the great auto crash

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BOOKS

End of a Dream orThe Great

Auto CrashAn Inside Story



The Great Auto Crash.© Copyright 2009 by William B. Z. Vukson

All rights reserved. Printed in Canada. No part of thisbook may be used or reproduced in any manner whatsoeverwithout 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., 1962-

Canadian Dollar Chaos 2001Political Structural and Technological Change 2001The Pound Sterling Chronicals 2001The Regal Dollar 2001The Yen Mystery 2001

ISBN: 1-894611-77-2

G7 Books

Toronto, Fairfax, Buffalo,

[email protected]



i

Table of Contents

Warning iiiPart I v

Preface viiForward ixTechnology and Trade at the Peril of the Auto Industry 1

Part II 5The Inside Story Behind the Analysis of the Auto Industry 7Nixon and OPEC 10Gerald Ford - Short Tenure Long Impact 15Carter and the Second Oil Shock 18Reagan and the Rise of Toyota 22A Case Study of Japanese Auto Manufacturersin the 1980s 31

Bush I and the Fall of the Wall 35Clinton and Globalization 39Bush II and the Great Depression of 2008 44Obama and the end of Sustainability 48Japan’s Contribution to Sustainability 52Japanese Initiatives to Sustainability inProduction and Employment in the U.S. 56Explaining the Decline of General Motors 58The Rise of Financial Warfare 62Geo Auto-Politics 65Yen - Dollar Yearly Averages 69Deutsche Mark Politics 68Deutsche mark - Dollar Yearly Averages 72Major Auto Transforming Events over thePast Half Century 74

Addendum 89European Sustainability 90Renault and Daimler in Action 95Index 98Bibliography 101



iii

The Great Auto CrashAn Inside Story

This book takes as its reference point the interests of themanufacturing sector. More specifically, it presents acommentary 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 theworld as well as its own government.

The auto industry is much more complex than it appears onthe surface. There is literally an “army” of analysts and

journalists that devote most of their time in trying tounderstand the direction, risks, opportunities and new trendsin automotive.

The factors that affect the health of the domestic autosector are numerous, but “The Great Auto Crash” tries toisolate some of these factors that are normally neglected bythe media.

Factors such as access to consumer finance, the rapidity of technological change, global geo-politics and trade policy,

WARNING!



iv

The Great Auto Crashcurrency market politics, and perhaps most importantly theinconsistencies ingrained in monetary and fiscal policies over time in the U.S.; are just as important, or perhaps even moreso, than high oil prices!

The year 2009 will become significant in the changes thathave occurred in this key sector. The big question will remainwhether a constructive debate can address these more remotefactors to the health of this industry over the longer term

and whether we are prepared to act on any constructivesuggestions that may surface in the aftermath?

Over the last 40 years, the US has become a services orientedeconomy at the expense of traditional manufacturing. Whatis good for one sector’s interests may not be good for theother, and vice-versa. We have seen domestic manufacturingpressed and pushed to its limits with policies that have beenmuch friendlier to financial and service sector interests.Is the Obama team about to turn this system of preferencesaround so that some form of balance between the interestsof these two broad sectors can once again co-exist?



Part I



vi

The Great Auto Crash

One of The Cars at Cadillac Ranch in Amarillo Texas

L o r i

M a r t i n



vii

Preface

The auto industry occupies a vital role in bothadvanced industrial and developing countries. In

many instances, it and its spin-off industries are major employers and income generators. Only the housing andreal estate sector reigns equivalent in terms of economicactivity. Both of these sectors; housing and automotive, arethe basis for two of the biggest decisions that any consumer can make in terms of purchasing major ticket items in anyhousehold budget.

A vibrant and growing auto industry is the cornerstone andgoal of every government policy around the world. A healthyauto sector is capable of generating “sustainable” production,which in turn sustains high levels of employment, creatinga 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 from1970 to its present vulnerability and chaos that isomnipresent. This modern history shows how the industryhas been used for political leverage by leaders, and howreactionary, small-minded and expedient policies have bytrial and error created what exists today. Was the outcome that



viii

The Great Auto Crashwe see today ever planned or foreseeable by anyone? Hasthere ever been any kind of consistent strategy articulatedby policy makers that would ensure “sustainability” and not

just trial and error that was often a desperate reaction torandom geo-political events?

This book attempts to conceptualize and place into contextmajor economic and political “inflection points” that werekey turning points to the auto industry.

Some such events are well recognized in recent history, butthis book interprets them from the perspective of maintaining “sustainability” in this most vital sector, whichis arguably one of the most important pillars to our moderneconomic system today.



ix

Foreword

Former Federal Reserve Chairman, Allan Greenspan’sseemingly spotless central banking record, has come

under a considerable amount of scrutiny andinvestigation as of late. In a series of books released bothafter his resignation in 2006, and accelerated since the crashand burn of Wall Street and America’s banking system sincethe second quarter of 2008, the thesis holds his Fed mainlyresponsible for the thrashing of U.S. wealth; mainly throughthe collapse of nominal house prices.

A consensus has been building that his preemptive strikeson now well-known recent historical financial crises; “the1987 stock market crash;” “Mexican Peso Crisis;” “AsianCurrency Crisis;” “Russian Rouble Crisis;” “Long TermCapital Management (LTCM) bailout, and more recently, thereaction to the catastrophic events shortly after the

September 11, 2001 attack on the World Trade Centre andthe new millennium’s hollowing out of the USmanufacturing sector; can be directly blamed for the 2008Credit Crisis and the “Great Auto Crash” of 2009, which hasnot only brought down nominal housing wealth, but can alsobe directly traced to the demise of the once mighty GeneralMotors Corporation.



x

The Great Auto CrashTo propose such a scenario elevates the role of monetarypolicy to a position where it is expected to counter severebouts of “structural” economic change. Many contemporaryanalysts that have had a sound grounding in monetarist freemarket training in the nation’s leading business schools viewthe economic system in such a fluid way that financialpolicies can be held responsible for massive dislocation in thereal economic system over the past several decades.

To extend this analysis further and use the argument madepopular by Economics Nobel Laureate Robert Lucas; it ismainly “policy errors” by governments and central banks,which create behavioral changes leading to unexpected realoutcomes in the economy and the financial system thatseemingly mirrors it.

In other words, government institutions such as theFederal Reserve and the Treasury can never do any goodto the economic system and anything that they attemptto “fine-tune“ within the economy will result in bothunexpected and undesirable outcomes over the mediumto longer term horizons.

In essence, the late US Representative Jack Kemp, successfully

applied this critique early to the Treasury’s role in theeconomy by aligning his views with the general deregulatorytrend as symbolized through the politics of the late 1970swith the ascent of the Reagan and Thatcher eras. Its interestingto note that some thirty years thereafter, have only now criticsof the Fed surfaced under the current financial crisis.

What Lucas attempted to show in the early 1980s, was howfutile it was for monetary policy and central banking toinfluence some kind of “activist agenda” on the real side of the economy. His theorizing impacted monetary policythinking to such an extent that the realignment of the mandatesof European Central Banks laid the foundation for the singleEuropean currency in 1999, as well as today’s forerunner of the German Bundesbank; the European Central Bank or ECB.



xi

ForwardTo propose that policy had limits in Central Banking was Lucas’lasting legacy which we should perhaps ironically revisit andreflect on under today’s crisis. The single minded determinationfor Central Bankers in the 1990s to focus on inflation formedthe basis for the European Currency Union, and the whole-hearted support of the German government was grantedconditionally.

This event was contrary to the actions of the Greenspan Fed

throughout the 1990s. As detailed above, a series of financialcrises has prompted a pre-emptive strike by the Greenspan Fedin direct contravention to the conservatively minded “Lucascritique,” as well as the intellectual basis for monetarydevelopments in the European Union.

The role under which the Greenspan Fed modeled itself, wasconsistent with the conflicting constitutional mandate that theFed carried from the early days of its foundation. This paradoxwas to foster both low inflation as well as growth andemployment opportunity in the US economy. To be watchfulover inflation, in many times may be inconsistent with thegoals 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 tocontend 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 theECB was to target money supply growth, specifically thebroader M3 type of money supply growth that included longterm savings. This, again, a contradiction to how the Fed ranits monetary policy, after briefly experimenting with themanagement of money supply under Paul Volcker in 1979, itquickly abandoned this game plan by 1982, when it becameevident that record high real short term interest rates werebeginning to affect the industrial base of the US.



xii

The Great Auto CrashIn many ways, the abandonment of the monetary experimentunder Volcker foreshadowed the 25 year struggle of the domesticthree auto producers in the US. In many ways, this was thepolicy event that led to their long term decline into bankruptcy.

An overvalued dollar more than anything spurred a growthin Japanese auto imports that had a lasting effect on thetrade-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 policyevents? Why is Greenspan’s Fed now under scrutiny as muchas the bankruptcies of GM and Chrysler are by mosteveryone these days?

The critique of Greenspan and his tenure at the Fed is dishedout by naive commentators who still believe that the US

housing crisis was aggravated mainly by unscrupulousmortgage brokers, mainly based in California, Florida andperhaps Arizona, who are wholly to blame for the downfallof the US banking and economic system over the past twoyears?

Similarly, the problems that stem from a singular behavioralproblem that is true anti-market behavior by mortgagebrokers, can also be pinned on the management of the Fedby Greenspan. This has recently been upheld by some of the more finance-centric academic economists such as RobertBarro of Harvard University, who has come out attackingthe former Fed Chairman for not showing enough of anaptitude for economic abstraction.

I guess in Barro’s mind, a sound Fed Chairman must have hisviews affirmed by “like-minded” peers in such notableabstractions as the “American Economic Review” and the“Quarterly Journal of Economics” Marginalized as these may beto a select elite of a few hundred readers, the Greenspan” recordat the Fed is now upheld as being the singular action that couldhave saved the life of the US economy; prevented the credit

crisis; saved the LIBOR market;… saved Chrysler and GM.



xiii

ForwardThe Greenspan Fed, it is now argued in retrospect, had theopportunity to offset via interest rate policy the crisis that hasbrought down the banking, hence the automotive sectors. Bymaintaining rates far too low and underpinning their

justification on a constantly improving productivity basedeconomic system inspired by “technological process” and“information Technological” changes, the Greenspan Fedseverely misread the diagnosis of “irrational exuberance.”

It was not the irrational exuberance that was witnessed onstock markets, but more seriously and ultimately morefatally, it was the irrational exuberance that befelled thehousing market in the US. The over-reliance on rates thatwere just “too low,” in order to pre-empt the effect of technology and the externalities omnipresent fromSeptember 11 on the economy, resulted in the

unprecedented collapse of the housing bubble in 2007, whichin turn short-circuited Bear Stearns, Lehman Brothers andnow, chronologically, the auto sector.

In essence, the domino effect began with the GreenspanFed’s misinterpretation of productivity gains in the economyover the late 1990s; then leading to its activist basedovershooting on interest rates which were deemed to benegative between 2001 and 2004; then leading to the housingbubble, with the final implosion in the banking system andnow the auto sector’s “Big 3” becoming the “Bankrupt 3.”

This is the common wisdom that has propelled AlanGreenspan as the villain to many finance-centriccommentators to this day. However, I would argue in defense

of the former Chairman of the Governors of the FederalReserve System.

To these short sighted commentators, the Fed is the “be alland end all” in the US and global economy. To them, the Fedcan do wonders at the control of a few magical switches.Although taking on the role of activist institution to offseteconomic fall-out and risks to the US economy throughout



xiv

The Great Auto Crashthe late 1990s, even Chicago School Nobel Laureate, RobertLucas, has always recognized that monetary policy should berestricted to singularly managing the rate of change in theprice level, or the rate of inflationary expectations. I amcertain that within their thesis, many monetary theoristsnever intended the Fed to offset bouts of negative inflationin such a radical way.

Having said this, Lucas’ theory of “rational expectations”

was penned in an era when spectacular gains in IT andglobalization have not yet emerged. Even under Lucas’theory, the Fed could manage inflation actively as long as allother things were being kept equal. Meaning that the UScontinue to be the world’s leader; that the US continue tobe a “mixed economy in scope;” that the US continue to beregulated according to Glass-Steagall; where the two distinct

cultures of investment and commercial banking remainseparated, and that financial innovation not grow atexponential rates.

