres. US officials were less able to get their European counterparts to do the same. Consequently, foreign direct investment commitments by Toyota, Honda and Nissan grew rapidly during these years. Auto investment from Japan also became aligned with the interests and aspirations of labor within the southern American states, as they created new jobs just when the Detroit three were downsizing periodically. It also created new geographical automotive regions within the US, as the new investments were being made in zones that were miles away from Detroit. If the Big 3 now attacked Japanese imports as the epicentres of their problems, they would really be attacking states such as Alabama, South Carolina, Tennessee and Texas, whose interests were in no way aligned with the legacies of Michigan, Ohio, Illinois and Indiana when it came to producing automobiles. In retrospect, from the American auto perspective, the Reagan years can be re-considered as being friendly to the interests of the Big 3 or what was fast becoming the Detroit 3 or the Domestic 3 only from the standpoint of ending the pricing pressures in favor of the Japanese 28

producers. Ever since Volckers abandoned monetary experiment created an over-valuation in the dollar, Toyotas Hondas and Nissans became much more attractive to the US consumer from a pure value proposition. Also, the collapse of OPEC power in this decade saved the global auto producers from erratic and predatory pricing at the pump. These two events, one artificial and the other real were behind the general resurrection of the auto sector worldwide, not only in the US. However, the wildcard development which the Big 3 looked on very suspiciously, was the Reagan Administrations insistence that the Japanese produce more of their vehicles within the North American marketplace. This, as it evolved over the next several decades, would be the nail which would shut down any sort of political attack mechanism against the Japanese auto makers in Washington from a trade policy perspective. In ending, the Reagan years would be known as offering short and medium term solutions to the Big 3, but also sowing the seeds of their longer term downfall by splitting the polical consensus between the direct investment southern state recipients and those of the traditional Big 3 around the northern areas adjacent to Michigan and the Great Lakes. In summary, the 1980s were favorable to the worldwide auto producers and consumers since OPEC power and oil prices were waning during this decade. An end to Volckers Fed and his policy of monetarism brought down the dollar hence leveled the playing field once again in favor of the Big 3. But, it created a new way by which the Japanese producers would reach the American consuming public, which was to shift production from Japan to southern American states and to Ontario. This would create jobs in the short to medium term and gain political accolades in Washington, but would work against the political interests of the Big 3 over the longer term, 29

since the Washington political consensus would be split between northern and southern state interests within the realm of auto production. It would also split the opposition to free trade politically and lead to further developments in opening up trade routes over the next two decades, leading to a mixed impact on the overall health of the Big 3.
30
A Case Study of Japanese Auto Manufacturers in the 1980s
rom the perspective of the Japanese auto producers, the 1980s early on clearly were in their favor, as the second oil shock in 1979 created a panic among buyers of cars in America. Clearly, long line ups at the fuel pumps and gas guzzling muscle cars, were not favored by average consumers in the US. Toyotas smaller line of more fuel efficient offerings emerged on the radar screens of many buyers during this period. This shifting consumer preference was helped by the overvaluation of the dollar as imports from Japan became much more cheaper after the installation of Paul Volcker as Federal Reserve Chairman in 1980. Paul Volckers monetarist experiment was very friendly to the likes of Toyota, which provided them with the spur that they needed to grow their market share and make the US and Canadian markets essential pillars to their worldwide growth plans. The most significant trend that developed in these years was the moral suasion that was practiced by Reagans officials in convincing Japans government to force Japanese transplant 31

investments in the US. These were made in different degrees over the next several decades, as Toyota invested in productive capacity in both Ohio and in Ontario. Honda invested heavily in both the US and in Ontario to the point where their productive capacities in North America reached 85 percent, whereas Toyota produced around 45 percent in North America compared to what it sold in these markets. Nissan also produced heavily in the US, but was mainly absent from committing any production in Canada. In this respect, the direct investments made to productive capacity in North America, as well as to a large extent in the UK for the European market, became an increasingly important element in the increase of Japanese sales in these markets. From the perspective of the Japanese auto companies, committing large amounts of productive capacity to North America came with a number of risks. One of which was whether or not their brands could ever really be considered as being American over time? Also, the challenge was how models that would be produced within the Americas could ever be re-exported to markets in adjacent zones or even back to Japan? Significantly, there have been a number of major events from Nixon to Reagan, which have been of benefit to Japans producers and I summarize them below:
1) Nixons use of commercial and trade policy in order to win over the Japanese as allies in the fight against Communism and the sphere of influence of China and the former Soviet Union from a geopolitical angle. Nixon granted the US market to the Japanese auto producers in exchange for their loyalty on the political front. 2) The 1973 OPEC oil embargo laid the foundation for crises at the pump for American consumers. The second oil crisis in
32
A Case Study of Japanese Auto Manufacturers

1979, caused the Big 3 to panic by producing sub-standard vehicles that were a far cry from their glory years only a decade ago and caused them to lose focus of their traditional strengths. The second oil embargo elevated the Japanese producers to heights that they have never experienced before in the American marketplace, as the Big 3 stumbled. 3) The appointment of Paul Volcker as Federal Reserve Chairman in 1979 and his monetary experiment that raised the prime rate above twenty percent for a brief period was a major factor that made Japanese imports very affordable as an alternative to US and Canadian consumers. This was an event that hit the Big 3 as hard as their mis-calculation of the second oil embargo and went in tandem in elevating the Japanese producers to levels that they never have experienced before in the US market. 4) Reagan Administration officials such as Donald Regan, George Shultz and James Baker, who encouraged Japanese auto companies to build cars in the US if they wanted to continue benefiting from the US marketplace. They were very diplomatic in the sense that they did not want to insult Japanese leaders at the height of Cold War geo-politics in this decade, but needed to reassert sustainability in opportunity and employment. This foreign direct investment or FDI that Japanese producers committed to, split the countrys politics between North and South
33

over the longer term, and prevented any use of a trade weapon to shut down domestic markets when the going got very tough for the Big 3. 5) Use of Summitry politics by Reagan officials such as James Baker, especially during the Plaza Hotel meeting of G7 Finance Ministers in 1985, closely followed by a full G7 Summit in France in 1987 at the Louvre, which basically served to undo the mistake which Volcker made at the Fed in 1982 by over-valuing the dollar artificially for a few years and making Japans autos overly competitive to US and Canadian buyers. By using moral suasion on most of their counterparts in Europe and in Japan, policy coordination attempts at this time devalued the US dollar substantially with respect to the Yen and to a lesser degree against the Deutsche Mark and the Pound Sterling. In summary, this geopolitical and geo-economic climate in the 1980s, could not have been more friendly to Japanese producers over the longer term. Such circumstances have turned these managements during this era into geniuses that they were not. They also were the main elements that truly spured the US consumer to reach a point of no return towards the Big 3 and eventually cemented their downfall two decades later.
34
Bush I and the Fall of the Wall
Globalization and new markets The recession of 1991 The rise of China Russian chaos Bush loyalists blame Greenspan Bushs defeat in 1992
Market Shares in the US (1990):

GM Ford Chrysler Honda Nissan Toyota 35.4%; 23.9%; 12.2%; 6.2%; 4.5%; 7.6%
Oil Prices under Bush I Nominal

1989 1990 1991 1992 $18.33 23.19 20.20 19.25
Inflation Adjusted
$31.40 37.69 31.51 29.15
George H.W. Bush was notable for the events that occurred during his administration that were more or less completely out of his control. 35

The collapse of the communist system that was formally presented to the world through the collapse of the Berlin Wall in 1989, was mainly attributable to Reagans sharp military build up in the mid 1980s, when Bush was his Vice President and to advances in communications technology. This period was one of great uncertainty, war, chaos, but also one of great hope. From an economic perspective, the tying of formerly closed economies into the global system of markets would prove to be significant in the containment of natural resource costs, and more significantly to the price of oil for many years to come. Russia would prove to be the most significant country that was poised to open its resource markets to the global economy and price signaling system. Also, it would present a compelling market for auto producers over the longer term, which just now seems to be bearing fruits to producers on a world wide basis. The rush to make large SUVs in the U.S. can be intimately traced to the collapse of communism and the Berlin Wall. Not via direct effect, but certainly from creating an expectation of deflationary conditions. One that was night and day from the inflationary environment that engulfed the industry throughout the Nixon-Ford-Carter era just a decade ago. In essence, the global economy going from boom to bust in ten short years as the old command and control system self-destructed. George H.W. Bushs re-election prospects in 1991 went by way of the former communist system. By unleashing a mass deflationary zeal throughout global markets as communism collapsed, consumers and industry could feel a structural change forthcoming, hence interrupting their normal consumption and investment activity and adding to unemployment. This structural interruption to the economies of the west were significant from an automotive industry angle. These 36
Bush I and the fall of the Wall

were the advent years of new materials, processes and the financial packaging of the car. It also was the beginning of the era where the U.S. started its love affair with the SUV, and where both finance combined with lower oil prices would work in the same direction of sustaining this high yield production activity for the Big 3. Under Bush, the advent of a North American free trading zone attained its pinnacle. What was the first negotiation that culminated with the Free Trade Agreement between Canada and the U.S., quickly was expanded to include the southern hemisphere of the continent and bring Mexico into the fold. What was once unthinkable, quickly became the basis for a new automotive infrastructure within the North American trading zone. Although many first and second tier parts companies relocated to the maquiladora regions of Mexico, to take advantage of free trade, lower costs and cheaper labour, it would not be until China opened up to the world later in the 1990s, that the U.S. would begin to feel the full brunt of globalisation in its manufacturing and auto sectors. The Bush years would become known for the initial shock, but it was the Clinton years that really saw the execution of both the Mexican, as well as the more significant China effects on the auto sector domestically.
37
38
Clinton and globalization
Pound Sterling crisis August 1993 Brussels Compromise as French franc fluctuation bands increased to 15% Financial Deregulation under Treasury Secretary Robert Rubin Rapid Technological Change Internet Quality HIts the Big 3 EV1 Fords Brand Strategy 1997 Asian Financial Crisis Fed bail-out of Long Term Capital Management hedge fund
Market Shares in the US (2000):

GM Ford Chrysler Honda Nissan Toyota 28%; 23%; 14.5%; 6.7%; 4.3%; 9.3%
39
The Great Auto Crash Oil Prices under Clinton Nominal

1993 1994 1995 1996 1997 1998 1999 2000 $16.75 15.66 16.75 20.46 18.64 11.91 16.56 27.39
Inflation Adjusted
$24.62 22.45 23.35 27.71 24.67 15.52 21.12 33.79
Sustainability in the Clinton Years

Japanese foreign investment in US automotive production started to accelerate after Treasurys James Baker spurred the Japanese auto makers to commit to the US market after they started to gain spectacular market share from the domestic producers. What has become the 1980s story of sustainability in production and in employment, soon came under threat from technological changes in the early 1990s. The onset of the internet economy in the early part of the decade was pre-dated by the collapse of the Berlin Wall and the onset of deflationary forces throughout the commodity-based regions of the world. Production inputs were kept stable by this event, as the price of oil did not even factor into sales strategies in these early years. In fact, it was the collapse of these major socially managed economies that provided US consumers a new sense of freedom to experiment with vehicles where fuel economy had no bounds. The introduction of the SUV in the early part of this decade was accelerated by the time that all auto producers jumped on the bandwagon. After all, it was very lucrative to manufacture these vehicles since their size and power justified a far greater margin than what was being earned through selling midsized sedans. 40
Clinton and Globalization

