For the first half of the lifetime of the automotive industry, the former Big Three carmakers − General Motors, Ford and Chrysler − had the North American car market to themselves. That is the source of much of their current trouble. Naturally enough, they developed a mindset and management style that has subsequently proven hard to shake. Now those three have been augmented by four or five automakers with head offices in other countries. This is a large jump in the number of suppliers offering product to the car-buying public. Something has to give. The Detroit Three are being severely tested.

GM, Ford and Chrysler, faced with plunging consumer spending, weak credit and stiff competition, are only barely hanging on to survival. They have approached Washington for bridge financing to see them through the next couple of months. Congress has been unwilling to make such a financial commitment on the grounds that there is no evidence that a turnaround in their fortunes is imminent. Two questions hang in the air. Why send good money after bad? And will it all have been wasted in another quarter or two?

The White House and many market watchers believe that the Detroit Three should not be allowed to fail at a time when the economy is showing no signs of bottoming out. Bankruptcy protection may well offer the firms an opportunity to carry out appropriate restructuring, but there are fears about what this will due to further erode demand. Will consumers buy vehicles from a firm in bankruptcy, knowing that future parts supplies, dealership networks and servicing may all be in jeopardy?

Plus, there is the so-called “cascade” effect. No single car firm can be allowed to fold, except under well-managed (i.e., controlled) conditions. This is because of the risk involved for suppliers. Most parts suppliers have contracts with more than one manufacturer. Insolvency for one automaker that puts a major supplier out of business will cripple other carmakers. Even the Japanese assemblers have raised this as a reason for government to bail out the Detroit Three. Total potential job losses and the damage to the economy can really only be guessed at, although the negative effects would be severe.

It is worth pointing out that the last time Chrysler was on the brink, those desperate times provided the creative spark for two new product lines, the minivan and the sports utility vehicle. It may be the case that this time, too, the embattled carmakers are close to finding success. GM’s planned Volt and other hybrids being assembled and under development are appropriate responses to a changing marketplace. And two of the three firms under duress have achieved considerable success in penetrating emerging markets − General Motors in China, Brazil and Russia and Ford in Brazil and Russia.

What the industry is looking for immediately is a “bridge to Obama.” In other words, the firms are seeking enough financing to enable them to survive until the new administration is sworn in on January 20th. Then the Democrats can work with the industry to establish a longer-term solution. It appears that President Bush agrees with this plan. Money is about to be made available from TARP (the Troubled Asset Relief Program that was set up to bail out the financial sector.) In Canada, Ottawa has pledged a financial amount commensurate with this country’s share in total production, about 20% of the U.S. figure.

The Detroit Three, contrary to what may be popular opinion, have made many of the adjustments necessary for them to turn things around. Quality has been greatly improved, costs have been lowered and emerging markets are providing good sales growth. Ford is apparently in marginally better financial shape than GM or Chrysler. Chrysler is the only one of the three that is privately held, being owned by the private equity fund, Cerberus. So far, Cerberus has been burned on its deal to purchase Chrysler from Daimler-Benz.

Based on reading the latest reports, here is my sense of what needs to be done with respect to the Detroit Three.

(1) They need to adjust their number of models and production levels to below their current reduced market shares. If they have success in increasing sales in the future, this can be met by adding shifts. They need to concentrate on their most successful product lines, taking into account current sales success, future sales prospects in a greener environment and, of course, profitability.

(2) They need to make further strides in modifying their corporate culture and means of responding to markets. The Detroit Three need to change from top-down (vertical) to bottom-up, or at least horizontal, as has generally been adopted by their competition in the form of the “new domestics” or “transplants”. Too often, the management style out of Detroit has been one of directives coming down from on high. With respect to design changes and suggestions for productivity improvements, the transplants have been much more receptive to ideas percolating up from the assembly-line floor.

3) There is a particular challenge for unions in this latest auto crisis. In a world of globalization, union labour costs are still too high. This is particularly true in Canada, although the drop in value of the loonie is, at least temporarily, alleviating the problem. Last year, the UAW signed labor agreements in the U.S. that lowered costs with respect to new hires, wages going forward and pensions and health care benefits for retired workers. Crippling “heritage” costs were offloaded. Detroit Three union hourly wage rates versus new-domestics’ non-union hourly wage rates are now much closer in line.

But is that enough? When a company is threatened with bankruptcy and that company is the source of one’s livelihood, sacrifices sometimes have to be made to achieve a longer-term good. Globalization is changing the world, especially for workers on production lines. There are too many other places in the world where the same work can be done cheaper.

The union model − which has a long history of providing benefits for both workers and management, beyond just structuring wage negotiations − may have to be transformed to allow greater flexibility on the earnings front. Exceptional circumstances may be another clause that needs to be written into labour agreements. This is a considerable challenge that will determine the future of a whole category of work in industrialized nations.

The foregoing are harsh realities that no one should take any pleasure in stating. Hopefully, today’s crisis for the Detroit Three is not a final chapter in a book with an abrupt ending, but rather only one more instalment in a volume with a long way to go and happier passages yet to come.

Alex Carrick