In addition, this theory was also influential when some two-thirds of the global economy was still under a managed or command type of system, especially in a China and Russiawhich were closed to a global market. In short, the Fed wasnot 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 exactlythe types of changes noted above in the form of radical de-regulation in the asset and financial markets; radical de-regulation in product and services markets such as the type

that globalization has exacted with the emergence of Chinaas a production location for the world’s economy; andfinally, the severe technological changes that have effectivelywiped out sectors such as the publishing, printing andautomotive sectors.

Although severe technological changes create someopportunity, they also lead to massive dislocation and



xv

Forwarddestruction of processes and industries, leading to inevitablere-allocations of property rights among special interests inbankruptcy courts. This is exactly where we find ourselvescurrently with both Newspaper Publishing and Automotiveproduction.

In short, the Fed can not manage these types of changes in arapidly changing economic system. Greenspan had to makedue, and I am certain that he realized this, with the hand that

he was being given both by the Executive Branch andCongressional legislators when it came to global trade policy;and more significantly, when he commented on how rapidtechnology was affecting the productivity of the US economicsystem.

Granted, he may have been somewhat over-zealous inpromoting financial market deregulation, but this can onlybe one element among a number of arguments that have ledto the massive dislocations that are being witnessed in theautomotive sector today.

Would lower than normal Fed funds rates effect trade andglobalization agreements? The changing economic systemsaround the world, and of course, rapid technology that has

empowered consumer borrowers in an unprecedented wayvia the internet? No. Yet these are precisely the reasons whythe housing sector became the first domino in the overallimplosion of credit. To what extent did the bubble create itself based on technological offerings to consumers? Or the factthat banks were no longer dealing with a “mixed” economy andthat bankers have to a large extent lost their touch and skills

in granting expansion credits to small and medium enterprisesin manufacturing and a broader mixed economic base?

When you lose as much of an industrial base to China as theUS has in the last decade, then risk-aversion in bank CreditDivisions dictates that you make the most prudent loans to“bricks and mortar,” or comfort industries such as housing andreal estate. Also, the fact that financial innovation was never



xvi

The Great Auto Crashbelieved to have reached its “limits” from a quantitativeperspective, allowed the innovation to be democratized tothe most marginal borrower possible in this uni-dimensionalhousing sector.

Furthermore, given that the average life span of a car wasaround fifteen years; how was it possible to make such asector 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 abalanced and “mixed” economy, consumers wereultimately able to churn newer and newer vehicles inthe process. Also, by providing innovative leasingalternatives and financing, consumers were also able toallow the auto sector to be artificially sustainable inproduction from the 1980s to the spring of 2008. Aslong as housing combined with innovation andsingularity in “comfort” lending by banks kept rolling,so would production keep its momentum.

It is my contention, then, that as in the case of theunscrupulous mortgage brokers that still dominate the

minds of commentators as the singular cause advancedfor the meltdown of the housing market; Alan Greenspancan not be blamed for pre-emptively attempting to offsetan economic downturn over the medium to longer termby using the Fed Funds rate policy instrument from 1995until 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 G7grouping of advanced economies since the Reagan-Thatcher years of the early 1980s.

Likewise, in terms of rapid hyper-technological changes,there was very little that the Fed could work with from asingular policy perspective; which was its singular relianceon the Fed Funds rate as the sole policy variable.



ForwardOn the one hand, Greenspan was fighting decades of legislation in favor of freer global markets for products andservices, and on the other the rapid changes in quality andprocesses made possible by advances in science.



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G u s t a v

o F a

d e l

Geneva 2009



1

Technology and Trade at thePeril of the Auto Industry

Similar to the battles that the Greenspan Fed hasundertaken in trying to understand where the economicsystem was heading from 1995 to 2006, the automotive

industry’s reaction to these two factors seems to outweigh anyimpact that the OPEC cartel may have had on sales patternsthroughout the 1990s and into the new millennium. This is avery controversial statement to make.

The demise of Chrysler and GM must have had something todo with them not engineering appropriately their product mixto the sudden surge in gas prices at the pump? A quick glanceat fuel economy data may indicate otherwise, since if onecompares the average expenditure per annum on the averagesmall vehicle, which is somewhere around $1,800, a large luxurysedan 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 additionalexpenditure of a few thousand dollars on average per annum,would this be enough of an impact to deter the consumer frompurchasing these kinds of vehicles should the price of fueldouble? Triple? Quadruple? Perhaps it would if the pricequadruples for the marginally stretched consumers?



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The Great Auto CrashHowever, under normal times, the availability of finance andcredit would have more than offset these price increases. If there were no collapse in banking and credit, then it may beargued that the risk of rising fuel would have been mitigatedto the point where the impact on GM and Chrysler wouldhave been offset to enough of an extent that they would stillbe intact today as going concerns and not mired in thebankruptcy 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 presentedearlier herein, that the credit crisis and collapse of banking mayhave to a large extent have been mitigated, if a more sensiblelong term approach to trade and investment agreements wouldhave been put in place.

This is not to say that manufacturers should have beenprevented from moving production to China or India, butmore from the “structural” adjustment process within the U.S.economy that may have prevented the banking system fromdefensively seeking to dominate the safest lending opportunitiesto 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 pricesthat were made available to consumers in the US, has to a largeextent also contributed to the imbalance in the credit marketswhere 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 thesystem 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 uni-sectoral economy more than offset the negatives that a doubling

or tripling of oil prices may have caused to Chrysler and GM.



3

Technology and Trade at the Peril of the Auto IndustryIn that respect, free trade came full circle and affected thecredit markets indirectly, thereby impacting the financialmechanism that car sales became to rely on over the pastdecade. Although it created plenty of new opportunities for GM in countries like China and Russia, its overall impact isto be deemed to have been a negative and a cause for itsentry 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 questionsraised by the political parties.

Just as technology creates a new opportunity frontier, so italso destroys a large number of jobs and way of life for many.The gimmick that was used to offset this impact against theauto industry was the “magic” of financial innovations andleasing made possible by technological change in the financialservices sector. This, combined with advertising, encouragedconsumers to change their cars often. Lease rates were for an average of three years, and so consumers came to behavein a way that created an entrenched model for productplanners to frequently fuel this desire for newer and better products.

The increase in durability and quality became mostnoticeable in the 1990s, where vehicles made by most of thelarge manufacturers, foreign and domestic, were very goodand not susceptible to frequent breakdowns.

The lifespan of the vehicle increased from a range of threeto five years in the 1970s; to currently, where it is very likelythat 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 productionbe sustained and employment be sustained under suchconditions? Sustainability in this key strategic sector was

always taken for granted by the politics of the time.



4

The Great Auto CrashThe short to medium term response to the sustainableproduction question was via leasing and adopting the latestfinancial industry innovation. Only recently, wereconsumers allowed to tap the “equity” in their homes inorder to fuel car sales at the dealer level. As China and Indiarose to prominence in the world economic system, it wasinevitable that American living standards would begin tobe affected adversely.

The increasing ratification of the new world order by bothtechnological advances in communications, and then, anexplosion of new trade agreements that began with the FreeTrade Agreement (FTA) in 1988 between the US and Canada,and thereafter spread rapidly around the world during theClinton Administration; “hollowed out” the Americanindustrial landscape, leaving a “uni-dimensional” carcass

which was its housing and real estate sector, together with thepromise of a higher “value-added” service sector.

This move to affirm the existence of a uni-dimensional housingsector during the George W. Bush years, helped exacerbate thegrowth of consumer credit through borrowing instruments thatwere property based. It singularly drove financial innovationsin this direction for many years, thus helping to support thebadly needed “sustainable production” and “sustainableemployment” in the automotive sector within the Americas.

In conclusion, there is very little that can be blamed here on theactivist Federal Reserve of Allan Greenspan. The Fed can only doso much in offsetting likely hazards to the US and industrializednation communities. A globalization ratified by free trade deals

and rapid technological change were perhaps more than sufficientin offsetting price changes than were the policy instruments of theFederal Reserve over the past few decades!



5

PartII



6

R i c h

a r d T h

o r n

t o n



7

The Inside Story Behind theAnalysis of the Auto Industry

Many auto analysts track production figuresand sell their forecasts to various types of clientele. Very few offer a service where prices

are forecast of individual models and across allcategories of vehicle. Forecasting production figures isa far easier process because factors such as economicgrowth 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 “scrappagerates” or how consumers react to new product and howlong they keep their older cars and trucks.

Scrappage may be affected by broad economicconditions such as GDP growth prospects, taxes onincome and foreign trade effects that affect the retailprices of cars. However, this is also a cultural or behavioral trait that is specific to certain regions andcountries. For example, Canadians keep their cars andtrucks much longer than Americans. Likewise, Russianslike to change their trucks far more frequently thanGermans, Belgians and the Dutch.



8

The Great Auto CrashSimilarly, another cultural factor in determining demandfor vehicles is whether families or individuals like to keepone car or more than one car and truck under their ownership. It is a well known statistic now, that Americanhouseholds throughout the 1990s and early in the newmillennium owned more than one car per household.

These factors have been remarkably consistent from 1990to 2007 in the US and Canadian automotive markets

and have been the basis to very consistent and stablemodeling by most analysts within the profession.Needless to say, any sorts of geo-political and geo-economic impacts such as the meltdown in financialleverage 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 interviewedby the press, continuously state their belief and hope thatthey will be “profitable” hence “commercial” entities withsales in the US marketplace around ten million units. Thisis a major adjustment that was not expected by any quotedauto analyst ever over the last few years.

When yearly production in the US averaged betweenfifteen and seventeen million units, the most pessimisticforecast of production barely scraped the low end of fifteen million. Once again, geo-political and geo-economic forecasts were just not a part of the overallpicture within the profession.

Any voices that transcended the low end of fifteen millionwere at best just ignored. Where the auto analyst or automotive economist goes from here is anyone’s bestguess. However, suffice it to say that there definitely willbe a demand or a mandate for those that were ignoredprior 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



10

Nixon and OPEC

• Nixon blames Fed Chairman William McChesneyMartin for his defeat in 1960 due to tight creditand slow growth preparing Fed for the Burnsappointment

• Nixon leads vendetta against Burns Fed during

1972 elections forcing high inflation and moneygrowth• 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 wageand 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

H a n k W

a l k

e r - L i f e

M

a g a z i n

e



11

Nixon and OPECOil Prices under Nixon

Nominal InflationAdjusted1968

$3.18 $19.411969 3.32 19.221970 3.39 18.561971 3.60 18.881972 3.60 18.291973 4.75 22.731974 9.35 40.29

The Nixon era gave way to the muscle car. The OPEC oilembargo of 1973 was the first major external shock to theauto industry in America, sending oil prices up by a factor of four from October 17, 1973 to March 18, 1974. Thisbrought the hegemony of the big, heavy and powerful

automobile to a slowly winding end that came to define thetransformation of the auto sector throughout the 1970s.

Not only was the emergence of OPEC something to takenote of geo-politically, but also the heightened state of theCold War between the US and the former Soviet Union andred China combined with a Federal Reserve policy under the then Governor Arthur Burns, to re-affirm the existenceof a steadily rising rate of inflation throughout this decade.

Inflation was very friendly to the state of the American autosector throughout the 1970s. A lax monetary policy by theBurns Fed laid a framework for continuing gains in nominalwages 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 withprice increases at the dealer level. This “tit-for-tat” systemcame 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 gainsunder the era of rapid inflationary pressures; not the unions

and certainly not the producers. All parties remained in a



12

The Great Auto Crashstalemate throughout the Nixon years in terms of dividingup the economic pie.