In a way, the geo-political climate in the early 1990s that spurred an overall climate of deflation or price stability in commodities can be considered as one of the main events which made the price of oil a nonissue during this decade. The stability in the price in turn spurned a consumer buying frenzy for this range of vehicle, making it a very lucrative period for most auto producers, especially the domestic three. Despite the very attractive price in oil, however, a severe recession in the early part of the decade would have offset some of the positive effects of sustainability that was afforded by this low oil price. As auto executives looked towards these newly emerging markets that were just opening up in the former Communist regions of Europe, it was only those EU based producers that took the plunge in the early years. As uncertainty hit crescendo levels in the years from 1991 to 1996, Renaults investment in Slovenia, joined with Fiat Groups traditional presence in countries such as Romania and Russia, to lay a foundation for possible future expansion once a certain political climate emerged from the rubble. Although many auto producers were very slow in investing productive operations into the newly emerging countries of Europe, they were even slower in identifying Chinas complex market and the changes that were apparent from 1992 to 1997. If we take our sustainability concept and apply it in the early part of the 1990s to the auto sector, then a low price of oil tended to offset some of the debilitating outcomes of the recession from 1991 to 1994. However, it can not be said that the industry as a whole was able to benefit from these newly emerging geographical regions in terms of increasing either exports and foreign direct investment to benefit from the immediate geo-political changeover. The negotiation of the North American Free Trade Agreement or NAFTA in 1993 bound the Mexican market in with those of Canada and the US. Both Canada and Mexico would greatly benefit from selling production to 41

the US consumer for a protracted period of time. By the time that the recession of the early 1990s ended for the US, NAFTA enabled the American consumer to help both NAFTA partners in combating the downturn. NAFTA was paired with the single European market project and the preparation for the launching of a single currency; the Euro. Both events made the most out of the march to globalization in this decade and opened up markets to auto producers and vice versa. These new market liberalizing movements helped in assisting the entire goal of sustainability in employment and production in this key global sector, but it was not as potent a weapon as what was to come under Treasury Secretary Robert Rubin in 1996. As cars extended their natural lives through the evolution to a digital smarter product with software and computers mounted to engines, it was also new metal composites and treatments that soon prevented rust and body panel deterioration. It was evident that by the middle of the decade, a car or truck would be able to double its previous life on the road. This quality imputed into the production process was very significant in that production was sliding away from a mechanical process to one that was being digitized and engineered electronically. The impact that this had on sustainability would be revolutionary in what would evolve as the fight to save the vitality of this sector from an employment angle. Not only did low oil not elevate the case for sustainability during these years, free markets and globalization went some way in addressing this concern, but were still unable to convincingly offset the displacement from the rapid gains being made in technology. It wasnt until the repeal of the Glass Steagall Act which separated investment from commercial banking that sustainability could once again re-assert itself in the fast changing auto sector. 42
Clinton and Globalization

Robert Rubin, the former Goldman Sachs executive was appointed as Bill Clintons Treasury Secretary in 1996. Rubin joined with Alan Greenspan at the Federal Reserve in making financial deregulation the focus of his tenure. Not only did he promote free financial markets in banking and the nurturing of a shadow banking sector, he was able to convince law makers to fully liberalize and adopt cutting edge technologies to encourage financial innovation and to expand off-balancesheet transactions that did not require some form of capital adequacy insurance at the regulatory level. Needless to say, these were all very beneficial in offsetting the decline in sustainability in the auto sector from rapid technological changes in processes and materials. Not only were new financial products being offered to help in leasing cars and trucks and maintaining a sustainable level of sales in the industry, new consumer financing alternatives were being offered to US buyers of cars that would enable them to leverage off the equity that they had built up in their homes. The overall dot.com bubble that was emerging during these years also made financing just about any idea possible, as the impossible became within reach and possible to many. All of these outcomes were all ingrained in first the deregulation that was promoted and mated to financial and technological innovations in markets. These effects were the most potent in creating a sustainable consumer for all car producers, which would more than offset by many times over the positives which were created by a low oil price regime and the non-emergence of OPEC power in the 1990s; together with the emergence of free trade agreements and the whole concept of promoting globalization in markets that were only a decade ago all but closed off to the west.
43
Bush II and the Great Depression of 2008
Fed lowers rate in response to September 11, 2001 attacks and corporate scandal Fed Funds rate hits all time low of 1% by 2004 Bush reappoints Greenspan to fifth unprecedented term on May 18, 2004 Great Financial Unraveling hits sustainable production Greenspan defends decade of financial innovation and derivatives Greenspan admits in congressional testimony on October 23, 2008 that he was partially wrong in opposing financial regulation Sub prime mortgage industry collapses in March 2007 Auto Sales Financed by Housing preserving sustainability in industry Freer Trade under Terrorism Chaos in Parts Sector Lehman Brothers brings down GM and Chrysler and sustainability through financial magic Housing and Autos Collapse Rise of hybrids North vs. South: the new Civil War Senator Richard Shelby attacks Detroit 44

Ben Bernanke appointed Fed Chairman February 2006 Issues Bernanke Doctrine which advocates for a pre-emptive activist monetary policy Bernanke believes that its in the interest of governments to create some inflation
Market Shares in the US:

GM Ford Chrysler Honda Nissan Toyota 22.0 % 14.4 % 11.0 % 10.8 % 7.2 % 16.7 %
Oil Prices under Bush II Nominal

2001 2002 2003 2004 2005 2006 2007 2008 $23.00 22.81 27.69 37.66 50.04 58.30 64.20 126.33
Inflation Adjusted
$27.59 26.94 31.97 42.35 54.01 61.37 64.93 123.88
The new millenniums first decade broke with the experience at the pump from the Clinton years. The combination of the initial effects from globalization and tying up new markets to the worlds financial markets, together with the onset of easy consumer finance began to show fatigue. The commercial focus of the Clinton era faded rapidly, and when the attacks on the World Trade Centre occurred, it was clear that the US was on an entirely different path under a new President. 45

Former GM CEO, Rick Wagoner, happened to be caught in the middle of a new geo-politics that slowly began to chip away GMs commercial viability. Just as in the case of OPECs first oil shock in 1973, GM and the domestic three played a game of denial in this new era, which eerily began to repeat the history of mismanaging new geopolitical and policy based shocks to the sustainability of the domestic auto market. When the first oil shock came in 1973, the Big 3 at that time denied that the game had changed. However, when the second OPEC shock came later in the decade, they were left scrambling for a strategy that would expediently reposition their traditional market share, hence sustainability in production, employment and profits when all Japanese vehicle sales were still being imported. The scene was very similar now again throughout the term of George W. Bush. Not only was sustainability an issue to GM, Ford and Chrysler, but it now also became an issue to Toyota, Honda and Nissan, not to mention some of the late comers like Hyundai. Back then, it was the replacement of Paul Volckers monetarism with Alan Greenspans accommodating interest rate regime, together with James Bakers Plaza Accord in 1985, which both leveled the playing field between foreign and domestic producers in the US auto market. Not only this, but the longer term push to enhance sustainability in the US market through Japanese direct investment and the creation of a sustainable labor market in the southern tier states of Alabama, Tennessee and Mississippi. In this new millennium, sustainability in the sector was attempted through the enhancement in consumer finance and the continuation of deregulation and financial sector innovation. However, as consumer finance began to reach its natural limits and started to show cracks that were never imaginable 46

during the Clinton years, new concepts of sustainability began to emerge such as hybrid vehicles. The entire green revolution became a concept that was being embraced by many officials in government. The introduction of hybrid vehicles emerged through Toyotas Prius in the late 1990s and was extended to alternative fuels such as hydrogen, pure battery power through Lithium Ion battery research and even extended to the use of biofuel concepts. What all of these initiatives were doing were fragmenting the auto market while attempting to address sustainability. The auto market was being segregated to those that viewed mobility as getting from point A to B in the quickest most fuel efficient manner; to those that valued performance and horsepower factors as they traveled from A to B, but not necessarily in the straightest line possible. This fragmentation also gave an opportunity to smaller, more entrepreneurial start-ups that were on the cutting edge of battery research. This is a throwback to the turn of the last century, when a similar environment ensued and which became to define the development of mass production and the creation of the assembly line. Shortly thereafter, the industry began to merge into the familiar names that are currently under pressure and their very existence threatened.
47
Obama and the end of Sustainability
The Rise of Fiat??? A Quick Surgical Bankruptcy Obama Challenges Investor Hierarchy Supreme Court backs down The Resurgence of Labor Power A Green Agenda Forward State Help or Neo Fascism? Will leveling the playing field help sales After receiving a hefty TARP bail-out in the final few months of the Bush Presidency, first Chrysler and then GM were led into a surgical bankruptcy in the first half of the new Democratic Obama Administration. The key to sustaining production of vehicles and employment in this vital sector, had the onus fall on the US Court System. After the government offered to be the key financier in a newly restructured GM and Chrysler, it was the labor unions in the two companies that came out ahead of those that funded the companies. After challenging the restructuring first in the New York Appeals Court and then to the Supreme Court of the US, it became apparent that sustainability for this sector 48
Obama and the End of Sustainability

ranked above the rights of those that funded it prior to both companies bankruptcy filings. In a ruling by the New York appeals Court, it was clear that the Court viewed continuity and sustainability as the over-riding goals in this sector. Also, what was very clear in the ruling was the sheer disruption that would have been caused to employment and the supply-chain if a liquidation request had been granted to some dissident bond holders. In other words, what we can read from this in terms of bankruptcy is that the traditional ranking of lenders rights is fine, as long as a systemic disruption to the sustainability of a key sector is not in question. The importance of the auto sector to US interests was clearly spelled out by both the Administration, as well as the legal system under a period of great uncertainty. The move by the Obama Administration to re-regulate the financial industry after the fall-out on Wall Street in 2008, would also weaken a key pillar of sustainable automotive production that was started by Robert Rubin in the Clinton years. Moves to create a clearing house for off balance sheet assets and liabilities and regulate the shadow banking system, would go some way in eliminating financial innovations that were key in extending credit to those that never would have had any access to it in the past. Likewise, moves to regulate hedge funds would also create havoc in the free flow of capital which was vital in ensuring that innovation in finance would be extended to mainstreet and to those that were the end buyers of leased cars and trucks at the dealer level. This layer of financial magic as it were, heavily offset some of the technological innovations that were enemies to the sustainability in production and employment throughout the 1990s and the George W. Bush era. To re-assert fiscal policy dominance as a replacement of the sustainability enhancing features of financial innovation 49

would require much quicker and a far more potent dose of government spending than what was being proposed under Obama to now. Only a continuously increasing spending plan that would dwarf the recent TARP bail-outs would replace the effectiveness of policy sustainability to the general economy and the auto sector. What has been proposed to now by the Obama team, comes up way too short under a potentially new regime of re-regulating financial innovation and the shadow banking markets. As many Republican leaders have mentioned, it is tax cuts in payroll and retail sales which may potentially affect spending the quickest in a very uncertain period in the US. Increased spending and general stimulus on infrastructure programs take a very long time to implement nationally, and may harm the support system by which the entire sustainability concept works in the auto industry. If the Obama Administration is to raise scrutiny on finance and raise the regulatory bar, then they must be far more aggressive in proposing further spending that would address the decline in the industry. As we saw with the collapse of the auto industry, it was nothing internal or specific to the industry itself which crippled production and sales, but it was a broad economic shock that was wholly unexpected by most which has brought the industry to its knees. Short of a radical increase in spending, the Obama team is also promoting newer green technologies in the sector, which it hopes will free itself from the debilitating negatives of OPEC oil cartel price increases. In this respect, the Administration is addressing only one aspect that has affected sustainability in production and employment, but has more than offset any benefits that a green strategy would accrue to sustainability by re-regulating finance and not 50
Obama and the End of Sustainability

providing enough of a big bang from spending. Just the act of promoting alternative energy itself will fragment the industry over the medium to longer term. It is not clear at this moment just how Hybrid cars and trucks or full electrical vehicles will impact the employment picture in the industry. Early evidence from these strategies is that green cars more than anything resemble kit cars that can be assembled without resorting to a traditional assembly line and the use of large labor forces with massive doses of union bargaining power. In this respect, the whole concept of sustainability must be redefined, should the mechanical vehicle more and more become digitalized and transformed to one that can be snapped together without any resort to traditional production methods. Recent uses of fiscal incentives and rebates to get consumers to purchase electrical vehicles or hybrids is a new tool that can generate some form of sustainability or at least add marginally to this ideal in the short term. Extending the use of fiscal incentives as in the case of Germany and the European Union recently and the USs cash for clunkers program, can add much needed short term stimulus to production and employment, but this fiscal strategy needs to be augmented in five year intervals if these measures would continue to create turnover and raise manufacturing. The Obama Administration to now has come up short in this area of direct fiscal incentives, as it has in its attempts to replace finance with fiscal initiatives, at least in the foreseeable short term.
51
Japans Contribution to Sustainability
Auto trade and the Yen value Japanese direct investment Korean direct investment The single European Currency The Canadian Dollar The Mexican Peso As Japanese imports became noticeable to US consumers in the early 1980s, US lawmakers started to show some uneasiness, especially in States that were dependent on the domestic three producers. What was initially a goodwill gesture to Americas ally; Japan, during the height of Cold War politics, as the Nixon Administration opened up their domestic market to the auto trade, their success soon became a real concern to politicians elected during the Reagan era. As Fed Chairman Paul Volckers war on inflation raged from 1981 to 1983, the natural outcome of an overvalued dollar wreaked real havoc to the domestic auto industry, as Japanese imports were elevated to levels unseen prior to this policy exercise. It is interesting to look at some of the reactions of Japans producers in terms of commitments that they made to domestic sustainability in production and employment and the timing of their commitments. For example, if we 52

put the entire issue of Japanese imports into some context, we see that there were basically four important policy events from the early 1980s; throughout the Reagan Administration, and to the early years of the Clinton years and the negotiation of free trade agreements such as the North American Free Trade Agreement or (NAFTA) in 1993. In the case of Honda Motor, they were the first to commit to a sustainable manufacturing presence in the US market. In the late 1970s, they began first producing motorcycles in Ohio and then began aggressively producing cars from 1983. In this respect, they were an early contributor to sustainability in employment in the domestic US economy and their commitment to investment predated the Plaza Accords in 1985 that were negotiated by Treasury Secretary James Baker. Honda Motor also quickly ramped up production from some 400,000 cars to almost 700,000 in 2001. They were definitely the beneficiaries of low oilprices; financial deregulation and the NAFTA Accords during this period. All of these measures were very friendly in assisting their sustainability plans in the important US and North American markets. Nissans car production in the US market also predated Bakers Plaza Accords in 1985. Their production of 100,000 plus cars in 1984 was a contribution to sustainability in employment in the US, and predated the policy moves made under the Reagan Administration to massively force an enduring investment presence. This production peaked in 1987 at 220,000 plus cars, which was also determined to a large extent by the dollar devaluation that the Plaza Accords effected. Therefore, sustainability in the US was enhanced by this policy exercise meted out by the Reagan Administration. Nissans production steadily increased in the early to mid 1990s encouraged by the NAFTA agreement and also benefiting from financial innovation and consumer choices that this made possible. 53

Its also interesting to note that Nissans truck production in North America co-incided with the negotiation of the Free Trade Agreement between Canada and the US in 1988, and remained relatively consistent throughout the 1990s at just marginally above the 100,000 level. In terms of the Mazda auto alliance between Ford Motor and Mazda of Japan, they began domestic US production in 1987/88 at around 167,000 cars. It is clear that Bakers Plaza Accord was central to this sustainability gesture by Mazda and Ford. This production has remained remarkably steady over the next decade and has more or less fluctuated between 100 and 200,000 cars annually. In the case of Subaru/Isuzu, which was first introduced to the US market by entrepreneur Malcolm Bricklin in the early 1970s, production began in the late 1980s around 1989/90. Subaru was late to produce in the US, but was always considered to be a niche product that would not be attractive to a mass market as in the case of the other Japanese auto makers. Nonetheless, the free trade agreements and financial innovation in consumer finance were factors which caused production to sustain itself from 50 to 100,000 cars on an annual basis. Ironically, Subarus truck production mirrored that of its car production in North America and fluctuated in the range between 50 to 100,000 trucks until the early years of the new millennium. In the case of Toyota, car production did not predate the Plaza Accords of 1985. This is contrary to the investment decisions that were made by both Honda and Nissan, and more in line with the reactions of Mazda and Subaru/Isuzu. Toyota produced 150,000 plus cars in 1989, and this was increased by another 100,000 cars by the time that NAFTA was implemented in 1993 between the US, Canada and Mexico. 54

Toyotas car production peaked in the mid 1990s at around 400,000 cars. Not until 2005, would this production level exceed 500,000 cars in North America. Truck production was introduced in 1997, it grew dramatically throughout the new millennium and the Bush years, until peaking out at over 400,000 in 2007. The Plaza Accords of 1985 were perhaps the initial political impetus to add sustainability in the domestic US market, but it was the Free Trade Accords of 1988 and 1993, which were the events that convinced Toyota Motor to make a commitment to investment in North America. Relatively stable gas prices throughout these years can not explain why Toyota dramatically increased output of cars in the 1990s, as it could explain the gains that it made in the OPEC decade of the 1970s. Clearly, we can make a case for the Plaza effect; the free trade unification of North Americas markets and also the revolution in consumer finance at the dealer level, which can explain the dramatic positive impact to sustainability that this auto producer has made to the domestic US market and the timing of its investment.
55
Japanese Initiatives to Sustainability in Production and Employment in the U.S.

Subaru Lafayette, IN. Isuzu
Moraine, OH.
Honda
Marysville, OH. East Liberty, OH. Anna, OH. Russels Point, OH. Lincoln, AL. Tallapoosa, GA. Greensburg, IN.
Mazda
Flat Rock, MI.
Nissan
Smyrna, TN. Decherd, TN. Canton, MS.
Toyota
Fremont, CA. Georgetown, KY. Long Beach, CA. St. Louis, MO. Troy, MO. Jackson, TN. Princeton, IN. Buffalo, WV. Huntsville, AL. San Antonio, TX.
This list does not include Research and Design Centers. (Source: JAMA) 56
Small Town Studio
57
Explaining the Decline of General Motors
Life Magazine -Hank Walker
"because for years I thought what was good for the country was good for General Motors and vice versa." Charles Wilson, Secretary of Defense.
Under pressure from the Obama Administration, General Motors CEO Rick Wagoner reluctantly tendered his resignation in the spring of 2009. A few months later, the heralded auto maker entered chapter 11 bankruptcy protection. How could a company so large and so vital to the American economic system helplessly plunge towards the abyss in three short decades. Was there anyone to blame for this? Should Rick Wagoner be the sacrificial lamb after decades of unforeseen events slowly chipping away at its US market share. To understand the downfall of GM one must first be resigned to the fact that GMs market share loss was more political than it ever was commercial. There was no gloriously simple free enterprise story here. No white knight emerging out of an ivy league MBA school that could have managed to steer GM towards its former past glory. Instead, it were the following chronological events which finally brought an end to an american icon: 58

i) Cold War politics of the Nixon era and the introduction of Japanese imports to bind Japan politically to US interests. ii) OPEC oil embargoes in 1973 and again in 1978 which shocked GM as Americas pre-eminent producer and forced a hastily planned introduction of questionalble fuel saving vehicles at the detriment of their traditional market iii) The appointment to the Federal Reserve of Paul Volcker, as the first monetarist Fed Chairman, who orchestrated an interest rate rise in excess of twenty percent, hammering local industry. Not only from the perspective of domestic credit and finance, but more importantly from the over-valuation of the US dollar in relation to the Yen and Deutsche mark. This spurned momentum to cheap Japanese imports as it never has before. iv) The appointment of James Baker as Ronald Reagans Treasury Secretary and the successful negotiation of the Plaza Accords in 1985; devaluing the dollar which gave GM and the domestic producers some badly needed breathing room, but only in the short term. v) The moral suasion on the part of Baker to get Japanese producers to commit to American sustainability by levering investment into the US. This provided a foundation for the long term political decline of the domestic three in the US market. vi) The election of Mickey Kantor as Trade Secretary under Bill Clintons Administration and the use of
59

currency market politics as a trade and investment weapon against Japanese producers. This encouraged Toyota, Honda and Nissan to invest and produce even more output in the US market, hence hammering the interests of GM and company further politically. vii) The development of financial markets and Robert Rubins repeal of Glass Steagall financial regulations, heralding a new revolution in consumer finance and adding to overall sustainability in production, especially within the Sport Utility Vehicle (SUV) class. viii) The collapse of finance, shadow banking and derivatives after Lehman Brothers and Bear Stearns filing of bankruptcy protection in 2008. This finally impacts the entire industry and implodes GM.
Looking at these developments can be reconsidered from the perspective of initial actions and reactions as the story goes.... First, Japanese imports are a good gesture by the Nixon Administration towards its ally Japan supporting the US fight in the Cold War against the Soviet Union. Then, once OPEC hits, Japanese cars get the attention of the consumer as an effective hedge against the new price regime, but just marginally. The appointment of Paul Volcker at the Fed brings a high dollar policy making the imports far cheaper than they would be. The political reaction to this fall in domestic sustainability is encapsulated by James Bakers Plaza Accords in 1985, which offer a short term solution to regain domestic sustainability through the devaluation of the dollar against the yen. However, more importantly, over the longer term, Baker provides a framework for regaining the lost sustainability domestically by 60

levering foreign direct investment from the Japanese into the US market where they commit to employing Americans whose jobs were carved out of the domestic producers such as GM, Ford and Chrysler. Under this scenario, ownership of production is internationalized and domestic sustainability is jointly shared by both domestically owned industry as well as foreign owned industry. Once this happens, attacks on foreign companies is less politically feasible, because they now begin to share the local sustainability burden within the US market. Under these scenarios, what was GM to do? Assert its opposition in Washington against closer Japanese ties? Or oppose the appointment of Paul Volcker at the Fed in the late 1970s? Could a US auto producer be so powerful as to have direct influence over a sustained weak dollar policy? Or, perhaps most importantly, could GM have opposed James Bakers policy of having Japan share domestic sustainability in the US market? It may have been able to do so, but ultimately, GM, Ford and Chrysler were politically passive. They were not that politically adept, since politics is more unpredictable than managing a commercial enterprise. However, perhaps more interestingly, US industrial power in Washington was fast waning at the expense of the rise of finance and banking and general services. These new powers just did not share any sense of urgency to the old industrial order and landscape in America that was represented by a company such as GM and Detroit
US Market Shares GM
1980 1990 2000 2008 44.5% 35.4 28.0 22.0
Toyota
6.4% 7.6 9.3 16.7
Source: Financial Times 61
The Rise of Financial Warfare
Auto Policy under Reagan and Baker Louvre and Plaza Summits as Auto Trade Weapons G7 Summits and the Currency Weapon Just as sustainability was fostered or supported throughout the 1990s and new millennium by breathtaking advances in finance combined with technology, so too was the growth of free and open trade offset by the political use of the currency markets. Just as Clinton Treasury Secretary, Robert Rubin, acted to deregulate the banking and investment markets and blur the line between credit and investment, so too was the rise of free trade offset by the use of currency market intervention. The best case in point being the Plaza Accords of 1985, which were practically molded to the interests of the domestic US auto producers in the short term. What first became a legacy from Cold War geo-politics, the opening up of the US domestic market to Japans exports, soon inherited an inertia of its own as free trade agreements and the concept of freer and open markets hit the American psyche in the 1980s. First, this trend was localized through the US-Canada Free Trade Agreement in 1988, but the momentum began to 62
The Rise of Financial Warfare

build as long as the direct impact on inefficient industry, including automotive, could be managed by politicians on the margins. Whenever the ideal of sustainability in this most important sector was threatened, or perceived to be under serious threat, politicians turned to a traditional weapon in regulating domestic market entry the currency or foreign exchange markets. When the Nixon eras Cold War policy first catapulted Japanese imports onto the US consumer, Fed Chairman Paul Volcker made it more of an urgent issue through his monetary experiment from 1981 to 1983. As money supply was reigned in to fight inflation, the spectacular over-valuation of the dollar as a by-product of this experiment, in relation to the Japanese yen, gave Toyota, Honda and Nissan a far greater system of support than Nixons Cold War politics just a decade ago. Just when the Big 3 domestic producers were threatened in the early 1980s and the entire ideal of sustaining one of Americas most vital sectors, the Reagan Administration under James Baker, spearheaded the Plaza Accords named after the meeting of the worlds most powerful market or commercial Finance Ministers at New Yorks Plaza Hotel. These accords were direct interventions in the currency markets in an era when these types of interventions were more feasible and possible. By devaluing the dollar relative to both the Japanese yen and the Deutsche mark made Japans automotive imports less attractive financially to US consumers. This was coupled with a moral suasive gesture on the part of Baker for Japans producers to share the burden of sustainability in Americas auto industry by committing to foreign direct investment and building new plants in the US. This was unheard of in the past, where 63

nationalism reigned supreme, especially in industrial policy and in Americas industrial sectors. A new experiment in internationalism and the democratization of investment had been created, and sustainability for Americas workers became more certain after the Big 3 ceded market share.
64
Geo Auto-Politics
A roadmap to Where We are Now
Politicians Friendly to the Domestic Three (Ford, GM and Chrysler):
1. Richard Nixon (President) 2. Jimmy Carter (President) in Short Term 3. Ronald Reagan (President) in Short Term 4. Gerald Ford (President) 5. Bill Clinton (President) 6. Barrack Obama (President) 7. Arthur F. Burns (Federal Reserve Chairman) 8. Alan Greenspan (Federal Reserve Chairman) 9. George William Miller (Fed. Chairman) 10. Ben Bernanke (Federal Reserve Chairman) 11. George Shultz (Treasury Secretary) 12. George William Miller (Treasury Secretary) 13. James Baker (Treasury Secretary) 14. Lloyd Bentsen (Treasury Secretary) 15. Robert Rubin (Treasury Secretary) 16. Timothy Geithner (Treasury Secretary) 17. Henry Paulson (Treasury Secretary)
65
The Great Auto Crash Politicians Friendly to Japanese Imports