Richard Nixon announced the implementation of Wageand Price controls, as did his Canadian counterpart,Pierre Trudeau shortly thereafter. Their concern wasclearly not directed towards labor or management in theauto sector, but to mitigate the damages that this spiralwas 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 outsidersin this period of rapid price increases and accommodativepolicies at the Federal Reserve. The geo-politics of theCold War era and the threat of a nuclear attack by theSoviet Union and China maintained a closed trade andinvestment environment worldwide. Nowhere in sightwere terms such as “globalization” or “emerging markets”detected within this period.

Countries were either open or closed to foreign investmentand to trade. Based on the special relationship between theUS and Japan, the acceleration of auto imports such as

Toyota, Honda and Datsun; now Nissan, began to slowlyemerge in the North American markets. This, however,was a real exception to the rule, and was more a reactionto the Cold War policies of China and the Soviets in theSea of Japan that prompted the Nixon administration toappease commercial and trading interests within Japanand allow them access to the domestic market for their

automotive products, which were not expected to appealto the American consumer anyhow.

Technological advances within this period were confinedto increasing horsepower in the engine compartments of vehicles. Digital and software technology were stillnowhere to be found among the offerings of the “Big 3”auto producers within this era or in Japan.



13

Nixon and OPECRalph Nader’s crusade against the Corvair of the 1960smade headlines in the 1970s and laid the first foundationfor some form of regulatory scope in the auto industry inits twilight years. This lead to very preliminaryexperimentation on safety technology that today has cometo be taken for granted, including such revelations as air bagsand intermittent wipers in cars.

In terms of production material engineering, there was still

very little use of light weight composite materials in theframework of the cars and trucks of this era. A lack of flexiblecomposite materials caused many domestic as well as foreignimport brands to rust out prematurely.

It was expected that a vehicle bought brand new in the 1970swould last an average of about four to five years, if not less.In other words, when cars were bad; the car industry overallwas good! This is repeated by a number of auto analysts inprivate, but has never been a noticeable public stand by theforecasting industry.

In summary, the Nixon years were closed from theperspective of trade and investment, with few emergingmarket economies to take advantage of any kind of

environment of globalization whatsoever in retrospect. Anykinds of gestures to the Japanese and the Germans in termsof bringing in Toyota, Datsun and Honda; likewise,Mercedes Benz, BMW and Audi to the domestic USconsumer, was purely done for geo-political reasons in order to maintain the balance of Cold War power against theSoviet Union and Communist China. In short, auto

commercial policy was part and parcel of Cold War balanceof power politics.

Furthermore, these imports, especially from Japan, were notexpected to succeed with the American consumer in anysignificant way. Japanese quality, in retrospect, gained thefavor of consumers in the US and Canada, but those of Fiat,Renault and French made Renault and Peugeot did not.



14

The Great Auto CrashIt was always believed that the progress of the Japanesevehicles would go by way of the non-German Europeanbrands in this market. After all, US geo-political interestscame to view these imports as an extension of US foreignpolicy, particularly at a sensitive juncture with the rise of theRed Brigades in Italy and the spread of revolutionary zealthroughout the traditional allied sphere of Western Europe.



15

Gerald FordShort Tenure Long Impact

• The Rise of Greenspan• The end of Vietnam

• The Pardon and a New Era

Oil Prices under Gerald FordNominal Inflation

Adjusted1975 $12.21 $48.211976 $13.10 $48.911977 $14.40 $50.48

Gerald Ford’s Presidency was not considered to be verysignificant by most. However, it was very significant in thatit introduced some of the most enduring political and policyfigures that are still with us today.

Politicians such as former Vice President Dick Cheney andDonald Rumsfeld; former long serving Fed Chairman AlanGreenspan; former Reagan Defense Secretary, Caspar Weinberger, not to mention former Treasury Secretary,George Shultz, all either began or significantly developedtheir White House tenure under Gerald Ford’sAdministration. Ford did not have much of an influence onthe accommodative policies of the Federal Reserve System



16

The Great Auto Crashthroughout these years, and inflation continued to acceleratefrom 1974 to 1976. What Ford was in politics was a “transitionAdministration” that took the US political stream fromRepublicanism to the Democrats under Jimmy Carter.

The Ford Administration did have a calming affect on themajor big story affecting consumer demand for automobilesduring these years; the price of oil. It was under Gerald Ford’sAdministration that the OPEC cartel’s pricing effects were

held at bay; perhaps temporarily, but certainly under histenure, the initial increases under the Nixon years seemed atthis point to be an aberration to the muscle and power car producers in Detroit. In retrospect, these calming policiesprior to the second round of major oil price shocks duringthe Carter years, actually were setbacks to the planning andprogress of model design in Detroit.

The false hope that a stabilization in oil prices created inDetroit was one of “business as usual” just when new modelsthat were more fuel efficient from Japan were beginning totempt the American consumer more and more. This falsehope during the Ford years created a false sense of securityin Detroit that set back the industry through another entireproduct cycle. The planning for new models was so behindthat this false sense of stability in oil and gas prices resultedin a chaotic and sudden rush to downsize cars by consumersfor when the second major oil shock arrived in 1979.

This false sense of security in Detroit, together with theexperimentation in monetary targeting by the Federal ReserveChairman 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 initialOPEC oil embargo shock behind us, we don’t anticipatethat this environment will return any time soon. This was a



17

Gerald Ford – Short Tenure Long Impactone time event that was made possible by conflicts in theMiddle East, especially between Egypt and Israel, and alsothe heightened state of the Vietnam War resulted in a brutalshock to world oil supplies. We see these conflict zonescooling and with it a much more stable price at the pump.

Also, a move towards arms control talks with the SovietUnion, also created a sense that Détente would beprogressing within this geo-political sphere, which was

clearly a sign of the times then. Hope on the geo-politicalfront will bring down tension and hence prices even further,rendering the increases during the oil embargo of the Nixonyears 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 nextmodel planning cycle, we recommend that more of thesame be designed and produced for the Americanconsumer.



18

Carter and the SecondOil Shock

• Oil’s Lasting Impact• Chrysler Bail-out

• Iacocca’s 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 workson the bail-out of Chrysler

• Miller best known for role on ChryslerLoan Guaranty Board and the $1.5 billionadvanced 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



19

Carter and the Second Oil Shock• Prime lending rate peaks at 21.5% in 1981• Farmers drive tractors to DC in protest against

Volcker’s high rates• European Exchange Rate Mechanism (ERM)

negotiated to reduce exchange rate risks inEuro zone

Oil Prices under CarterNominal Inflation

Adjusted1978

$14.95 $48.711979 25.10 73.441980 37.42 97.471981 35.75 83.541982 31.83 70.07

The false geo-political hopes inherent in the Ford years causedDetroit to fall further behind the Japanese. It was not untilthe second major oil shock during the Carter years, thatcaused the “Big 3” auto producers to start scrambling for anappropriate product mix to address the issues at the pumps.

With Chrysler nearing its first bankruptcy and thesubsequent bail-out from the Carter Administration, therequired investment in product design and planning had tobe rushed under an unmistakably changing environment.What the second oil shock did, was to shatter some of thecomplacency that the “Big 3” had in their own beliefs thatthe 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 wouldcounter what has now turned into the “Japanese Importthreat.” Only five years ago, these cars that Toyota andDatsun (Nissan) were importing into the US were not to betaken seriously commercially, as they were perceived to bemerely “geo-political” imports which served the interests of



20

The Great Auto Crashthe US state much more than they would ever have beenable to serve or satisfy the US consumer; let alone becomemuch of a threat to the powerful Detroit auto producers. Inaddition to the high price of oil and the growing unease atthe fuel pumps across America, where lines of vehiclesbecame a permanent feature of the US motoring landscape,was the unexpected outcome of the changing monetarypolicy environment at the Federal Reserve under the soon tobe appointed Paul Volcker.

Volcker’s Fed became known for its experiment in targetingmoney supply, or in technical jargon, the total of all shortand longer term deposits in the banking system. As depositsin the system grew, so could the Federal Reserve counter with higher short term borrowing rates, hence choking off anyfurther 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 demandfor domestic cars, but it also made Japanese imports far moreaffordable to the US consumer, when high interest rates madethe dollar appreciate against the Japanese yen. This monetaryexperimentation period also generated the first evidence of agrowing trade friction between the Japanese and the US basedon the growing imbalance in the auto trade.

In fact, it would be the auto trade that spurs many policyinitiatives over the next decade in order to address thischanging balance of power globally. It not only results inthe 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.



21

Carter and the Second Oil ShockWhat began with a shock on the real side of the economywith both the first and second OPEC oil price increasesof the 1970s, evolved to the shocks that emanated from theclimate of economic policy experimentation inWashington in the 1980s.



22

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-ordinatedintervention• 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-ordinatedIntervention



23

Reagan and the Rise of ToyotaMarket Shares in the US (1980):

GM 44.5%;Ford 20.3%;Chrysler 11.3%;Honda 3.4%;Nissan 5.6%;Toyota 6.4%

Oil Prices under ReaganNominal InflationAdjusted

1983 $29.08 $62.021984 28.75 58.781985 26.92 53.151986 14.44 27.99

1987 17.75 33.191988 14.87 26.70

Just as 1970s Cold War politics helped Japanese auto makersgain an easy access route to the American marketplace, the1980s revealed the first cracks in this relationship. As theCold War between the Soviet Union and the US entered itsfourth 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 inthe 1980s.

The Carter Administration was just defeated after the secondOPEC oil crisis reached astronomical proportionsthroughout the decade of the 1970s; inflation was pegged atbeing well above ten percent and a new Federal ReserveChairman, Paul Volcker, heralded in the new decade of the1980s.

Although money supply targeting by the Volcker Fed wassingularly designed to beat back price inflation, the outcomewas in fact a major “financial explosion” in the ascent of

Japan’s auto makers. Just as the then “Big 3” Detroit based



24

The Great Auto Crashproducers 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 extrapolicy based burden to the overall impact that the realeconomic effects of the oil embargo had by OPECthroughout the 1970s under both Presidents Nixon andCarter.

With short term Fed Fund rates peaking to just over twentypercent from 1981 to 1983, and creating one of the worsteconomic downturns since the Great Depression of the 1930s,the financial shock to the balance of international automotivetrade was via the exchange rate parity between the yen andthe dollar.

The dollar became severely overvalued during this period tothe point where it made absolute sense for Americanconsumers to begin experimenting with these import vehiclesfrom Japan. Just as the “Big 3” mistimed the second oilembargo, and were thus faced with backtracking to “quicklyproduce smaller cars” for a consumer that was fuel pumpsticker shocked with their gas guzzlers; a financial shock likethe over-valuation of the dollar set the early stages for theascendancy of the Japanese three producers, lead by Toyotain the US. In short, this was a Washington manufacturedpolicy shock!

It was not necessarily a fact that the Japanese made morefuel efficient cars, hence the American consumer was focusedon hedging the increasingly erratic prices at the pumps; but

it was more a testament to the undervaluation of Japaneseimports which was made possible by tight Fed money policiesto the point where these vehicles were just too good to passup 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 futureerratic price changes to the cost of gas at the pump.



25

Reagan and the Rise of ToyotaWhat Paul Volcker’s Fed did to the demise of GM andChrysler more than offset the negatives of the two oilembargoes during the Nixon and Carter Administrations.The fact that they mismanaged and mistimed the second oilcrisis during the Carter era of the late 1970s, by rushing todesign dubious models such as the K-car by Chrysler’s LeeIacocca at the time, and Ford’s experimentation with a verymediocre Mustang, began to turn consumers off who were

used to the magnificent designs and power of the musclecars that were launched on the market just a decade ago.

The legacy of these cars like GM’s Chevelle, Chrysler’sCharger and Ford’s Mustang Shelby just could not offsetthe hastily contrived models of the late 1970s and early 1980s.Such notables as GM’s Pontiac, Chrysler’s Cordoba andFord’s Tempo and Topaz lines, were sufficiently inferior products when currency markets gave even more of an edgeto Japan’s imports based on price.

Not only were legacy factors working against the “Big 3” atthis point in time, but they were also spoiling any goodwillthat this glorious legacy carried with it by forcibly designingthese types of half-baked models to nervously address the

oil shocks. The final blow came via the over-valued dollar andthe Volker Fed’s policy shock.