1. Jimmy Carter (President) over long term 2. Ronald Reagan (President) over long term 3. George W. Bush (President) until 2007 4. William McChesney Martin (Fed. Chairman) 5. Paul Volcker (Federal Reserve Chairman) 6. Donald Regan (Treasury Secretary)
The numbers tell the story. With data taken from official sources such as the Bank of England, The Japanese Yen never moved in tandem with any financial or economic events, unlike other currency parities such as the Deutsche mark, British Pound Sterling or even the Canadian dollar. When interest rates or expected inflation rates were deemed to change in one country, then a sudden shock in the currency parity would always ensue. Not so with the Japanese Yen and US dollar parity. Even when Japanese nominal interest rates collapsed to near zero, the Yen counterintuitively rose relative to the dollar. Likewise, when economic growth declined in Canada, then the Canadian dollar compensated by falling relative to its US counterpart. Likewise, a fall in Englands base interest rate usually adjusted sterling lower relative to the dollar. When it comes to the Yen, what has been more likely to move the parity between the Yen and the dollar has been a series of threats and counter-threats among government officials between the two countries in the sphere of trade. In the early years of the Clinton Administration, Trade Secretary, Mickey Kantor, used rhetoric against Japan in moving the Yen higher and pushing it to a record yearly average high of 94.08 yen to one dollar. 66
Geo Auto-Politics
Evidence from the 1970s currency chaos years after the collapse of the Bretton Woods Agreement of fixed currency parities in 1972, show the Yen at a yearly average of 303.42 to one dollar at the end of 1975, a year and a half after the first OPEC oil embargo in 1973. The strength of the dollar during these years severely affected trade with Japanese vehicles, making them both a fuel option consideration as well as a cheap alternative to domestic cars. As the OPEC shock disrupted sustainable production and employment in the domestic economy, a strong dollar ensured that this sustainability would be further eroded later in the early 1980s. The dollar was devalued to 190.24 during the second OPEC oil shock at the end of 1978 under the Carter Administration and the George Miller years at the Fed. This helped domestic producers sustain production domestically and maintain employment levels. However, during the twilight years of the Carter Administration, the Yen went back to 249.27 to one dollar at the end of 1982. As Paul Volcker introduced monetary targeting at the Federal Reserve and attacked the rampant inflation rate by raising prime interest rates above twenty percent, Japanese sales began to pick up momentum at the expense of sustainability in the domestic US auto sector. The election of the Reagan Administration and the appointment of James Baker to the role of Treasury Secretary not only reversed the rise of the dollar, but laid the foundation for long term sustainability by forcing Japanese producers to first invest, then employ American workers in the US. The Plaza Accord in 1985 propelled the dollar down to a yearly average of 168.33 from a level of 238 throughout the Volcker monetary experiment years. From 168 Yen to the dollar, the Yen continued its downward trajectory as it came under attack from trade Secretary Kantor during the early part of the Clinton years from 1992 to 1995. 67

Such political gestures first on the part of James Baker and then Mickey Kantor, were designed to force more investment and re-investment in the domestic US operations of the Japanese producers. The process was also assisted on the monetary side through the removal of Paul Volcker and the appointment of Alan Greenspan as the new Federal Reserve Chairman in 1987, which promised a more accommodating stance to both the Reagan and Clinton teams.
68
Yen - Dollar Yearly Averages (/$)

(Major political intervention in defense of sustainability for US domestic economy)
1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
296.75 296.39 268.24 210.04 (2nd OPEC shock) 219.05 226.15 220.46 249.27 (Paul Volcker era) 237.43 237.55 238.30 168.33 (Plaza Accords) 144.67 128.24 138.04 144.65 134.46 126.60 111.07 102.12 94.08 (Kantor effect) 108.77 120.94 130.83 113.73 107.79 121.45 125.15 115.88 108.16 110.20 116.30 117.76 103.40
69
Deutsche Mark Politics
After the initial OPEC shock in 1973, the Dm. traded at a yearly average of 2.46 to one US dollar. The combination of the second OPEC shock in 1978 and the resignation of George Miller at the Fed propelled the mark to a high of 1.82 to the dollar in 1980. Paul Volckers monetary experiment at the Fed caused the dollar to over-value to 2.43 marks. This is when imports of Audi and BMW cars hit a peak in the North American marketplace, as these luxury German cars became noticeable for the first time ever in a mass market push that was evident to the average American. The Volcker monetary experiment combined with the Reagan tax cuts in the early part of the decade of the 1980s were a formidable boom to German luxury imports into the US. The progress of the revaluation of the dollar hit a peak in 1985 just prior to the Plaza Accords at 2.94 Deutsche marks to the dollar, accelerating the success of BMW, Mercedes Benz and Audi in the US market. The Plaza Accord sent the mark to a high of 2.17 to the dollar. It continued to advance until in 1990 it hit a new 70