The election of the Reagan Administration in 1981 wasbased on a number of factors, many of which wereconsidered of a financial nature and some on a geo-political platform. Ronald Reagan campaigned for anacross the board tax cut that was based on a new call topolitical action by a group of what was known as “supply-side” 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 publicationssuch as William F. Buckley’s National Review.



26

The Great Auto CrashThe main purpose of the supply-side revolution was to re-assert purchasing power to those that made above averageincomes. It was the premise that those that would benefitthe most would lead a program of “trickle down” whichwould positively affect the middle and lower income tiersvia job creation that would be undertaken by the tax surpluswhich the upper tiers of income earners would then investin the creation of jobs in America.

This “trickle down” effect may have been implementedduring the Reagan years, but it also unmistakably created aboom for luxury goods producers throughout the 1980s. Notonly were Japanese imports on the rise, but luxury Germannameplates such as Mercedes Benz, BMW and Audi didvery 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 overvaluationof the dollar and undervalued Toyotas, Hondas and Nissans,but domestic luxury nameplates such as Cadillac, Lincoln andBuick were increasingly eclipsed by German imports spurnedby the Reagan tax cut.

By the time that the advisors from the Reagan Administrationcame to the realization that the domestics were severely under pressure, they moved to assert a changeover at the FederalReserve. Paul Volcker was on his way out at the Fed by themiddle years of the decade, and he would be subsequentlyreplaced by Republican economist Alan Greenspan.

Greenspan’s rise came during the Nixon and FordAdministrations, but he gained increasingly bi-partisansupport in Washington, mainly due to his success on WallStreet with his own private practice through TownsendGreenspan, an economic consulting firm that he foundedin the 1950s.

The Greenspan appointment in 1987 was symbolic from the

perspective that it signaled a fresh new era at the Federal



27

Reagan and the Rise of ToyotaReserve, and it affirmed a new financial context whereby thedollar as the pre-eminent reserve currency was slowlydevalued over the longer term.Both Treasury Secretaries under the Reagan years, first DonaldRegan and then James Baker moved to assist the newlyappointed Fed Chairman by co-ordinating an assisteddevaluation in the dollar which was then supported by themajor industrialized trading countries in the mid to late 1980s.

A change in direction to the fortunes of the “Big 3” in Detroithad to be instituted at the international level by a generalagreement that the dollar needed a devaluation of the typethat would level the trade playing field and bring to an endthe price competition to the “Big 3” from Toyota, Nissanand Honda.

Now that the collapse of the oil price and waning of OPECpower assisted the renaissance of the auto industry worldwideduring the 1980s, the “Big 3” were still being disadvantagedby an overvalued dollar, making imports much cheaper andway more competitive to consumers.

The Reagan policy for the auto industry domestically wasaddressed on three fronts: first the low oil prices and thedismantling of OPEC power; secondly the revaluation of the yen and the Deutsche Mark and thirdly, by addressingthe employment picture in the domestic auto industry bythe policy of “import substitution” via direct investment inthe 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 G7Finance Ministers meetings in 1985 first at the Plaza Hotelin New York and then adjusted and fine tuned effectively atthe Louvre summit in the summer of 1987 in Paris.

Then Treasury Secretary, James Baker, convinced hiscounterparts that a revaluation of the yen and the Deutschemark were essential in order to address the growing structural



28

The Great Auto Crashtrade deficit in the US, with particular emphasis on the autosector 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 themarch towards the creation of the single currency, and allof the monetary politics that came to define the era of loosespending in Europe came to an end by the end of the decade

of the 1980s.More significantly, these summits were also used by the USto forcefully lobby the Japanese first for restraint in exportingtheir vehicles to the US, but also to switch the productionof these cars to the US and Canadian geographic spheres.US officials were less able to get their European counterpartsto do the same.

Consequently, foreign direct investment commitments byToyota, Honda and Nissan grew rapidly during these years.Auto investment from Japan also became aligned with theinterests and aspirations of labor within the southernAmerican states, as they created new jobs just when theDetroit three were downsizing periodically.

It also created new geographical automotive regions withinthe US, as the new investments were being made in zonesthat were miles away from Detroit. If the “Big 3” nowattacked Japanese imports as the epicentres of their problems, they would really be attacking states such asAlabama, South Carolina, Tennessee and Texas, whoseinterests were in no way aligned with the legacies of Michigan, Ohio, Illinois and Indiana when it came toproducing automobiles.

In retrospect, from the American auto perspective, theReagan years can be re-considered as being friendly to theinterests 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



29

Reagan and the Rise of Toyotaproducers. Ever since Volckers abandoned monetaryexperiment created an over-valuation in the dollar, ToyotasHondas and Nissans became much more attractive to theUS consumer from a pure value proposition.

Also, the collapse of OPEC power in this decade saved theglobal auto producers from erratic and predatory pricing atthe pump. These two events, one artificial and the other realwere 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 ReaganAdministration’s insistence that the Japanese produce moreof their vehicles within the North American marketplace.This, as it evolved over the next several decades, would bethe nail which would shut down any sort of political attack mechanism against the Japanese auto makers in Washingtonfrom a trade policy perspective.

In ending, the Reagan years would be known as offeringshort and medium term solutions to the “Big 3,” but alsosowing the seeds of their longer term downfall by splittingthe polical consensus between the direct investment southern

state recipients and those of the traditional “Big 3” aroundthe northern areas adjacent to Michigan and the Great Lakes.

In summary, the 1980s were favorable to the worldwide autoproducers and consumers since OPEC power and oil priceswere waning during this decade. An end to Volcker’s Fedand his policy of monetarism brought down the dollar henceleveled the playing field once again in favor of the “Big 3.”But, it created a new way by which the Japanese producerswould reach the American consuming public, which was toshift production from Japan to southern American statesand to Ontario.

This would create jobs in the short to medium term and gainpolitical accolades in Washington, but would work against

the political interests of the “Big 3” over the longer term,



30

since the Washington political consensus would be splitbetween northern and southern state interests within therealm of auto production. It would also split the oppositionto free trade politically and lead to further developments inopening up trade routes over the next two decades, leadingto a mixed impact on the overall health of the “Big 3.”




32

The Great Auto Crashinvestments in the US. These were made in different degreesover the next several decades, as Toyota invested inproductive capacity in both Ohio and in Ontario. Hondainvested heavily in both the US and in Ontario to the pointwhere their productive capacities in North America reached85 percent, whereas Toyota produced around 45 percent inNorth America compared to what it sold in these markets.Nissan also produced heavily in the US, but was mainlyabsent from committing any production in Canada.

In this respect, the direct investments made to productivecapacity in North America, as well as to a large extent in theUK for the European market, became an increasingly importantelement in the increase of Japanese sales in these markets.

From the perspective of the Japanese auto companies,committing large amounts of productive capacity to NorthAmerica came with a number of risks. One of which waswhether or not their brands could ever really be consideredas being “American” over time? Also, the challenge was howmodels that would be produced within the Americas couldever be re-exported to markets in adjacent zones or evenback to Japan? Significantly, there have been a number of major events from Nixon to Reagan, which have been of benefit to Japan’s producers and I summarize them below:

1) Nixon’s use of commercial and trade policy inorder to win over the Japanese as allies in thefight against Communism and the sphere of influence of China and the former Soviet Union

from a geopolitical angle. Nixon granted the USmarket to the Japanese auto producers inexchange for their loyalty on the political front.

2) The 1973 OPEC oil embargo laid thefoundation for crises “at the pump” for

American consumers. The second oil crisis in



33

A Case Study of Japanese Auto Manufacturers1979, caused the “Big 3” to panic by producingsub-standard vehicles that were a far cry fromtheir glory years only a decade ago and causedthem to lose focus of their traditional strengths.

The second oil embargo elevated the Japaneseproducers to heights that they have neverexperienced before in the Americanmarketplace, as the “Big 3” stumbled.

3) The appointment of Paul Volcker as FederalReserve Chairman in 1979 and his “monetaryexperiment” that raised the prime rate abovetwenty percent for a brief period was a majorfactor that made Japanese imports very

affordable as an alternative to US and Canadianconsumers. This was an event that hit the “Big 3”as hard as their mis-calculation of the second oilembargo and went in tandem in elevating the

Japanese producers to levels that they never haveexperienced before in the US market.

4) Reagan Administration officials such as DonaldRegan, George Shultz and James Baker, whoencouraged Japanese auto companies to buildcars in the US if they wanted to continuebenefiting from the US marketplace. They werevery 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 neededto reassert sustainability in opportunity andemployment. This foreign direct investment orFDI that Japanese producers committed to, split the country’s politics between North and South



34

The Great Auto Crashover the longer term, and prevented any use of atrade weapon to shut down domestic marketswhen the going got very tough for the “Big 3.”

5) Use of Summitry politics by Reagan officialssuch as James Baker, especially during the PlazaHotel meeting of G7 Finance Ministers in 1985,closely followed by a full G7 Summit in France

in 1987 at the Louvre, which basically served toundo the mistake which Volcker made at the Fedin 1982 by over-valuing the dollar artificially fora few years and making Japan’s autos overlycompetitive to US and Canadian buyers. Byusing moral suasion on most of their

counterparts in Europe and in Japan, policy co-ordination attempts at this time devalued the USdollar substantially with respect to the Yen andto a lesser degree against the Deutsche Mark andthe Pound Sterling. In summary, this geo-political and geo-economic climate in the 1980s,

could not have been more friendly to Japaneseproducers over the longer term. Suchcircumstances have turned these managementsduring this era into geniuses that they were not.

They also were the main elements that trulyspured the US consumer to reach a point of no

return towards the “Big 3” and eventuallycemented their downfall two decades later.



35

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• Bush’s defeat in 1992

Market Shares in the US (1990):GM 35.4%;Ford 23.9%;Chrysler 12.2%;Honda 6.2%;Nissan 4.5%;Toyota 7.6%

Oil Prices under Bush INominal Inflation

Adjusted1989

$18.33 $31.401990 23.19 37.691991 20.20 31.511992 19.25 29.15

George H.W. Bush was notable for the events that occurredduring his administration that were more or less completely

out of his control.



36

The Great Auto CrashThe collapse of the communist system that was formallypresented to the world through the collapse of the Berlin Wallin 1989, was mainly attributable to Reagan’s sharp militarybuild up in the mid 1980s, when Bush was his Vice Presidentand to advances in communications technology.

This period was one of great uncertainty, war, chaos, but alsoone of great hope. From an economic perspective, the tyingof 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 thatwas poised to open its resource markets to the globaleconomy and price signaling system. Also, it would presenta compelling market for auto producers over the longer term,which just now seems to be bearing fruits to producers on aworld wide basis.

The rush to make large SUVs in the U.S. can be intimatelytraced to the collapse of communism and the Berlin Wall.Not via direct effect, but certainly from creating anexpectation of deflationary conditions. One that was night

and day from the inflationary environment that engulfedthe industry throughout the Nixon-Ford-Carter era just adecade ago. In essence, the global economy going from boomto bust in ten short years as the old command and controlsystem self-destructed.

George H.W. Bush’s re-election prospects in 1991 went by wayof the former communist system. By unleashing a massdeflationary zeal throughout global markets as communismcollapsed, consumers and industry could feel a structuralchange forthcoming, hence interrupting their normalconsumption and investment activity and adding tounemployment.

This structural interruption to the economies of the west

were significant from an automotive industry angle. These



37

Bush I and the fall of the Wallwere the advent years of new materials, processes and thefinancial 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 wouldwork in the same direction of sustaining this high yieldproduction activity for the “Big 3.”

Under Bush, the advent of a North American free tradingzone attained its pinnacle. What was the first negotiation

that culminated with the Free Trade Agreement betweenCanada and the U.S., quickly was expanded to include thesouthern hemisphere of the continent and bring Mexico intothe fold. What was once unthinkable, quickly became thebasis for a new automotive infrastructure within the NorthAmerican trading zone.

Although many first and second tier parts companiesrelocated to the maquiladora regions of Mexico, to takeadvantage of free trade, lower costs and cheaper labour, itwould not be until China opened up to the world later in the1990s, 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 Chinaeffects on the auto sector domestically.