plateau of 1.62 after the success of the single currency project in Europe molded the mark into an undisputable anchor currency. It hit a new high to the dollar at a yearly average of 1.43 at the end of 1995 at the height of the turmoil in Europe, after the Italian lira and British Sterling left the Exchange Rate Mechanism under intense speculative pressures. The Deutsche mark finally became the Euro in 1999 and left the world currency markets at a parity of 1.84 to one US dollar. Since German cars appealed to a more niche segment of the US market, they were not subjected to the attacks which the Japanese producers experienced under the reign of James Baker and Mickey Kantor from 1985 to 1994. German export success was relegated to a niche which was very well treated by Reagan and Clinton fiscal policy over this decade and resulted in increasing their market shares throughout the US. Some marginal conciliatory gestures were made, however, by the German producers, where BMW opened a production plant in Spartanburg, South Carolina. Both Mercedes and Audi did not open production plants in the US, and were relatively immune from US auto geopolitics. A very different approach to that of the Japanese who played in a mass market and were susceptible to forced contributions to the ideal of sustainability in America.
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Deutsche mark - Dollar Yearly Averages (Dm./$)
(major political intervention in defense of sustainability for US domestic economy) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2.46 2.52 2.32 2.01 1.83 1.82 2.26 2.43 2.56 2.85 2.94 2.17 1.80 1.76 1.88 1.62 1.66 1.56 1.65 1.62 1.43 1.50 1.73 1.76 1.84
(2nd OPEC shock) (Paul Volcker era) (Plaza Accords)
(Kantor effect)
72
Year: 1955
Strategy: Offensive Political Environment: General Economic Growth; massive road building program; Cold War and closed economies; Marshall Plan effects still resonate among market economies, especially the U.S. Economic Environment: Growth with low oil prices. Closed economies with the U.S. leading among market economies. The Packard Caribbean is a symbol of the growing prosperity in America in the 1950s. Its 275 horsepower engine is the most powerful yet available to consumers.
Plate 1
Year: 1961
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Economic Environment: Growth with Prosperity; low oil prices; consumer differentiation and first attempt to create a "European Lifestyle Niche" in America.
Plate 2
Year: 1961
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. No competition among domestics in mass market for cars. Economic Environment: Growth with Prosperity; low oil prices; consumer differentiation and first attempt to create a "European Lifestyle Niche" in America.
Plate 3
Year: 1962
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Economic Environment: Growth with Prosperity; low oil prices; consumer differentiation and first attempt to create a "European Lifestyle Niche" in America. The 1962 Cadillac is all about achieving status and the pinnacle of all lifestyles.
Plate 4
Year: 1962
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Economic Environment: Growth with Prosperity; low oil prices; consumer differentiation and first attempt to create a "European Lifestyle Niche" in America. Checker is all about having it all; safety, comfort, room and the ability to seat "8 adults." It is the ultimate family transport vehicle and price of fuel is no object in this era of plenty.
Plate 5
Year: 1963
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Economic Environment: Growth with Prosperity; low oil prices; consumer differentiation and first attempt to create a "European Lifestyle Niche" in America. The Corvair is so fun that buyers would be content with minor cosmetic changes for the 1963 model. Interiors are "refined a bit," and mind the "aluminized muffler," which is enough to appeal to the average American consumers in this quiet and comfortable era. _
Plate 6
Year: 1962
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Economic Environment: Growth with Prosperity; low oil prices; consumer differentiation and first attempt to create a "European Lifestyle Niche" in America. The Oldsmobile Ninety-Eight launch comes in an easy and enjoyable era where the skies the limit. What better than launch yet another luxury lifestyle vehicle?
Plate 7
Year 1968
Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Economic Environment: Growth with Prosperity; low oil prices; consumer differentiation and first attempt to create a "European Lifestyle Niche" in America. OK used car Chevrolets carry an outstanding 25 month warranty and a wide array of discounts on repairs. Cars in the 1960s were built big, strong, fast and durable and able to meet the standards of OK Used Cars. How would the inferior built cars of the late 1970s fare under a similar warranty?
Plate 8
Year 1968
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Economic Environment: Growth with Prosperity; low oil prices; consumer differentiation and first attempt to create a "European Lifestyle Niche" in America. The Chrysler Newport is big, bold, comfortable and just a few more dollars a month than a "small car" in America. This, of course, was when oil and gas prices were not an issue at all.
Plate 9
Year 1968
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Economic Environment: Growth with Prosperity; low oil prices; consumer differentiation and first attempt to create a "European Lifestyle Niche" in America. The Ford Cortina is an import from the UK, hence a British "niche" vehicle for the American market. Interestingly, the ad states: "Those are the features that help make Ford's Model C Cortina the largest selling car in England. And these features make it so right for America." Surprisingly, what works in England ought to also work in America? This is a "niche" within a "niche" when the clear preference in America during these times was for bigger and more powerful.
Plate 10
Year 1968
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Economic Environment: Growth with Prosperity; low oil prices; consumer differentiation and first attempt to create a "European Lifestyle Niche" in America. Ford goes after those that care about interiors in this Ad. The new "Comfortweave Vinyl" material is used as the sole feature that will appeal to the general public.
Plate 11
Year 1968
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Economic Environment: Growth with Prosperity; low oil prices; consumer differentiation and first attempt to create a "European Lifestyle Niche" in America. The skys the limit for the 68 Plymouth Satellite celebrating a record year and a worry-free era for motorists favoring large and powerful cars.
Plate 12
Year 1968
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Economic Environment: Growth with Prosperity; low oil prices; consumer differentiation and first attempt to create a "European Lifestyle Niche" in America. The wide track Pontiac Firebird was designed for all of those brand new roads that have been recently built in America. "And you can order a 335 hp Ram Air version that uses those hood-mounted scoops to breathe," is the ultimate statement defining the spectacular era of the late 1960s. Horsepower and speed define the driving experience here.
Plate 13
Year 1968
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Economic Environment: Growth with Prosperity; low oil prices; consumer differentiation and first attempt to create a "European Lifestyle Niche" in America. The VW announces technological advances such as one of the first electronic computers and electronic fuel injection eliminating the need for troublesome carburetors. Once again, a European "niche" vehicle carving out a following in an era that prefers horsepower and size.
Plate 14
Year 1968
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Entry to new decade of 1970s without any awareness of pending OPEC oil shocks. Economic Environment: Growth with Prosperity; low oil prices; consumer differentiation and continued attempts to brand a niche market through European association. This case with the Buick and Opel brands fused together.
Plate 15
Year 1972
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. At the dawn of the new oil crisis age. Economic Environment: Growth with Prosperity; low oil prices; these were the last years of AMC's prosperous period in America. Even small AMC's were trying to convince consumers of their "big car" experience.
Plate 16
Year 1972
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. This comes at the eve of OPEC oil crisis years and the first oil shock. Economic Environment: Growth with Prosperity; low oil prices; consumer differentiation and the first European niche attempt is multiplied by the Simca's message that it really is not as small as one would think. The big car era endures until a few more years.
Plate 17
Year 1972
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Torino emphasizes the American preference for bigness, comfort and safety at any cost. Economic Environment: Growth with Prosperity; low oil prices; "bigness is better" and "heavier is better" and choose from "9 models" gives consumers an incredible array of choices; this all foreshadows the problems that the domestic producers will encounter throughout the 1970s.
Plate 18
Year 1972
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Bigness in a mid-sized sedan is the Satellite's way of appealing to the consumer's preference for large cars even if they are not in the large category. Economic Environment: Growth with Prosperity; low oil prices; "we've carved out enough trunk to hold a basket of laundry and a week's worth of groceries." indicates the preference for bigness and roominess in this pre-OPEC era.
Plate 19
Year 1972
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Pontiac shows the array of consumer choice associated with the brand. Economic Environment: Growth with Prosperity; low oil prices; the level of choice in one brand can appeal to all in a mass market environment. This is subtle niche differentiation within an entire brand.
Plate 20
ear 1972
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Triumph Spitfire carries on the European "niche" tradition in America. Economic Environment: Growth with Prosperity; low oil prices. This type of car and marketing is relatively impervious to political economy. The eve of the destruction of the pound sterling indicates some downward pressure in pricing for the Spitfire to American consumers at this juncture. This will accelerate as the decade progresses and a full fledged sterling crisis accelerates.
Plate 21
Year 1974
Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy and Cold War. Economic Environment: Growth with Prosperity; low oil prices; consumer differentiation and first attempt to create a "European Lifestyle Niche" in America. The Dart is proud of its interiors which have high-backed velour seats. This car is economical, but also does not shy away from its "quality and luxury present in each of these cars." This car bridges the two eras pre and post-OPEC oil shock in 1973. The Dart is a transitional vehicle that foreshadows the omnipresent global crises that are about to hit the local US.
Plate 22
Year 1974
Strategy: Defensive Political Environment: Watergate and the resignation of Richard Nixon as the OPEC I shock bites hard. Economic Environment: Crisis after OPEC I and imminent hit with OPEC II oil shock in the early years of the Carter Administration. The Datsun ad tries to look at the energy crisis with optimism. "Surprisingly, many aspects of the energy crisis have made driving more pleasurable." This ad reassures a frightened motorist that fuel prices will once again come back down to normality and that prosperity will be there again.
Plate 23
Year 1977
Strategy: Offensive Political Environment: Election of Carter Administration and ending of Viet Nam war. There are some vestiges of oil price stability after the first OPEC shock begins to wane. The environment braces for the next OPEC shock as confusion reigns in the message of the domestic auto producers. Economic Environment: Crisis after OPEC I and imminent hit with OPEC II oil shock in the early years of the Carter Administration. The Chevrolet Monza sticks it in the face of the uncertainty that prevails between the double barrel OPEC oil shocks: "5.0-litre, 2-bbl. V8... Turbo Hydramatic." that re-confirms that OPEC I may have been just an aberration to the American driving experience. Under Gerald Ford's reign, oil price and general crises lull generated a false sense of optimism among consumers; for just a brief period of time.
Plate 24
Year 1977
Strategy: Defensive Political Environment: Election of Carter Administration and ending of Viet Nam war. There are some vestiges of oil price stability after the first OPEC shock begins to wane. The environment braces for the next OPEC shock as confusion reigns in the message of the domestic auto producers. Economic Environment: Crisis after OPEC I and imminent hit with OPEC II oil shock in the early years of the Carter Administration. The Ford Pinto is the direct opposite strategy from the Chevrolet Monza. Confusion reigns among product planners in these years. The question being if OPEC I in 1973 was just a one time event, or if fuel crisis is now the norm? In Chevrolet's view it's a one off aberration; but, in Ford's view its not, as it begins to scramble to achieve consumer relief by visibly subtracting from the true American driving experience that was evident just a few years ago.
Plate 25
Year 1977
Strategy: Offensive Political Environment: Election of Carter Administration and ending of Viet Nam war. There are some vestiges of oil price stability after the first OPEC shock begins to wane. The environment braces for the next OPEC shock as confusion reigns in the message of the domestic auto producers. Economic Environment: Crisis after OPEC I and imminent hit with OPEC II oil shock in the early years of the Carter Administration. The Mazda GLC means "great little car" is packed with offerings for the new high gas price environment. It is a battle of the import "niches" as it makes references to its competitors the "VW Rabbit" and the "Honda CVCC."
Plate 26
Year 1978
Strategy: Offensive Political Environment: Election of Carter Administration and ending of Viet Nam war. There are some vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once again rocked the American car industry and consumers. Economic Environment: Crisis after OPEC I and direct hit with OPEC II oil shock in the early years of the Carter Administration. The BMW 733 takes advantage of the growing despair in the US luxury market after product planners and engineers rush to sacrifice luxury at the expense of fuel economy standards. The BMW becomes a growing "niche" that begins its successful run in this tumultuous period for the domestic producers.
Plate 27
Year 1978
Strategy: Offensive Political Environment: Election of Carter Administration and ending of Viet Nam war. There are some vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once again rocked the American car industry and consumers. Economic Environment: Crisis after OPEC I and direct hit with OPEC II oil shock in the early years of the Carter Administration. The Chrysler Cordoba is an attempt to sell lifestyle to those that still have not been rocked by the high gas prices in this era. This is a bold move by Chrysler which eventually leads them to a bail out orchestrated by the Carter Admnistration's George William Miller. It is also the prelude to the appointment of Lee Iacocca and the launch of the K-car era of the early 1980s.
Plate 28
Year 1978
Strategy: Offensive Political Environment: Election of Carter Administration and ending of Viet Nam war. There are some vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once again rocked the American car industry and consumers. Economic Environment: Crisis after OPEC I and direct hit with OPEC II oil shock in the early years of the Carter Administration. Ford incredulously goes after the growing niche from Germany. This ad's strategy is mystifying to say the least!
Plate 29
Year 1978
Strategy: Offensive Political Environment: Election of Carter Administration and ending of Viet Nam war. There are some vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once again rocked the American car industry and consumers. Economic Environment: Crisis after OPEC I and direct hit with OPEC II oil shock in the early years of the Carter Administration. This ad attempts to reassure Oldsmobile's traditional market which has seen some disturbing trends in the late 1970s to changes in luxury brand nameplates.
Plate 30
Year 1978
Strategy: Offensive Political Environment: Election of Carter Administration and ending of Viet Nam war. There are some vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once again rocked the American car industry and consumers. Economic Environment: Crisis after OPEC I and direct hit with OPEC II oil shock in the early years of the Carter Administration. Toyota enters the luxury segment with the Cressida as traditional domestic three buyers get disillusioned with some of the tinkering to their brands due to the impact of high oil and gas. Toyota is perhaps inspired by the growing interest in German niche segments like the BMW 733.
Plate 31
Year 1979
Strategy: Defensive Political Environment: Election of Carter Administration and ending of Viet Nam war. There are some vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once again rocked the American car industry and consumers. Economic Environment: Crisis after OPEC I and direct hit with OPEC II oil shock in the early years of the Carter Administration. Cadillac reassures its traditional market and base with this ad as "niche" segments from both Germany and Japan turn on the pressure in this segment.
Plate 32
Year 1979
Strategy: Offensive Political Environment: Election of Carter Administration and ending of Viet Nam war. There are some vestiges of oil price stability after the first OPEC shock begins to wane. The environment braces for the next OPEC shock as confusion reigns in the message of the domestic auto producers. Economic Environment: Crisis after OPEC I and imminent hit with OPEC II oil shock in the early years of the Carter Administration. GM is ready with its front wheel drive technology for the new decade of the 1980s. It also has doubled up its efforts to treat rust problems over the past decade with new coated steel.
Plate 33
Year 1979
Strategy: Defensive Political Environment: Second Oil Shock during Carter Administration. Appointment of Paul Volcker at Federal Reserve and high interest rates. First bail-out of Chrysler Corporation. Economic Environment: Second oil shock convinces consumers that high prices are here to stay. High interest rates and the last of dollar weakness. The Pontiac Phoenix is also directly responding to the high oil price environment as it is delivering "More Pontiac to the Gallon."
Plate 34
Year 1979
Strategy: Defensive Political Environment: Second Oil Shock during Carter Administration. Appointment of Paul Volcker at Federal Reserve and high interest rates. First bail-out of Chrysler Corporation. Economic Environment: Second oil shock convinces consumers that high prices are here to stay. High interest rates and the last of dollar weakness. The Toyotal Tercel is unmistakably Stingy. The Tercel pinches pennies at the pump, and fast becomes the choice of consumers during these uncertain times.
Plate 35
Year 1979
Political Environment: Second Oil Shock during Carter Administration. Appointment of Paul Volcker at Federal Reserve and high interest rates. First bail-out of Chrysler Corporation. Economic Environment: Second oil shock convinces consumers that high prices are here to stay. High interest rates and the last of dollar weakness. This ad is impervious to the high oil crisis that has prevailed during the late 1970s. It trumpets the new technology that GM engineers have developed that is to "please the ear as much as the eye."
Plate 36
Year 1979
Strategy: Offensive Political Environment: Election of Carter Administration and ending of Viet Nam war. There are some vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once again rocked the American car industry and consumers. Economic Environment: Crisis after OPEC I and direct hit with OPEC II oil shock in the early years of the Carter Administration. The new LeBaron Town and Country Wagon emphasizes fuel economy and luxury which is not compromised.
Plate 37
Year 1979
Strategy: Offensive Political Environment: Election of Carter Administration and ending of Viet Nam war. There are some vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once again rocked the American car industry and consumers. Economic Environment: Crisis after OPEC I and direct hit with OPEC II oil shock in the early years of the Carter Administration. The Lincoln Continental Mark V is completely impervious to the high gas and oil prices or any geopolitical events of this era. It completely knows its market.
Plate 38
Year 1979
Strategy: Offensive Political Environment: Election of Carter Administration and ending of Viet Nam war. There are some vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once again rocked the American car industry and consumers. Economic Environment: Crisis after OPEC I and direct hit with OPEC II oil shock in the early years of the Carter Administration. The Celica Supra steps in to offer an alternative to the "watered down" domestic luxury segment after a significant portion of its market gets rocked by the high oil prices from the OPEC II shock.
Plate 39
Year 1980
Strategy: Offensive Political Environment: Election of Carter Administration and ending of Viet Nam war. There are some vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once again rocked the American car industry and consumers. Economic Environment: Crisis after OPEC I and direct hit with OPEC II oil shock in the early years of the Carter Administration. Renault Alliance niche car emphasizes new technology such as electronic fuel injection together with fuel economy for a niche segment.
Plate 40
Year 1983
Strategy: Offensive Political Environment: Election of Reagan Administration after record high inflation and oil prices under the Carter years. The environment is ripe for the appointment of Paul Volcker at the Federal Reserve and a new era of high interest rates and an overvalued US dollar. Economic Environment: An overvalued dollar makes imports cheaper and high interest rates discourage borrowing to buy a vehicle in the early 1980s. The Honda Accord underscores the case for product. Value for money, or as many would say: "product product product." This is the anthem that has sent the domestics on the defensive ever since this era.
Plate 41
Year 1986
Strategy: Defensive Political Environment: The Plaza Accords in 1985 and the intervention of Reagan Administration Treasury Secretary James Baker III to devalue the US dollar against the Yen and the Deutsche mark result in a leveling of the pricing playing field in the domestic auto sector. Economic Environment: The dollar is devalued after a co-ordinated intervention by the Central banks of Japan and Germany, making imports more expensive to American consumers. The move to lever direct investment into the US from Japan begins a new chapter in 1985. The Chrysler Conquest is built by Mitsubishi in Japan to counter gains made by Japanese produced sport coupes like the Mazda RX-7 and the Nissan 300 ZX, that have taken advantage of the overvalued US dollar during the early 1980s.
Plate 42
Year 1987
Strategy: Offensive Political Environment: Plaza Accords devalue US dollar and level playing field for the domestic three against Japanese imports. Economic Environment: The Reagan tax stimulus program is in full effect. The US economy is booming from the mid to late 1980s. This Buick advertisement sums it up completely: " Buick Presents a Better Time to Buy," as it emphasizes the low interest rate environment and the domestics increasing capacity to compete on pricing relative to imports.
Plate 43
Year 1983
Strategy: Offensive Political Environment: Appointment of Paul Volcker at Federal Reserve and high interest rate policy with overvaluation of US dollar. Economic Environment: High interest rates and high U.S. dollar from Volcker "monetary" experiment hammers U.S. based producers from Japanese and European imports. The VW Jetta emphasizes German engineering when the domestics were vulnerable from a product angle as well as the attractive price in US dollars when the dollar was severely overvalued in the early 1980s.
Plate 44
Year 1983
Strategy: Defensive Political Environment: Appointment of Paul Volcker at Federal Reserve and high interest rate policy with overvaluation of US dollar. Economic Environment: High interest rates and high U.S. dollar from Volcker "monetary" experiment hammers U.S. based producers from Japanese and European imports. The 1983 Plymouth Horizon challenges consumers to "Match It." This ad specifically refers to the Corolla as direct competition which has just received a huge advantage from US monetary policy and the over-valuation of the dollar.
Plate 45
Year 1983
Strategy: Defensive Political Environment: Appointment of Paul Volcker at Federal Reserve and high interest rate policy with overvaluation of US dollar. Economic Environment: High interest rates and high U.S. dollar from Volcker "monetary" experiment hammers U.S. based producers from Japanese and European imports. The 1983 Ford Crown Victoria claims that Ford makes the "best built American cars" in this ad. It goes on to reassure consumers that they can "still own this much car." This despite the unprecedented set back from high interest rates and the over-valued dollar that has given imports from Japan and Germany an advantage.
Plate 46
Year 1983
Strategy: Defensive Political Environment: Appointment of Paul Volcker at Federal Reserve and high interest rate policy with overvaluation of US dollar. Economic Environment: High interest rates and high U.S. dollar from Volcker "monetary" experiment hammers U.S. based producers from Japanese and European imports. The Colt is positioned to compete with the Civic, Sentra, GLC and Tercel, as the ad states. Moreover, the Colt is imported and built by Mitsubishi in Japan so that it can also take advantage of the overvalued U.S. dollar and deliver competitive prices, but at the expense of local employment and spinoffs.
Plate 47
Year 1983
Strategy: Defensive Political Environment: Appointment of Paul Volcker at Federal Reserve and high interest rate policy with overvaluation of US dollar. Economic Environment: High interest rates and high U.S. dollar from Volcker "monetary" experiment hammers U.S. based producers from Japanese and European imports. The Buick Skylark tries to reassure the traditional Buick buyers that its still a "Buick." This despite the visible cutbacks it has had to make to save on price as well as fuel economy in this difficult early 1980s era for the domestic U.S. producers.
Plate 48
73
Major Auto Transforming Events over the Past Half Century

1. Richard Nixon, Arthur Burns and the Cold War (1970-1974)
Richard Nixons election in 1968 was significant in that this was one of the most friendly Presidents to the manufacturing sector in the history of the US. After Nixons loss in the run up to the 1960 election, he blamed then establishment Fed Chairman William McChesney Martin Jr. in orchestrating a credit contraction that ended his political run. Nixons appointment of Keynesian Federal Reserve Chairman, Arthur Burns in 1970, ensured that he would receive pro-fiscal support from financial policy. Burns belief in a natural rate of unemployment at four percent and in the Phillips Curve where more inflation led to a higher sustainable employment rate, governed his policies at the Fed throughout the 1970s. Central to his monetary policy was a targeting of the Federal Funds rate and the short term and long term commercial market rates. He opted to keep these as low as possible via loose monetary policy to the benefit of the auto industry and at the expense of Wall Street and financial investors. The early introduction of Japanese vehicles to the North American consumer had more to do with Cold War geopolitics and the process of maintaining Japanese support of US military installations in the south Pacific, especially during the Vietnam War in the early 1970s.
2. OPEC Oil Shocks I and II

The OPEC oil shock from October 1973 to March 1974, caught the domestic auto sector off-guard, but it was the 74
Major Auto Transforming Events

second oil shock during the Carter Administration that did most of the damage. When the second oil shock came in 1978, the domestic auto producers were in a general sense of panic to redesign their muscle car offering to the public. This rush produced some of the most hideous models ever and initially catapulted Japanese imports into the psyche of the American consumer.
3. The Demise of George William Miller

The short lived Federal Reserve Chairman continued the pro-keynesian policies of the Burns Fed. He became known as an outsider, who was even more dovish on inflation and on interest rates, and eventually resigned his post to move over to the Treasury and negotiate the first Chrysler loan bailout of $1.5 billion. In short, a very friendly and pro domestic auto sector Fed Chairman and Treasury Secretary. Millers term was short, but very significant, in that his policies of a devalued dollar ensured that Japanese imports were held at bay during this late 1970s period which was critical for re-engineering a context for the Big 3. It capped off the 1970s as being very friendly to the domestic production of Ford, GM and Chrysler at a time when they were ill prepared for the second OPEC oil shock.
4. Paul Volckers Monetary Shock

One of the greatest enemies to the domestic three auto companies was Paul Volckers tenure at the Federal Reserve. Whether intentional or not, Volckers fight against inflation asserted the new automotive order in the US. After Arthur Burns focus on a four percent rate of unemployment and George Millers refusal to raise interest rates during the final years of the Carter Administration, a double digit rate of inflation became the political focus in the beginning of the new decade of the 1980s. 75

Jimmy Carter, under intense pressure from Wall Street and financial interests, especially within his own Administration, appointed a career civil servant to the post of Federal Reserve Chairman. Paul Volcker immediately changed the focus of monetary policy from one that targeted unemployment and low interest rates, to one that restricted the fuel that determined both of these targets. Influenced by the Chicago School of free market economists, led by Nobel Laureate Milton Friedman, this change had an immediate impact on business and the formation of forward-looking scenarios by both business managers, owners as well as labor. The record twenty percent prime interest rates created a spiral that was most unfriendly to industrial groups, such as Ford, GM and Chrysler. A crash in growth, coupled by high financing costs and a huge overvaluation in the dollar relative to the yen; added one further element to the gains that were being made by Japanese imports in the late 1970s under the second OPEC oil shock. An overvalued dollar ensured that very competitive Toyotas, Hondas and Nissans were another factor that would ensure the slow march to obliteration for Ford, GM and Chrysler. This currency event persisted from 1982 to 1985, when the Plaza Accord or Agreement created a broad consensus to intervene in the currency markets to devalue the dollar and save the domestic industry in the short term.
5. James Bakers Fantastic Tenure at Treasury

Probably one of the most competent Treasury Secretaries in modern memory was James Baker III. Appointed as Treasury Secretary by Ronald Reagan, Baker was the architect of policies that would offset some of the negative effects of Japanese import competition. 76

His move to offset the strong dollar was equivalent in effect to his move later in the decade to undo some of the stimulus that the Reagan tax cut had caused. Bakers move to meet the major Finance Ministers among the six largest industrial countries in New York at the Plaza Hotel, formed what was now infamously known as the Plaza Accord. This was basically an agreement in co-ordinating intervention in the worlds foreign exchange markets, by buying Deutsche Marks and Japanese Yen, and by selling the dollar. This effect would reverse the incredibly competitive prices facing US consumers on Japanese cars. Further, Baker moved to persuade the Japanese groups to increase their foreign direct investment in plant and equipment in favor of the US economy over the longer term. This direct investment in the US by the likes of Toyota, Honda and Nissan, was already being made by both Nissan and Honda. Toyota was the very last player in this department, and they continue to lag the other two producers in their commitments to making more than half of all the cars that they sell in the US economy. By contrast, Hondas commitment to direct investment had pre-dated the Plaza Accords, and Nissans commitment to producing vehicles in the US market had done likewise. In the political sphere, this long term investment commitment and creation of jobs in the US, split the political consensus geographically between Detroit and the southern US states. Since Nissan, Honda and Toyota had committed most of the new investment in the southern states, any moves to regulate imports on behalf of the domestic three, were met with opposition in Congress. No longer were trade restrictions possible on a political basis, and the more that depressed southern regions received wage-enhancing 77

investment by the Japanese; created a natural barrier of support to the foreign groups in Washington.
6. Clinton and Rubin

The 1990s were an impressive decade in terms of growth and stability. This was achieved with some good skill from the likes of Bill Clinton and Treasury Secretary Robert Rubin, but also came about through a very lucky development of events. Not only were oil prices being kept at bay and consumers were enjoying historically low rates, something more pronounced was happening to the auto industry. Spectacular gains in innovation and the digitization of the automobile was fast replacing the mechanically produced vehicles which reigned over the past half century. When mechanical automobiles naturally drove sustainable production and employment through the three to five year scrappage cycle. A new instrument needed to be created that would continue this sustainability; when now, in fact, the average age of the car had jumped from three to five years, to something that was between five and ten years, if not longer. The more durable that a vehicle became and the smarter that these vehicles had become through the use of technology, software and different composites, the less would issues such as rust or mechanical defects matter anymore. When you create a product that naturally extends its lifecycle and practically doubles it, then sustainability in production and employment become instant issues. These were addressed, however, in the 1990s via Robert Rubins deregulation of financial markets, which were now capable of producing all types of hybrid financial instruments. This financial magic enabled new schemes to develop by auto producers to the point where they had become banks or finance companies in equal proportions as they were designers and manufacturers of products. 78

What the Clinton Administration did, was to lay the framework for technological innovation in finance and banking. De-regulation of Glass-Steagall, which separated the various channels of financial services were merged together to produce a whole new set of instruments that would be available to dealerships that sold cars. A buyer need not buy a car anymore, but could lease it. They could lease it for three, four or five years, or they could terminate their lease even after one year and participate in the new design sweepstakes that brought the most recent trends to market. Ownership was a thing of the past and consumers were literally buying a range of miles or kilometers, but were also participating in the new design age by changing products very frequently. This cutting edge culture, created by consumer financial innovations, ensured that new cars would sell fast and quick. Sustainable production has now been re-defined and was no longer burdened by the old industrial age scrappage concept, where a car needed to be replaced based on depreciation and malfunction. The cars that were being replaced in the 1990s financial deregulation era, were cars that provided excellent product in the used car market due to their lasting quality and durability. Once again, policy had created a new scenario for the industry, one that this time was favorable in its entirety and in support of sustainability across the entire industry.
7. Greenspans Contribution to Sustainability