38



39

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 HIt’s the “Big 3”• EV1• Ford’s Brand Strategy• 1997 Asian Financial Crisis• Fed bail-out of Long Term Capital Management

hedge fund

Market Shares in the US (2000):GM 28%;Ford 23%;

Chrysler 14.5%;Honda 6.7%;Nissan 4.3%;Toyota 9.3%



40

The Great Auto CrashOil Prices under Clinton

Nominal InflationAdjusted1993

$16.75 $24.621994 15.66 22.451995 16.75 23.351996 20.46 27.711997 18.64 24.671998 11.91 15.521999 16.56 21.122000 27.39 33.79

Sustainability in the Clinton Years Japanese foreign investment in US automotive productionstarted to accelerate after Treasury’s James Baker spurred the

Japanese auto makers to commit to the US market after theystarted to gain spectacular market share from the domesticproducers. What has become the 1980s story of “sustainability”in production and in employment, soon came under threatfrom technological changes in the early 1990s.

The onset of the internet economy in the early part of thedecade was pre-dated by the collapse of the Berlin Wall and the

onset of deflationary forces throughout the commodity-basedregions of the world. Production inputs were kept stable bythis event, as the price of oil did not even factor into salesstrategies in these early years. In fact, it was the collapse of these major socially managed economies that provided USconsumers a new sense of freedom to experiment with vehicleswhere fuel economy had no bounds.

The introduction of the SUV in the early part of this decadewas accelerated by the time that all auto producers jumpedon the bandwagon. After all, it was very lucrative tomanufacture these vehicles since their size and power justifieda far greater margin than what was being earned through sellingmidsized sedans.



41

Clinton and GlobalizationIn a way, the geo-political climate in the early 1990s that spurredan overall climate of deflation or price stability in commoditiescan be considered as one of the main events which made theprice of oil a nonissue during this decade. The stability in theprice in turn spurned a consumer buying frenzy for this rangeof vehicle, making it a very lucrative period for most autoproducers, especially the domestic three.

Despite the very attractive price in oil, however, a severe

recession in the early part of the decade would have offsetsome of the positive effects of sustainability that was affordedby this low oil price. As auto executives looked towards thesenewly emerging markets that were just opening up in the former Communist regions of Europe, it was only those EU basedproducers that took the plunge in the early years.

As uncertainty hit crescendo levels in the years from 1991 to1996, Renault’s investment in Slovenia, joined with Fiat Group’straditional presence in countries such as Romania and Russia,to lay a foundation for possible future expansion once a certainpolitical climate emerged from the rubble. Although manyauto producers were very slow in investing productiveoperations into the newly emerging countries of Europe, theywere even slower in identifying China’s complex market andthe changes that were apparent from 1992 to 1997.

If we take our “sustainability” concept and apply it in the earlypart of the 1990s to the auto sector, then a low price of oiltended to offset some of the debilitating outcomes of therecession from 1991 to 1994. However, it can not be said thatthe 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 theimmediate geo-political changeover.

The negotiation of the North American Free TradeAgreement or NAFTA in 1993 bound the Mexican marketin with those of Canada and the US. Both Canada andMexico would greatly benefit from selling production to



42

The Great Auto Crashthe US consumer for a protracted period of time. By thetime that the recession of the early 1990s ended for the US,NAFTA enabled the American consumer to help bothNAFTA partners in combating the downturn. NAFTA waspaired with the single European market project and thepreparation for the launching of a single currency; the Euro.

Both events made the most out of the march to globalizationin this decade and opened up markets to auto producers

and vice versa. These new market liberalizing movementshelped in assisting the entire goal of sustainability inemployment and production in this key global sector, butit 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 adigital smarter product with software and computers mountedto engines, it was also new metal composites and treatments thatsoon prevented rust and body panel deterioration. It wasevident that by the middle of the decade, a car or truck wouldbe able to double its previous life on the road.

This quality imputed into the production process was verysignificant in that production was sliding away from a mechanical

process to one that was being digitized and engineeredelectronically. The impact that this had on sustainability wouldbe revolutionary in what would evolve as the fight to save thevitality of this sector from an employment angle.

Not only did low oil not elevate the case for sustainabilityduring these years, free markets and globalization went someway in addressing this concern, but were still unable toconvincingly offset the displacement from the rapid gains beingmade in technology.

It wasn’t until the repeal of the Glass Steagall Act whichseparated investment from commercial banking thatsustainability could once again re-assert itself in the fastchanging auto sector.



43

Clinton and GlobalizationRobert Rubin, the former Goldman Sachs executive wasappointed as Bill Clinton’s Treasury Secretary in 1996. Rubin

joined with Alan Greenspan at the Federal Reserve in makingfinancial deregulation the focus of his tenure. Not only did hepromote free financial markets in banking and the nurturingof a “shadow banking” sector, he was able to convince lawmakers to fully liberalize and adopt cutting edge technologiesto encourage financial innovation and to expand “off-balance-sheet” transactions that did not require some form of capitaladequacy insurance at the regulatory level. Needless to say,these were all very beneficial in offsetting the decline insustainability in the auto sector from rapid technologicalchanges in processes and materials.

Not only were new financial products being offered to help inleasing cars and trucks and maintaining a sustainable level of

sales in the industry, new consumer financing alternatives werebeing offered to US buyers of cars that would enable them toleverage off the equity that they had built up in their homes.

The overall “dot.com” bubble that was emerging during theseyears also made financing just about any idea possible, asthe impossible became within reach and possible to many.All of these outcomes were all ingrained in first thederegulation that was promoted and mated to financial andtechnological innovations in markets.

These effects were the most potent in creating a sustainableconsumer for all car producers, which would more than offsetby many times over the positives which were created by a lowoil price regime and the non-emergence of OPEC power in

the 1990s; together with the emergence of free tradeagreements and the whole concept of promotingglobalization in markets that were only a decade ago all butclosed off to the west.



44

Bush II and the GreatDepression 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 fifthunprecedented 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 inopposing 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



45

Bush II and the Great Depression of 2008• Ben Bernanke appointed Fed Chairman

February 2006

• Issues “Bernanke Doctrine” which advocates fora pre-emptive activist monetary policy• Bernanke believes that its in the interest of

governments to create some inflation

Market Shares in the US:GM 22.0 %Ford 14.4 %Chrysler 11.0 %Honda 10.8 %Nissan 7.2 %Toyota 16.7 %

Oil Prices under Bush IINominal Inflation

Adjusted2001 $23.00 $27.592002 22.81 26.942003 27.69 31.972004 37.66 42.352005 50.04 54.012006 58.30 61.372007 64.20 64.932008 126.33 123.88

The new millennium’s first decade broke with the experienceat the pump from the Clinton years. The combination of the initial effects from globalization and tying up newmarkets to the world’s financial markets, together with theonset of easy consumer finance began to show fatigue.

The commercial focus of the Clinton era faded rapidly, andwhen the attacks on the World Trade Centre occurred, it wasclear that the US was on an entirely different path under anew President.



46

The Great Auto CrashFormer GM CEO, Rick Wagoner, happened to be caughtin the middle of a new geo-politics that slowly began to chipaway GM’s commercial viability. Just as in the case of OPEC’s first oil shock in 1973, GM and the domestic threeplayed a game of denial in this new era, which eerily beganto repeat the history of mismanaging new geopolitical andpolicy based shocks to the sustainability of the domesticauto market.

When the first oil shock came in 1973, the “Big 3” at that timedenied that the game had changed. However, when thesecond OPEC shock came later in the decade, they were leftscrambling for a strategy that would expediently repositiontheir traditional market share, hence sustainability inproduction, employment and profits when all Japanesevehicle sales were still being imported.

The scene was very similar now again throughout the termof George W. Bush. Not only was sustainability an issue toGM, Ford and Chrysler, but it now also became an issue toToyota, Honda and Nissan, not to mention some of the latecomers like Hyundai.

Back then, it was the replacement of Paul Volcker’s

monetarism with Alan Greenspan’s accommodating interestrate regime, together with James Baker’s Plaza Accord in1985, which both leveled the playing field between foreignand domestic producers in the US auto market.

Not only this, but the longer term push to enhance sustainabilityin the US market through Japanese direct investment and thecreation of a sustainable labor market in the southern tier statesof Alabama, Tennessee and Mississippi.

In this new millennium, sustainability in the sector wasattempted through the enhancement in consumer finance andthe continuation of deregulation and financial sector innovation.

However, as consumer finance began to reach its naturallimits and started to show “cracks” that were never imaginable



47

Bush II and the Great Depression of 2008during the Clinton years, new concepts of sustainabilitybegan to emerge such as “hybrid vehicles.”

The entire green revolution became a concept that was beingembraced by many officials in government. The introductionof hybrid vehicles emerged through Toyota’s Prius in the late1990s and was extended to alternative fuels such as hydrogen,pure battery power through Lithium Ion battery researchand even extended to the use of biofuel concepts.

What all of these initiatives were doing were fragmentingthe auto market while attempting to address sustainability.The auto market was being segregated to those that viewedmobility as getting from point A to B in the quickest mostfuel efficient manner; to those that valued “performance”and horsepower factors as they traveled from A to B, butnot necessarily in the straightest line possible.

This fragmentation also gave an opportunity to smaller, moreentrepreneurial start-ups that were on the cutting edge of battery research. This is a throwback to the turn of the lastcentury, when a similar environment ensued and whichbecame to define the development of mass production andthe creation of the assembly line.

Shortly thereafter, the industry began to merge into thefamiliar names that are currently under pressure and their very existence threatened.



48

Obama and the end ofSustainability

• 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 fewmonths of the Bush Presidency, first Chrysler and thenGM were led into a “surgical bankruptcy” in the first half of the new Democratic Obama Administration.

The key to sustaining production of vehicles andemployment in this vital sector, had the onus fall on the USCourt System. After the government offered to be the keyfinancier in a newly restructured GM and Chrysler, it wasthe labor unions in the two companies that came out aheadof 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



49

Obama and the End of Sustainabilityranked above the rights of those that funded it prior toboth companies’ bankruptcy filings. In a ruling by the NewYork appeals Court, it was clear that the Court viewedcontinuity and sustainability as the over-riding goals in thissector. Also, what was very clear in the ruling was the sheer disruption that would have been caused to employmentand the supply-chain if a liquidation request had beengranted 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 rightsis fine, as long as a systemic disruption to the sustainabilityof a key sector is not in question. The importance of the autosector to US interests was clearly spelled out by both theAdministration, as well as the legal system under a periodof great uncertainty.

The move by the Obama Administration to re-regulate thefinancial industry after the fall-out on Wall Street in 2008,would also weaken a key pillar of sustainable automotiveproduction that was started by Robert Rubin in the Clintonyears. Moves to create a clearing house for off balance sheetassets and liabilities and regulate the shadow bankingsystem, would go some way in eliminating financialinnovations that were key in extending credit to those thatnever would have had any access to it in the past.

Likewise, moves to regulate hedge funds would also createhavoc in the free flow of capital which was vital in ensuringthat innovation in finance would be extended to mainstreetand 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 offsetsome of the technological innovations that were enemiesto the sustainability in production and employmentthroughout 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



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The Great Auto Crashwould require much quicker and a far more potent doseof government spending than what was being proposedunder Obama to now.Only a continuously increasing spending plan that woulddwarf the recent TARP bail-outs would replace theeffectiveness of policy sustainability to the general economyand the auto sector. What has been proposed to now by theObama team, comes up way too short under a potentially new

regime of re-regulating financial innovation and the shadowbanking markets.

As many Republican leaders have mentioned, it is tax cutsin payroll and retail sales which may potentially affectspending the quickest in a very uncertain period in the US.Increased spending and general stimulus on infrastructureprograms take a very long time to implement nationally, andmay harm the support system by which the entiresustainability concept works in the auto industry.

If the Obama Administration is to raise scrutiny on financeand raise the regulatory bar, then they must be far moreaggressive in proposing further spending that would addressthe decline in the industry.

As we saw with the collapse of the auto industry, it wasnothing internal or specific to the industry itself whichcrippled production and sales, but it was a broad economicshock that was wholly unexpected by most which has broughtthe 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 negativesof OPEC oil cartel price increases.

In this respect, the Administration is addressing only one aspectthat has affected sustainability in production and employment,but has more than offset any benefits that a green strategywould accrue to sustainability by re-regulating finance and not



51

Obama and the End of Sustainabilityproviding enough of a big bang from spending.

Just the act of promoting alternative energy itself willfragment the industry over the medium to longer term. It isnot clear at this moment just how Hybrid cars and trucks or full electrical vehicles will impact the employment picture inthe industry.

Early evidence from these strategies is that green cars more thananything resemble “kit” cars that can be assembled withoutresorting to a traditional assembly line and the use of largelabor forces with massive doses of union bargaining power.

In this respect, the whole concept of sustainability must beredefined, should the mechanical vehicle more and morebecome digitalized and transformed to one that can besnapped together without any resort to traditional

production methods.Recent uses of fiscal incentives and rebates to get consumersto purchase electrical vehicles or hybrids is a new tool thatcan generate some form of sustainability or at least addmarginally 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 US’s“cash for clunkers” program, can add much needed shortterm stimulus to production and employment, but thisfiscal strategy needs to be augmented in five year intervalsif these measures would continue to create turnover andraise manufacturing.

The Obama Administration to now has come up short inthis area of direct fiscal incentives, as it has in its attempts toreplace finance with fiscal initiatives, at least in the foreseeableshort term.



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Japan’s Contribution toSustainability

• 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 inthe early 1980s, US lawmakers started to show someuneasiness, especially in States that were dependent on thedomestic three producers. What was initially a goodwillgesture to America’s ally; Japan, during the height of ColdWar politics, as the Nixon Administration opened up their domestic market to the auto trade, their success soon becamea real concern to politicians elected during the Reagan era.

As Fed Chairman Paul Volcker’s war on inflation raged from

1981 to 1983, the natural outcome of an overvalued dollar wreaked real havoc to the domestic auto industry, as Japaneseimports were elevated to levels unseen prior to this policy exercise.

It is interesting to look at some of the reactions of Japan’sproducers in terms of commitments that they made todomestic “sustainability” in production and employmentand the timing of their commitments. For example, if we



53

Japan’s Contribution to Sustainabilityput the entire issue of Japanese imports into some context,we see that there were basically four important policy eventsfrom the early 1980s; throughout the Reagan Administration,and to the early years of the Clinton years and the negotiationof free trade agreements such as the North American FreeTrade Agreement or (NAFTA) in 1993.

In the case of Honda Motor, they were the first to committo a sustainable manufacturing presence in the US market.

In the late 1970s, they began first producing motorcycles inOhio and then began aggressively producing cars from 1983.In this respect, they were an early contributor to sustainabilityin employment in the domestic US economy and their commitment to investment predated the Plaza Accords in1985 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 thisperiod. All of these measures were very friendly in assistingtheir sustainability plans in the important US and NorthAmerican markets.

Nissan’s car production in the US market also predatedBaker’s Plaza Accords in 1985. Their production of 100,000plus cars in 1984 was a contribution to sustainability inemployment in the US, and predated the policy moves madeunder the Reagan Administration to massively force anenduring investment presence.

This production peaked in 1987 at 220,000 plus cars, which wasalso determined to a large extent by the dollar devaluationthat the Plaza Accords effected. Therefore, sustainability inthe US was enhanced by this policy exercise meted out bythe Reagan Administration. Nissan’s production steadilyincreased in the early to mid 1990s encouraged by the NAFTAagreement and also benefiting from financial innovation andconsumer choices that this made possible.



54

The Great Auto CrashIts also interesting to note that Nissan’s truck production inNorth America co-incided with the negotiation of the FreeTrade Agreement between Canada and the US in 1988, andremained relatively consistent throughout the 1990s at justmarginally above the 100,000 level.

In terms of the Mazda auto alliance between Ford Motor and Mazda of Japan, they began domestic US production in1987/88 at around 167,000 cars. It is clear that Baker’s Plaza

Accord was central to this sustainability gesture by Mazda andFord. This production has remained remarkably steady over the next decade and has more or less fluctuated between 100and 200,000 cars annually.

In the case of Subaru/Isuzu, which was first introduced to theUS market by entrepreneur Malcolm Bricklin in the early1970s, production began in the late 1980s around 1989/90.Subaru was late to produce in the US, but was alwaysconsidered to be a “niche” product that would not beattractive to a mass market as in the case of the other Japaneseauto makers.

Nonetheless, the free trade agreements and financialinnovation in consumer finance were factors which caused

production to sustain itself from 50 to 100,000 cars on anannual basis. Ironically, Subaru’s truck production mirroredthat of its car production in North America and fluctuatedin the range between 50 to 100,000 trucks until the earlyyears of the new millennium.

In the case of Toyota, car production did not predate thePlaza Accords of 1985. This is contrary to the investmentdecisions that were made by both Honda and Nissan, andmore in line with the reactions of Mazda andSubaru/Isuzu. Toyota produced 150,000 plus cars in 1989,and this was increased by another 100,000 cars by the timethat NAFTA was implemented in 1993 between the US,Canada and Mexico.



55

Japan’s Contribution to SustainabilityToyota’s car production peaked in the mid 1990s at around400,000 cars. Not until 2005, would this production levelexceed 500,000 cars in North America. Truck productionwas introduced in 1997, it grew dramatically throughout thenew millennium and the Bush years, until peaking out atover 400,000 in 2007.

The Plaza Accords of 1985 were perhaps the initial politicalimpetus to add sustainability in the domestic US market,

but it was the Free Trade Accords of 1988 and 1993, whichwere the events that convinced Toyota Motor to make acommitment to investment in North America.

Relatively stable gas prices throughout these years can notexplain why Toyota dramatically increased output of cars inthe 1990s, as it could explain the gains that it made in theOPEC decade of the 1970s.

Clearly, we can make a case for the Plaza effect; the free tradeunification of North America’s markets and also therevolution in consumer finance at the dealer level, whichcan explain the dramatic positive impact to sustainabilitythat this auto producer has made to the domestic US marketand the timing of its investment.



56

Japanese Initiatives toSustainability in Productionand Employment in the U.S.

SubaruLafayette, IN.

Isuzu Moraine, OH.Honda

Marysville, OH.East Liberty, OH.Anna, OH.Russels Point, OH.

Lincoln, AL.Tallapoosa, GA.Greensburg, IN.

MazdaFlat Rock, MI.

NissanSmyrna, TN.Decherd, TN.Canton, MS.

ToyotaFremont, 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)



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S m

a l l T o wn

S t u d i o



58

Explaining the Decline ofGeneral Motors

Under pressure from the Obama Administration, GeneralMotors CEO Rick Wagoner reluctantly tendered hisresignation in the spring of 2009. A few months later, theheralded auto maker entered chapter 11 bankruptcy protection.How could a company so large and so vital to the Americaneconomic system helplessly plunge towards the abyss in threeshort 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 marketshare. To understand the downfall of GM one must first be

resigned to the fact that GM’s market share loss was morepolitical than it ever was commercial.

There was no gloriously simple free enterprise story here.No white knight emerging out of an ivy league MBA schoolthat could have managed to steer GM towards its former past glory. Instead, it were the following chronological eventswhich finally brought an end to an american icon:

"because for years I thought what

was good for the country was goodfor General Motors and vice versa." -Charles Wilson, Secretary of Defense.

L i f e M a g a z

i n e - H

a n

k W a

l k e r



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Explaining the Decline of General Motorsi) Cold War politics of the Nixon era and the

introduction of Japanese imports to bind Japanpolitically to US interests.

ii) OPEC oil embargoes in 1973 and again in 1978which shocked GM as Americas pre-eminent producer and forced a hastily planned introductionof 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, whoorchestrated an interest rate rise in excess of twentypercent, hammering local industry. Not only fromthe perspective of domestic credit and finance, but

more importantly from the over-valuation of the USdollar in relation to the Yen and Deutsche mark.

This spurned momentum to cheap Japanese importsas it never has before.

iv) The appointment of James Baker as RonaldReagan’s Treasury Secretary and the successfulnegotiation of the Plaza Accords in 1985; devaluingthe dollar which gave GM and the domesticproducers 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 Americansustainability by levering investment into the US.

This provided a foundation for the long termpolitical decline of the domestic three in the USmarket.

vi) The election of Mickey Kantor as Trade Secretary

under Bill Clinton’s Administration and the use of



60

The Great Auto Crashcurrency market politics as a trade and investment weapon against Japanese producers. This encouraged

Toyota, Honda and Nissan to invest and produceeven more output in the US market, hencehammering the interests of GM and companyfurther politically.

vii) The development of financial markets and Robert

Rubin’s repeal of Glass Steagall financial regulations,heralding a new revolution in consumer finance andadding to overall sustainability in production,especially within the Sport Utility Vehicle (SUV) class.

viii) The collapse of finance, shadow banking andderivatives after Lehman Brothers and Bear Stearns

filing of bankruptcy protection in 2008. This finallyimpacts the entire industry and implodes GM.

Looking at these developments can be reconsidered from theperspective 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 theCold War against the Soviet Union.

Then, once OPEC hits, Japanese cars get the attention of theconsumer 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. Thepolitical reaction to this fall in domestic sustainability isencapsulated by James Baker’s Plaza Accords in 1985, which offer a short term solution to regain domestic sustainability throughthe devaluation of the dollar against the yen.

However, more importantly, over the longer term, Baker providesa framework for regaining the lost sustainability domestically by



61

Explaining the Decline of General Motorslevering foreign direct investment from the Japanese into the USmarket where they commit to employing Americans whose jobswere carved out of the domestic producers such as GM, Fordand Chrysler.

Under this scenario, ownership of production is internationalizedand domestic sustainability is jointly shared by both domesticallyowned industry as well as foreign owned industry. Once thishappens, attacks on foreign companies is less politically feasible,

because they now begin to share the local sustainability burdenwithin the US market.

Under these scenarios, what was GM to do? Assert its oppositionin Washington against closer Japanese ties? Or oppose theappointment of Paul Volcker at the Fed in the late 1970s? Coulda 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 JamesBaker’s policy of having Japan share domestic sustainability in theUS market? It may have been able to do so, but ultimately, GM,Ford and Chrysler were politically passive. They were not thatpolitically adept, since politics is more unpredictable thanmanaging a commercial enterprise.

However, perhaps more interestingly, US industrial power inWashington was fast waning at the expense of the rise of financeand banking and general services. These new powers just did notshare any sense of urgency to the old industrial order andlandscape in America that was represented by a company suchas GM and Detroit

US Market SharesGM Toyota

1980 44.5% 6.4%1990 35.4 7.62000 28.0 9.32008 22.0 16.7

Source: Financial Times



62

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 throughoutthe 1990s and new millennium by breathtaking advances infinance combined with technology, so too was the growthof free and open trade offset by the political use of thecurrency markets.

Just as Clinton Treasury Secretary, Robert Rubin, acted toderegulate the banking and investment markets and blur the line between credit and investment, so too was the riseof free trade offset by the use of currency marketintervention. The best case in point being the Plaza Accordsof 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 Japan’sexports, soon inherited an inertia of its own as free tradeagreements and the concept of freer and open markets hitthe American psyche in the 1980s.

First, this trend was localized through the US-Canada FreeTrade Agreement in 1988, but the momentum began to



63

The Rise of Financial Warfarebuild as long as the direct impact on inefficient industry,including automotive, could be managed by politicians onthe margins.Whenever the ideal of sustainability in this most importantsector was threatened, or perceived to be under seriousthreat, politicians turned to a traditional weapon inregulating domestic market entry the currency or foreignexchange markets.

When the Nixon era’s Cold War policy first catapulted Japanese imports onto the US consumer, Fed ChairmanPaul Volcker made it more of an urgent issue through his“monetary experiment” from 1981 to 1983. As moneysupply was reigned in to fight inflation, the spectacular over-valuation of the dollar as a by-product of thisexperiment, in relation to the Japanese yen, gave Toyota,Honda and Nissan a far greater system of support thanNixon’s Cold War politics just a decade ago.