Federal Reserve Chairman Greenspan was appointed by Ronald Reagan in 1987. Just as Greenspan became Fed Chairman, the Volcker policy of controlling inflation by money supply control became a thing of the past. Greenspan is probably one of the most qualified Federal Reserve Chairman ever from the perspective of his eclectic exposure to both business and academia. Greenspan was also very similar 79

in his approach to Treasury Secretary Rubin, who made a determined effort to deregulate the financial markets in the US. Rubins repeal of Glass-Steagall was welcomed by Greenspan at the Fed, who believed that qualified bankers and financiers were best left to regulate themselves. That they would have the foresight to spot potential problem spots in the longer term horizon that regulators would not. In this world of both Rubin and Greenspan, financial deregulation was the only natural way to address the fantastic growth in technological innovations; which more or less went hand-in-hand. Greenspans era was known for low inflation, even though the Fed was nowhere near the strict monetarism doctrines during Paul Volckers reign. Also, it was an era where Greenspan practiced pre-emptive policy strikes, which was later more formally exposed and extended by his replacement, Ben Bernanke. Greenspans Fed used the Federal Funds rate in order to regulate what commercial banks charged themselves, as well as what they passed on down the line to their best customers. Greenspan was blamed for the Great Collapse of 2007 for maintaining an interest rate that was far too low for far too long. I would argue in his defense (see forward), that Greenspan could only play with the hand that was dealt to him after decades of globalization, free trade and rapid technological advances. The fact that real estate was left as one last seemingly safe sector for which to lend to and invest in was really an outcome of the demise of a mixed economy in the US more by accident than by design. The rise of technology and the internet short circuited many middle men in the traditional economy, whereas dirty industry such as steel production and tedious production was encouraged to shift to China and India to take advantage of the cheaper labor and tax regimes in these countries. 80

In essence, the US consumer was left with only real estate and the auto sector where they would make their incomes. Greenspan was constrained by the fact that any action to raise rates in the short term would have a far more detrimental effect on economic activity. Much more vulnerable was the US economy now, than even during the reign of Paul Volckers regime at the Fed in the early 1980s. The early 1980s era of a mixed economy needed a rate in excess of twenty percent to ensure that price increases were managed effectively. The economy that Greenspan managed, by contrast, would experience a nuclear winter should rates rise to such astronomical levels once again. Such was the severe difference in the nature of the US economy just over a period as short as two decades. This structural economic fact that Greenspan had to work with, ensured that the financially deregulated economy would continue to generate sustainability for the auto industry, both for domestics as well as the Japanese and Korean direct investors in the US. Just as with Robert Rubin, Alan Greenspan worked to ensure that sustainability for cars would continue under his watch at the Fed.
8. George W. Bush and the Rise of Hybrids

After September 11, 2001, the nature of the US economy changed radically from the 1990s defined by financial deregulation, open and emerging new markets and the rise of an internet economy. The government of George W. Bush was much more focused on geo-politics at the expense of the sustainable financial system that Clinton and Rubin had built throughout the 1990s. The appointment of Dick Cheney as Chief of Staff and of Donald Rumsfeld as Defense Secretary ensured the marginalization of the financial system throughout this period. 81

Although the system was assisted by a policy of deregulation, there was no underlying support for a mixed economy by this Administration that would underpin the sustainability of this system. In addition, the increasing rise in oil over this decade at the expense of consumer product manufactures such as cars and trucks, was perfectly acceptable to Bushs people. There were no initiatives as in the Nixon Administration and in the Carter Administration to attempt to address the skyrocketing price increases. Markets in oil were left to fend on their own terms and the outcome for automotive was devastating. Not because of these oil price increases, although they certainly had some impact (recall that the difference in oil costs from the most fuel efficient vehicle to the largest SUV was just a few thousand dollars per annum; indicating that US consumers would not sacrifice their preference for larger vehicles over such minor differences in price, instead they would prefer to adjust other discretionary spending habits to offset any OPEC oil increases), but because of the end to the system of financial sustainability that began with problems with investment house Bear Stearns in New York in 2007. If we summarize the events which led to the collapse of GM and Chrysler we can construct a chronological story which may follow this type of pattern:
a) Reliance on Security and the Threat of Terror from September 11, 2001 devalues the role of Treasury Secretary and questions financial sustainability. b) No real plan to balance the domestic economy relies on unfettered free trade policy at the expense of domestic manufacturing and dirty labor intensive industries. This also leads to a uni-dimensional reliance on housing and real
82

estate, finance and to a lesser extent automotive. c) The third remaining industry; automotive, is susceptible to the end of the Clinton/Rubin era of creating a sustainable financial safety net. d) Rapid technological advances in materials and the digitization of new cars, extends their life organically to a range of between ten and fifteen years in many cases. Or to a point where they can be reasonably expected to achieve over 300,000 kilometers or 200,000 miles in their life cycle. Many cars and trucks coming off of a four year lease, can easily be operational for an additional four to five years in the used car market. e) The continuation of financial sustainability and financial innovation is key to get consumers to roll-over their cars and trucks after just two to four years, even though their natural life is at least double or even triple this term. Any effect that would cripple this sustainable financial model would devastate the auto sector in the short term. f) Since real estate became the key sector, it was naturally susceptible to the concept of marginalization. This happens when more and more employees are added to the mortgage or sales business, and where credit worthy buyers diminish as more and more are drawn in to either seek employment in this sector, or to buy a house. This happens when there is no balance between sectors within an economy as is the current case in North America.
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g) Alan Greenspan at the Fed understands that to upend any cycle in a uni-dimensional economy takes much less interest rate movements than it did when Paul Volcker was Chairman. From this rationale a twenty percent rate in 1982 is equivalent to a six or seven or eight percent rate under Greenspans tenure. It has become far easier to instigate a downturn in the Bush II era, than it has during the 1970s or when Ronald Reagan was in office. On this basis, Greenspan was inclined not to attempt this experiment, so he kept rates low. h) Wall Street reaches an end to financial infinity. All of the magic that gave finance its innovative growth leading to the sustainability model in production and employment that the auto sector craved in light of the natural improvement in the life of cars and trucks, came to an abrupt crash when real estate marginalization set in on the real side of the economy. This one dimensional sector that everyone came to hang their hat on was being slowly transmitted to a state of crisis on Wall Street as early as 2005.
Only a few analysts saw this, and these were not the ones that had any kind of following or voice. Besides, even if they had the long term inertia began by Rubin in the 1990s through deregulation and the repeal of Glass-Steagall would be almost impossible to address or turn around in a few years. 84

Free trade, rapid technology and uni-dimensional marginalization combined to administer an ultimate blow that would send auto sales cascading downward from a perch of some seventeen million units to nine million units, wiping out all of the benefits of financial sustainability that was started in the early 1990s.
9. Obamas Quick Surgical Bankruptcy

Bear Stearns implosion in 2007 brought down Lehman Brothers, Citigroup and AIG. Some of the most vital and important organizations that enabled the implementation of the financial sustainability experiment which in turn would ensure automotive sustainability in production and employment. The final two years of the Bush II years were ominous for the auto industry domestically and for the geographic separation of Detroit from the southern tier states in the US. Republican sympathies were more aligned with Tennessee, Louisiana, Mississippi, South Carolina and Texas than they were to those of Detroit. Needless to say, these were also the locations of the newer Japanese factories and assembly plants. These newer investments had a natural advantage over Detroit; they were not burdened by labor legacies and they had a far younger workforce that was more flexible and quicker to changes in sales trends and consumer spending. A near collapse in half of all auto sales in the US market would be far more difficult for legacy Detroit based companies, than they would for the more flexible Japanese producers in the southern states. On the one hand, it was the cumulative effect of decades of detrimental policies combined with the natural evolution of technology which had more to do with former GM CEO Rick Wagoners forced resignation, 85

than it had with his shortcomings as the leader of the largest domestic car company. GM was a legacy company, and as a consequence of this, it was naturally inclined to move very slowly under periods of rapid change in geo-politics and geo-economics. In the short to medium term GM just had to accept the hand that it was given by these events and try to work around them the best that it could. In retrospect, it was a bad judge of these geopolitical trends as well. Barrack Obamas election came because of the collapse of this era of financial sustainability, which in turn created a sustainable auto industry from 1991 to 2007. Obamas actions addressing this abrupt change in the fortunes of the US economy were more in favor of a reality check. His administration has primed the domestic auto sector to accept the reality of rapid technological change in cars and trucks to a point where his is the first Administration to call for outright forward policies on green technology, hybrids and the overall fragmentation of the auto industry. An alternative strategy to this would have been some form of fiscal policy that would aggressively have used incentive schemes to get sales back on track to attaining the sixteen million unit point that had existed before the collapse of financial sustainability. Also, Obama, Summers and Geithner have moved to ensure that financial deregulation will end. Their promotion of more regulation in response to the crisis and witch hunt of derivatives traders, will ensure that the financial sustainability era is a thing of the past. The other major challenge of the Obama administration will be in addressing the crisis in housing and real estate. The granting of credit for cars and trucks was very much a feature of this system of consumer borrowing, where housing equity was transferred over to secure a vehicle. 86

With the onset of financial re-regulation, how can this Administration ensure that production and employment sustainability in the auto industry will achieve the sales trends that it achieved pre-2006? Or, will sustainability in auto production and employment really become a thing of the past? Will this Administration adopt a more defensive posture to the benefit of Detroit in the form of more protectionism and the regulation of free trade in cars and trucks? Or will the presence of Japanese and Korean plants in the southern tier of the U.S. work to offset any of these moves in Washington where they will work to assert their regional development interest, as well as the interest of the foreign producers in the US? One thing is for certain in the short term, or in Obamas first term; and that is that sustainability in the auto sector has come to an end, or has been radically redefined. In other words; will financial sustainability be finally replaced by some form of protectionism and the fine-tuning of the model of globalization that has been in place since the collapse of the Berlin Wall in 1990? Or will he replace it via a massive fiscal intervention that has not yet been imaginable since the post-war Roosevelt era?
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Addendum:
89
European Sustainability
This book has mainly been about how Japanese auto companies came to share a large component of Americas sustainability in production and employment in this, one of the most important sectors to its economy. European producers have been largely absent from our analysis and discussion of random political events that have seen the fortunes of GM and Chrysler collapse in the great auto crash of 2009. As a footnote, what can be said about Europe and its auto industry? Since the US is mainly a market for German producers such as Mercedes Benz, BMW, VW and the Audi brands, should the focus just be on Germany, or should it be EU wide from an American sustainability perspective? To begin, it would be interesting to take a look at the EUs industry country by country and see how many vehicles are sold in the country in question and just how many are produced locally in the country. As the table below shows, Germany, France and Spain all produce much more than what they buy in their local markets. The auto sector, therefore, is much more important to the national economies of Germany, France and Spain than it is to their fellow EU colleagues. Germany, by far the largest producer, sells much of its production globally and especially to US based consumers. Of all sales directed to the US market, it has only been BMW, with its Spartanburg South Carolina assembly plant, that has produced any luxury branded product in the U.S. (first its Z3 and Z4 models and then its SUV version branded the X5 has been produced at Spartanburg). From a US based perspective, EU production which is mainly directed to a niche luxury segment, was exempt largely from initiatives in lobbying for investment in the domestic market. 90
European Sustainability
Since Japans producers were much more mass market it came out of logic, that policy during the Reagan years of the 1980s was directed aggressively towards their gains in the mass market over those of GM, Ford and Chrysler. This fundamental fact and feature of the trade and commercial relations between the EU and the US over the auto sector, will ensure that very little EU investment will be targeted and levered into the US economy in the hopes of maintaining domestic sustainability harmony. Daimlers foray into the US market after it bought Chrysler, is one further reason why political actions will not encumber EU production, and mainly continue to treat its successes in the US as niche. Fringe EU auto producing countries such as Romania, Slovenia, Poland and the Czech Republic, have all gained handsomely from their memberships in the EU. All of these regions produce many more vehicles than they consume locally, but more of their parts are imported into the production chain than in the mature EU member states such as France and Germany. However, overall, these new member states have gained in sustainability through their EU memberships over the past decade. This is in contrast with the UK, Netherlands and Italy. These countries are mature founders of the EU, with perhaps the minor exception of the UK. Their contribution to overall EU sustainability comes at the expense of their local markets. In the case of the Netherlands, almost all auto sales are imported, with the exception of a few minor parts producers domestically. Italy also buys more vehicles than what are produced locally with the Fiat conglomerate. In the case of Italy, its locking of the lira to form the Euro has greatly benefited its domestic consumers by allowing them to import product at an economical level. The case of the UK is interesting from the perspective that like the policy in the US of levering Japanese investment, the UK followed a similar strategy throughout the 1990s. With 91

many Japanese producers insistent that sterling join the European Exchange Rate Mechanism, its ejection out of this framework in 1992 did not harm the progress of Japanese inward investment. Despite the setback to sterling and the addition of instability to Japanese exports to the EU, the UK has provided a sound historical location to produce with a vast automotive history and support infrastructure that has encouraged long term presence. In short, the Japanese producers have ensured that much of UK auto sector sustainability is recovered from its participation in the EU.
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European Sustainability Countries that Produce More than they Buy