Just when the “Big 3” domestic producers werethreatened in the early 1980s and the entire ideal of sustaining one of America’s most vital sectors, theReagan Administration under James Baker, spearheaded

the Plaza Accords named after the meeting of the world’smost powerful market or commercial Finance Ministersat New York’s Plaza Hotel.

These accords were direct interventions in the currencymarkets in an era when these types of interventions weremore feasible and possible. By devaluing the dollar relative to both the Japanese yen and the Deutsche mark made Japan’s automotive imports less attractivefinancially to US consumers.

This was coupled with a moral suasive gesture on the partof Baker for Japan’s producers to share the burden of sustainability in America’s auto industry by committingto foreign direct investment and building new plants in

the US. This was unheard of in the past, where



64

The Great Auto Crashnationalism reigned supreme, especially in industrialpolicy and in America’s industrial sectors. A newexperiment in internationalism and the democratizationof investment had been created, and sustainability for America’s workers became more certain after the “Big 3”ceded market share.



65

Geo Auto-PoliticsA 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 Term3. Ronald Reagan (President) in Short Term4. 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)



66

The Great Auto CrashPoliticians Friendly to Japanese Imports

1. Jimmy Carter (President) over long term 2. Ronald Reagan (President) over long term3. George W. Bush (President) until 20074. 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 officialsources 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 deemedto change in one country, then a sudden shock in thecurrency parity would always ensue. Not so with the JapaneseYen and US dollar parity. Even when Japanese nominalinterest rates collapsed to near zero, the Yen counter-

intuitively rose relative to the dollar.Likewise, when economic growth declined in Canada, thenthe Canadian dollar compensated by falling relative to itsUS counterpart. Likewise, a fall in England’s base interestrate 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 aseries of threats and counter-threats among governmentofficials between the two countries in the sphere of trade.

In the early years of the Clinton Administration, TradeSecretary, Mickey Kantor, used rhetoric against Japan inmoving the Yen higher and pushing it to a record yearlyaverage high of 94.08 yen to one dollar.



67

Geo Auto-PoliticsEvidence from the 1970s currency chaos years after thecollapse of the Bretton Woods Agreement of fixed currencyparities in 1972, show the Yen at a yearly average of 303.42to one dollar at the end of 1975, a year and a half after thefirst OPEC oil embargo in 1973.

The strength of the dollar during these years severely affectedtrade with Japanese vehicles, making them both a fuel optionconsideration as well as a cheap alternative to domestic cars.

As the OPEC shock disrupted sustainable production andemployment 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 OPECoil shock at the end of 1978 under the Carter Administrationand the George Miller years at the Fed. This helped domesticproducers sustain production domestically and maintainemployment 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 monetarytargeting at the Federal Reserve and attacked the rampant

inflation rate by raising prime interest rates above twentypercent, Japanese sales began to pick up momentum at theexpense of sustainability in the domestic US auto sector.

The election of the Reagan Administration and theappointment of James Baker to the role of Treasury Secretarynot only reversed the rise of the dollar, but laid the foundationfor long term sustainability by forcing Japanese producers tofirst invest, then employ American workers in the US.

The Plaza Accord in 1985 propelled the dollar down to ayearly average of 168.33 from a level of 238 throughout theVolcker monetary experiment years. From 168 Yen to thedollar, the Yen continued its downward trajectory as it cameunder attack from trade Secretary Kantor during the early

part of the Clinton years from 1992 to 1995.



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The Great Auto CrashSuch political gestures first on the part of James Baker andthen Mickey Kantor, were designed to force more investmentand re-investment in the domestic US operations of the

Japanese producers. The process was also assisted on themonetary side through the removal of Paul Volcker and theappointment of Alan Greenspan as the new Federal ReserveChairman in 1987, which promised a more accommodatingstance to both the Reagan and Clinton teams.



69

Yen - Dollar Yearly Averages(¥/$)

(Major political intervention in defense of sustainability for US domestic economy)

1975 296.751976 296.39

1977 268.241978 210.04 (2nd OPEC shock)1979 219.051980 226.151981 220.461982 249.27 (Paul Volcker era)1983 237.431984 237.551985 238.301986 168.33 (Plaza Accords)1987 144.671988 128.241989 138.041990 144.651991 134.461992 126.601993 111.071994 102.121995 94.08 (Kantor effect)1996 108.771997 120.941998 130.831999 113.732000 107.792001 121.45

2002 125.152003 115.882004 108.162005 110.202006 116.302007 117.762008 103.40



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Deutsche Mark Politics

After the initial OPEC shock in 1973, the Dm. traded at ayearly average of 2.46 to one US dollar. The combinationof the second OPEC shock in 1978 and the resignation of George Miller at the Fed propelled the mark to a high of 1.82to the dollar in 1980. Paul Volcker’s monetary experimentat the Fed caused the dollar to over-value to 2.43 marks.

This is when imports of Audi and BMW cars hit a peak inthe North American marketplace, as these luxury Germancars became noticeable for the first time ever in a massmarket push that was evident to the average American.

The Volcker monetary experiment combined with theReagan tax cuts in the early part of the decade of the 1980s

were a formidable boom to German luxury imports intothe US. The progress of the revaluation of the dollar hit apeak in 1985 just prior to the Plaza Accords at 2.94 Deutschemarks 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 thedollar. It continued to advance until in 1990 it hit a new



71

Deutsche Mark Politicsplateau of 1.62 after the success of the single currency projectin Europe molded the mark into an undisputable “anchor”currency. It hit a new high to the dollar at a yearly averageof 1.43 at the end of 1995 at the height of the turmoil inEurope, after the Italian lira and British Sterling left theExchange Rate Mechanism under intense speculativepressures.

The Deutsche mark finally became the Euro in 1999 and

left the world currency markets at a parity of 1.84 to oneUS dollar. Since German cars appealed to a more “niche”segment of the US market, they were not subjected to theattacks which the Japanese producers experienced under thereign of James Baker and Mickey Kantor from 1985 to 1994.

German export success was relegated to a niche which wasvery well treated by Reagan and Clinton fiscal policy over thisdecade and resulted in increasing their market sharesthroughout the US. Some marginal conciliatory gestureswere made, however, by the German producers, where BMWopened a production plant in Spartanburg, South Carolina.Both Mercedes and Audi did not open production plantsin the US, and were relatively immune from US auto geo-politics. A very different approach to that of the Japanesewho played in a mass market and were susceptible to forcedcontributions to the ideal of sustainability in America.



72

Deutsche mark - Dollar

Yearly Averages (Dm./$)(major political intervention in defense of sustainability for US domestic economy)

1975 2.461976 2.521977 2.321978 2.01 (2nd OPEC shock)1979 1.831980 1.821981 2.261982 2.43 (Paul Volcker era)1983 2.561984 2.851985 2.941986 2.17 (Plaza Accords)1987 1.801988 1.761989 1.881990 1.621991 1.661992 1.561993 1.651994 1.621995 1.43 (Kantor effect)1996 1.501997 1.731998 1.761999 1.84



Year: 1955

Plate 1

Strategy : Offensive Political Environment: General Economic Growth; massive road building program; Cold War andclosed economies; Marshall Plan effects still resonate among market economies, especially the U.S. EconomicEnvironment:Growth with low oil prices. Closed economies with the U.S. leading among market economies. ThePackard Caribbean is a symbol of the growing prosperity in America in the 1950s. Its 275 horsepower engine is the mospowerful yet available to consumers.



Year: 1961

Plate 2

Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy andCold War.Economic Environment: Growth with Prosperity; low oil prices; consumer differentiation and first attempt to create a"European Lifestyle Niche" in America.



Year: 1961

Plate 3

Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy andCold 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.



Year: 1962

Plate 4

Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy andCold 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.



Year: 1962

Plate 5

Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy andCold 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 "adults." It is the ultimate family transport vehicle and price of fuel is no object in this era of plenty.



Year: 1963

Plate 6

Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy andCold 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 cosmeticchanges for the 1963 model. Interiors are "refined a bit," and mind the "aluminized muffler," which is enough to appealto the average American consumers in this quiet and comfortable era. _



Year: 1962

Plate 7

Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy andCold 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 wherethe skies the limit. What better than launch yet another luxury lifestyle vehicle?



Year 1968

Plate 8

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 widearray of discounts on repairs. Cars in the 1960s were built big, strong, fast and durable and able to meet the standardsof OK Used Cars. How would the inferior built cars of the late 1970s fare under a similar warranty?



Year 1968

Plate 9

Strategy : Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy andCold 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 amonth than a "small car" in America. This, of course, was when oil and gas prices were not an issue at all.



Year 1968

Plate 10

Strategy: Offensive Political Environment:Glorious Growth Years of the 1960s combined with a closed economy andCold 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 forthe American market. Interestingly, the ad states: "Those are the features that help make Ford's Model C Cortina thelargest selling car in England. And these features make it so right for America." Surprisingly, what works in Englandought to also work in America? This is a "niche" within a "niche" when the clear preference in America during thesetimes was for bigger and more powerful.



Year 1968

Plate 11

Strategy: Offensive Political Environment:Glorious Growth Years of the 1960s combined with a closed economy andCold 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.



Year 1968

Plate 13

Strategy : OffensivePolitical Environment: Glorious Growth Years of the 1960s combined with a closed economy andCold 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 roadsthat have been recently built in America. "And you can order a 335 hp Ram Air version that uses those hood-mountedscoops to breathe," is the ultimate statement defining the spectacular era of the late 1960s. Horsepower and speeddefine the driving experience here.



Year 1968

Plate 14

Strategy : OffensivePolitical Environment:Glorious Growth Years of the 1960s combined with a closed economy andCold 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 electroniccomputers 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.



Year 1968

Plate 15

Strategy: Offensive Political Environment:Glorious Growth Years of the 1960s combined with a closed economy andCold 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 tobrand a niche market through European association. This case with the Buick and Opel brands fused together.



Year 1972

Plate 16

Strategy : OffensivePolitical Environment:Glorious Growth Years of the 1960s combined with a closed economy andCold 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 inAmerica. Even small AMC's were trying to convince consumers of their "big car" experience.



Year 1972

Plate 17

Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy andCold 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 nicheattempt is multiplied by the Simca's message that it really is not as small as one would think. The big car era enduresuntil a few more years.



Year 1972

Plate 18

Strategy: Offensive Political Environment: Glorious Growth Years of the 1960s combined with a closed economy andCold 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 choosefrom "9 models" gives consumers an incredible array of choices; this all foreshadows the problems that the domesticproducers will encounter throughout the 1970s.



Year 1972

Plate 19

Strategy : OffensivePolitical Environment: Glorious Growth Years of the 1960s combined with a closed economy andCold War. Bigness in a mid-sized sedan is the Satellite's way of appealing to the consumer's preference for large carseven 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 oflaundry and a week's worth of groceries." indicates the preference for bigness and roominess in this pre-OPEC era.



Year 1972

Plate 20

Strategy: Offensive Political Environment:Glorious Growth Years of the 1960s combined with a closed economy andCold 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 amass market environment. This is subtle niche differentiation within an entire brand.



ear 1972

Plate 21

Strategy: Offensive Political Environment:Glorious Growth Years of the 1960s combined with a closed economy andCold 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 imperviousto political economy. The eve of the destruction of the pound sterling indicates some downward pressure in pricing forthe Spitfire to American consumers at this juncture. This will accelerate as the decade progresses and a full fledgedsterling crisis accelerates.



Year 1974

Plate 22

Strategy: Offensive Political Environment:Glorious Growth Years of the 1960s combined with a closed economy andCold 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 caris economical, but also does not shy away from its "quality and luxury present in each of these cars." This car bridgesthe two eras pre and post-OPEC oil shock in 1973. The Dart is a transitional vehicle that foreshadows the omnipresentglobal crises that are about to hit the local US.