Germany France Spain
Countries That Buy More than they Produce

Italy UK Netherlands Austria Therefore, Germany, France and Spain add to domestic sustainability in employment and production since they assemble many more cars than they sell in their domestic markets. Conversely, Italy, UK, Netherlands and Austria, Denmark and Finland add to overall EU regional sustainability in auto assembly since they buy much more than what they make in their domestic economies.
Non-EU Evidence
US buys far more than it produces Japan produces much more than it buys
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The Great Auto Crash Evidence in EU Passenger Car Market (in millions) Sold Produced
Germany 3.5 France 2.0 Italy 2.3 Spain 1.6 UK 2.5 Netherlands 0.6 Austria 0.3 Denmark 0.15 Sweden 0.27 Finland 0.14 Totals 13.36 5.4 2.7 0.9 2.0 1.4 0.2 0.25 0 0.29 0.032 13.17
Non-EU
US Japan 13.2 4.2 8.7 10.0
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Renault and Daimler in Action
In 1990, both a French and a German auto company decided to do something that was only practiced in Anglo-Saxon styled economies. Renaults acquisition of Nissan and Daimlers takeover of Chrysler were as much reactions to geo-politics within Europe, as they were attempts to assert their respective might in the global automotive markets. In the late 1960s, German Chancellor Willy Brandt became the voice in favor of a controlled system of exchange rates which would regulate wild swings in local European currencies to the benefit of trade and investment within the region. As the global system of finance broke down with the formal ending of the Bretton Woods system during Richard Nixons presidency in the early 1970s, the Europeans moved to create a regional system that would serve the interests of their auto producers. Not only did each major European country have its own auto producer (Italy had Fiat, France had Renault and PSV, Germany had BMW, Daimler and VW, Sweden had Volvo and Saab and the UK had Rover and numerous smaller and more diverse producers) but they were increasingly accessing the markets of neighboring countries not to mention those that bordered the closed east bloc communist states. 95

Just as the Plaza Accords, and initially, Paul Volckers appointment as Federal Reserve Chairman, did politically move exchange rates in opposite directions in the US, the Europeans disdain for this kind of uncertainty in commercial relations quickly tabled a framework in the 1970s to combat wild currency fluctuations. This being consistent to their Social Democratic tradition in both France, Germany and then in the Benelux grouping of states. Although the European Monetary System of regulated exchange rates was first promoted by German Chancellor Willy Brandt in the late 1960s, it was not until the election of Helmut Schmidt in Germany, and Valery Giscard DEstaing, as French President, that a formal system of regulated financial relationships within Europe took hold through the European Monetary System and more specifically, the Exchange Rate Mechanism or ERM. From the view of European auto producers, sustainability and growth in the auto sector in their home countries could only be insured through an aggressive push into foreign markets as well as in their neighboring, EU wide countries. In the case of German luxury producers such as Daimler, Audi and BMW, it is essential to export in the US market as well as the emerging Chinese market. However, stability in the exchange rate and a harmonized central bank under the new European Central Bank or ECB, would also fortify their regional base and quickly add to the growth in sustainable domestic production. Daimlers move to acquire Chrysler in 1998 was a move to diversify its market presence in its most important market, from its status of only until then being a niche player. By contrast, Renault never had a presence in Japan, but decided in favor of acquiring Nissan from a purely defensive gesture. As France was being further drawn into the EU, and as France was in the process of losing the franc as a vital financial tool that defended sustainability in its own market 96
Renault and Daimler in Action

among domestic producers, Renault was unleashed by its government to aggressively insure its domestic market share from mainly EU based auto predators, especially the powerful producers that were pursuing an EU-wide policy in Germany. In a way, Renaults successful acquisition of Nissan to now, was attributable to its fear of an EU-wide automotive onslaught on the French market. In retrospect, this move worked to Renaults benefit. Conversely, Daimler strayed too far from its traditional niche market in the US and was ultimately forced to retreat to a segment that it truly understood- the luxury market in the US. The challenge of selling to an American market that was mass and at the lower end of the scale of mass retailing proved to be fatal to its growth plans and also a setback in insuring sustainability both in the US and in Germany after it was forced to abandon Chrysler.
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INDEX A
AIG 85 Daimler American Economic Review xii Datsun Audi 70-71, 90, 96 Dtente Dot Com Bubble
D
91, 95-97 12-13, 19, 23 17 43
B
Baker, James 22, 27, 33-34, 40, 46, 53, 59-61, 63, 65, 67-68, 71, 76 Barro, Robert xii Bear Stearns xiii, 60, 82, 85 Berlin Wall 36, 40, 87 Bernanke, Ben 45, 65, 80 Big 3 xiii, 11-12, 19, 23-30, 33-34, 37, 39, 46, 63-64, 75 BMW 13, 26, 70-71, 90, 95-96 Brandt, Willy 95-96 Bretton Woods 67 Buckley, William F. 25 Bundesbank x-xi Burns, Arthur Frank 10-11, 65, 74-75 Bush, George H.W. 35-36, 44-45, 84 Bush, George W. 4, 46, 49, 66, 81
E
European Central Bank x-xi, 96 European Currency Union xi Exchange Rate Mechanism 19, 71, 92, 96
F
Federal Reserve x, xvi, 4, 11-12, 20, 24, 26, 43, 59, 67, 75 Federal Reserve Chairman ix, 16, 23, 31, 33, 65-66, 68, 74-76, 79, 96 Federal Reserve System xiii, 15 Fiat 13, 41, 48, 91, 95 Ford Motor Company 1, 23, 25, 35, 39, 45-46, 54, 61, 65, 75-76, 91 Lincoln 26 Mustang 25 Tempo 25 Topaz 25 Ford, Gerald 15-16, 65 Foreign Direct Investment 20 Free Trade Agreement 4, 37, 41, 54-55, 62 Friedman, Milton 76
Carter, Jimmy 16, 18-19, 24-25, 36, 65-67, 75-76 Cash for Clunkers 51 Cheney, Dick 15, 81 Chicago School xiv, 76 Chrysler Corporation xii, 1-2, 18-19, G 23, 25, 35, 39, 44-46, 48, 61, 65, 75-76, 82, 90-91, 95-96 G7 2, , 27, 34, 62 Charger 25 Geitner, Paul 86 Cordoba 25 General Motors Corporation ix, xii, Citigroup 85 2-3, 23, 25, 35, 39, 44-46, 48, Clinton 4, 37, 39-40, 43, 45, 47, 49, 58-61, 65, 75-76, 82, 86, 90-91 53, 59, 62, 65-68, 71, 78-79, 81, 83 Buick 26 Cold War 12-13, 23, 33, 52, 59-60, Cadillac 26 62-63, 74 Chevelle 25
98
Index
Corvair 13 N Chevy 1 Nader, Ralph 13 EV1 39 NAFTA 41-42, 53-54 Pontiac 25 Nissan 12, 19, 23, 26-29, 32, 35, Giscard DEstaing, Valery 96 45-46, 53-54, 56, 60, 63, Glass Steagall Act xiv, 42, 60, 7976-77, 95-96 80, 84 Nixon, Richard Milhouse 10-12, 16, Globalization xiv-xv, 4, 12-13, 35, 32, 36, 52, 59-60, 63, 65, 39, 42-43, 45, 80, 87 74, 82, 95 Greenspan, Alan ix, xii-xiii, xv-xvii, North American Free Trade 4, 15, 22, 26, 35, 43-44, 46, Agreement See NAFTA 65, 68, 79-81, 84 Obama iv, 48-51, 58, 65, 85-87 Harvard University xii OPEC 1-2, 10-11, 16, 21-24, 27, 29, Honda 12-13, 23, 26-29, 32, 35, 39, 32, 43, 46, 50, 55, 59-60, 45-46, 53-54, 56, 60, 63, 76-77 67, 69-70, 72, 76, 82 Hyundai 46
P I
Iacocca Peugeot 13 18, 25 Plaza Accords22, 27, 34, 46, 53-55, 59-60, 62-63, 67, 69-70, 72, 76-77, 96 PSV 95 25 66, 68, 71 Q x Quarterly Journal of Economics xii
K
K-car Kantor, Mickey Kemp, Jack
L R 25 xvi, 22, 25-26, xiii, 44, 60, 85 Reagan, Ronald 52-53, 59, 62-63, 65-68, 70-71, xii 76, 79, 84, 91 22, 27, 34, 62 27, 33, 66 x-xi, xiv Regan, Donald Renault 13, 41, 95-97 Roberts, John Paul 25 M Rover 95 M3 Money Supply xi Rubin, Robert 39, 42-43, 49, 60, Martin, William McChesney10, 66, 74 62, 65, 78, 81, 84 Mazda 54, 56 Rumsfeld, Donald 15, 81 Mercedes Benz 13, 26, 70, 90 Miller, George William 18, 65, 67, 70, 75
Laffer, Arthur Lehman Brothers LIBOR Louvre Lucas, Robert
99

S
Saab 95 Schmidt, Helmut 96 Scrappage 7, 78-79 September 11, 2001 ix Shadow Banking 43 Shelby, Richard 44 Shultz, George Pratt 10, 15, 33, 65 Simon, William E. 10 Stockman, David 25 Sub Prime Mortgage 44 Subaru/Isuzu 54 Summers. Larry 86 Sustainability 3-4, 40-41, 48, 52, 56, 79, 90 SUV 1, 36-37, 40, 60, 82, 90 Toyota 12-13, 19, 22-24, 26-29, 31, 35, 39, 45-47, 54-56, 60-61, 63, 76-77 Prius 47 Trickle Down Economics 26 Trudeau, Pierre Eliot 12
U
UAW 11
V
Vietnam War 17, 74 Volcker, Paul xi, 16, 18, 20, 22-23, 25-26, 29, 31, 33, 46, 52, 59-61, 63, 66-70, 72, 75-76, 80-81, 84, 96 Volvo 95 VW 95
T
TARP Thatcher Thatcher, Margaret the Great Depression the Greenspan Fed The National Review Townsend Greenspan 48, 50 x xvi 24 xi-xiii, 1 25 26
W
Wage and Price controls 12 Wagoner, Rick 46, 58, 86 Wall Street ix, 84 Weinberger, Caspar 15 World Trade Centre ix, 45
100

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11. Vukson, William B.Z., 2003, Canadian Dollar Chaos, Toronto, Canada, G7 Books. 12. Vukson, William B.Z., 2001, From the Collapse of the Cold War to the Rise of the Hot High Tech Wars, Toronto, Canada, G7 Books. 13. Vukson, William B.Z., 2001, Political, Structural and Technological Change, Toronto, Canada, G7 Books. 14. Vukson, William B.Z., 2001, Three Investment Stories Under Free Trade, Toronto, Canada, G7 Books. 15. Vukson, William B.Z., 2001, Emerging Markets & Special Surveys, Toronto, Canada, G7 Books. 16. De Grauwe, Paul, 1992, The Economics of Monetary Integration, Oxford, UK, Oxford University Press.
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The Great Auto Crash

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End of a Dream or The Great Auto Crash

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