Year 1974

Plate 23

Strategy: Defensive Political Environment: Watergate and the resignation of Richard Nixon as the OPEC I shock biteshard.Economic Environment:Crisis after OPEC I and imminent hit with OPEC II oil shock in the early years of the CarterAdministration. The Datsun ad tries to look at the energy crisis with optimism. "Surprisingly, many aspects of theenergy crisis have made driving more pleasurable." This ad reassures a frightened motorist that fuel prices will onceagain come back down to normality and that prosperity will be there again.



Year 1977

Plate 24

Strategy : OffensivePolitical Environment:Election of Carter Administration and ending of Viet Nam war. There aresome vestiges of oil price stability after the first OPEC shock begins to wane. The environment braces for the next OPECshock 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 CarterAdministration. The Chevrolet Monza sticks it in the face of the uncertainty that prevails between the double barrelOPEC oil shocks: "5.0-litre, 2-bbl. V8... Turbo Hydramatic." that re-confirms that OPEC I may have been just an aberrationto the American driving experience. Under Gerald Ford's reign, oil price and general crises lull generated a false senseof optimism among consumers; for just a brief period of time.



Year 1977

Plate 25

Strategy : DefensivePolitical Environment:Election of Carter Administration and ending of Viet Nam war. There aresome vestiges of oil price stability after the first OPEC shock begins to wane. The environment braces for the next OPEshock 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 CarterAdministration. The Ford Pinto is the direct opposite strategy from the Chevrolet Monza. Confusion reigns amongproduct planners in these years. The question being if OPEC I in 1973 was just a one time event, or if fuel crisis is now thnorm? In Chevrolet's view it's a one off aberration; but, in Ford's view its not, as it begins to scramble to achieveconsumer relief by visibly subtracting from the true American driving experience that was evident just a few years ago.



Year 1977

Plate 26

Strategy : OffensivePolitical Environment:Election of Carter Administration and ending of Viet Nam war. There aresome vestiges of oil price stability after the first OPEC shock begins to wane. The environment braces for the next OPECshock 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 CarterAdministration. The Mazda GLC means "great little car" is packed with offerings for the new high gas priceenvironment. It is a battle of the import "niches" as it makes references to its competitors the "VW Rabbit" and the"Honda CVCC."



Year 1978

Plate 27

Strategy: Offensive Political Environment:Election of Carter Administration and ending of Viet Nam war. There aresome vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once agarocked 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 CarterAdministration. The BMW 733 takes advantage of the growing despair in the US luxury market after product plannersand 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.



Year 1978

Plate 28

Strategy: Offensive Political Environment: Election of Carter Administration and ending of Viet Nam war. There aresome vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once againrocked 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 CarterAdministration. The Chrysler Cordoba is an attempt to sell lifestyle to those that still have not been rocked by the highgas prices in this era. This is a bold move by Chrysler which eventually leads them to a bail out orchestrated by theCarter Admnistration's George William Miller. It is also the prelude to the appointment of Lee Iacocca and the launch ofthe K-car era of the early 1980s.



Year 1978

Plate 29

Strategy: Offensive Political Environment: Election of Carter Administration and ending of Viet Nam war. There aresome vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once agarocked 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 CarterAdministration. Ford incredulously goes after the growing niche from Germany. This ad's strategy is mystifying to saythe least!



Year 1978

Plate 30

Strategy: Offensive Political Environment:Election of Carter Administration and ending of Viet Nam war. There aresome vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once againrocked 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 CarterAdministration. This ad attempts to reassure Oldsmobile's traditional market which has seen some disturbing trends inthe late 1970s to changes in luxury brand nameplates.



Year 1978

Plate 31

Strategy: Offensive Political Environment:Election of Carter Administration and ending of Viet Nam war. There aresome vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once agarocked 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 CarterAdministration. Toyota enters the luxury segment with the Cressida as traditional domestic three buyers getdisillusioned with some of the tinkering to their brands due to the impact of high oil and gas. Toyota is perhapsinspired by the growing interest in German niche segments like the BMW 733.



Year 1979

Plate 32

Strategy: Defensive Political Environment:Election of Carter Administration and ending of Viet Nam war. There aresome vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once againrocked 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 CarterAdministration. Cadillac reassures its traditional market and base with this ad as "niche" segments from both Germanyand Japan turn on the pressure in this segment.



Year 1979

Plate 33

Strategy: Offensive Political Environment:Election of Carter Administration and ending of Viet Nam war. There aresome vestiges of oil price stability after the first OPEC shock begins to wane. The environment braces for the next OPEshock 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 CarterAdministration. GM is ready with its front wheel drive technology for the new decade of the 1980s. It also has doubledup its efforts to treat rust problems over the past decade with new coated steel.



Year 1979

Plate 34

Strategy: Defensive Political Environment:Second Oil Shock during Carter Administration. Appointment of PaulVolcker 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 ratesand the last of dollar weakness. The Pontiac Phoenix is also directly responding to the high oil price environment as itis delivering "More Pontiac to the Gallon."



Year 1979

Plate 35

Strategy: DefensivePolitical Environment:Second Oil Shock during Carter Administration. Appointment of PaulVolcker 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 ratesand 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 36

Year 1979

PoliticalEnvironment: Second Oil Shock during Carter Administration. Appointment of Paul Volcker at Federal Reserveand 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 ratesand the last of dollar weakness. This ad is impervious to the high oil crisis that has prevailed during the late 1970s. Ittrumpets the new technology that GM engineers have developed that is to "please the ear as much as the eye."



Plate 37

Year 1979

Strategy: Offensive Political Environment:Election of Carter Administration and ending of Viet Nam war. There aresome vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once againrocked 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 CarterAdministration. The new LeBaron Town and Country Wagon emphasizes fuel economy and luxury which is notcompromised.



Plate 38

Year 1979

Strategy: Offensive Political Environment:Election of Carter Administration and ending of Viet Nam war. There aresome vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once agarocked 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 CarterAdministration. The Lincoln Continental Mark V is completely impervious to the high gas and oil prices or anygeopolitical events of this era. It completely knows its market.



Plate 39

Year 1979

Strategy: Offensive Political Environment:Election of Carter Administration and ending of Viet Nam war. There aresome vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once againrocked 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 CarterAdministration. The Celica Supra steps in to offer an alternative to the "watered down" domestic luxury segment aftera significant portion of its market gets rocked by the high oil prices from the OPEC II shock.



Plate 40

Year 1980

Strategy: Offensive Political Environment:Election of Carter Administration and ending of Viet Nam war. There aresome vestiges of oil price stability after the first OPEC shock begins to wane. The second OPEC oil shock has once agarocked 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 CarterAdministration. Renault Alliance niche car emphasizes new technology such as electronic fuel injection together withfuel economy for a niche segment.



Plate 41

Year 1983

Strategy: Offensive Political Environment:Election of Reagan Administration after record high inflation and oil pricesunder the Carter years. The environment is ripe for the appointment of Paul Volcker at the Federal Reserve and a newera of high interest rates and an overvalued US dollar.Economic Environment:An overvalued dollar makes imports cheaper and high interest rates discourage borrowing tobuy a vehicle in the early 1980s. The Honda Accord underscores the case for product. Value for money, or as manywould say: "product product product." This is the anthem that has sent the domestics on the defensive ever since thisera.



Plate 42

Year 1986

Strategy: Defensive Political Environment:The Plaza Accords in 1985 and the intervention of Reagan AdministrationTreasury Secretary James Baker III to devalue the US dollar against the Yen and the Deutsche mark result in a levelingof 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 andGermany, making imports more expensive to American consumers. The move to lever direct investment into the USfrom Japan begins a new chapter in 1985. The Chrysler Conquest is built by Mitsubishi in Japan to counter gains madeby Japanese produced sport coupes like the Mazda RX-7 and the Nissan 300 ZX, that have taken advantage of theovervalued US dollar during the early 1980s.



Plate 43

Year 1987

Strategy: Offensive Political Environment:Plaza Accords devalue US dollar and level playing field for the domesticthree against Japanese imports.Economic Environment:The Reagan tax stimulus program is in full effect. The US economy is booming from the mid tolate 1980s. This Buick advertisement sums it up completely: " Buick Presents a Better Time to Buy," as it emphasizesthe low interest rate environment and the domestics increasing capacity to compete on pricing relative to imports.



Plate 44

Year 1983

Strategy: Offensive Political Environment:Appointment of Paul Volcker at Federal Reserve and high interest ratepolicy 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 thedomestics were vulnerable from a product angle as well as the attractive price in US dollars when the dollar wasseverely overvalued in the early 1980s.



Plate 45

Year 1983

Strategy: Defensive Political Environment:Appointment of Paul Volcker at Federal Reserve and high interest ratepolicy 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 "MatchIt." This ad specifically refers to the Corolla as direct competition which has just received a huge advantage from USmonetary policy and the over-valuation of the dollar.



Plate 46

Year 1983

Strategy: Defensive Political Environment:Appointment of Paul Volcker at Federal Reserve and high interest ratepolicy 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 "bestbuilt American cars" in this ad. It goes on to reassure consumers that they can "still own this much car." This despitethe unprecedented set back from high interest rates and the over-valued dollar that has given imports from Japan andGermany an advantage.



Plate 47

Year 1983

Strategy: Defensive Political Environment:Appointment of Paul Volcker at Federal Reserve and high interest ratepolicy 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 alsotake advantage of the overvalued U.S. dollar and deliver competitive prices, but at the expense of localemployment and spinoffs.



Plate 48

Year 1983

Strategy: Defensive Political Environment:Appointment of Paul Volcker at Federal Reserve and high interest ratepolicy 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 buyersthat its still a "Buick." This despite the visible cutbacks it has had to make to save on price as well as fuel economy inthis difficult early 1980s era for the domestic U.S. producers.



73

Deutsche Mark Politics



74

Major Auto TransformingEvents over the Past Half

Century1. Richard Nixon, Arthur Burns and the Cold War(1970-1974)

Richard Nixon’s election in 1968 was significant in that thiswas one of the most friendly Presidents to the manufacturingsector in the history of the US. After Nixon’s loss in the runup to the 1960 election, he blamed then establishment FedChairman William McChesney Martin Jr. in orchestrating acredit contraction that ended his political run.

Nixon’s appointment of Keynesian Federal ReserveChairman, Arthur Burns in 1970, ensured that he wouldreceive pro-fiscal support from financial policy. Burns’ belief in a natural rate of unemployment at four percent and inthe Phillip’s Curve where more inflation led to a higher sustainable employment rate, governed his policies at theFed throughout the 1970s.

Central to his monetary policy was a targeting of the FederalFunds rate and the short term and long term commercialmarket rates. He opted to keep these as low as possible vialoose monetary policy to the benefit of the auto industryand 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 geo-politics and the process of maintaining Japanese support of US military installations in the south Pacific, especially duringthe Vietnam War in the early 1970s.

2. OPEC Oil Shocks I and IIThe OPEC oil shock from October 1973 to March 1974,

caught the domestic auto sector off-guard, but it was the



75

Major Auto Transforming Eventssecond oil shock during the Carter Administration that didmost of the damage.

When the second oil shock came in 1978, the domestic autoproducers were in a general sense of panic to redesign their muscle car offering to the public. This rush produced someof the most hideous models ever and initially catapulted

Japanese imports into the psyche of the American consumer.

3. The Demise of George William MillerThe short lived Federal Reserve Chairman continued thepro-keynesian policies of the Burns Fed. He becameknown as an outsider, who was even more dovish oninflation and on interest rates, and eventually resignedhis post to move over to the Treasury and negotiate thefirst Chrysler loan bailout of $1.5 billion. In short, a very

friendly and pro domestic auto sector Fed Chairman andTreasury Secretary. Miller’s term was short, but verysignificant, in that his policies of a devalued dollar ensuredthat Japanese imports were held at bay during this late1970s period which was critical for re-engineering a contextfor the “Big 3.”

It capped off the 1970s as being very friendly to thedomestic production of Ford, GM and Chrysler at a timewhen they were ill prepared for the second OPEC oil shock.

4. Paul Volcker’s Monetary ShockOne of the greatest enemies to the domestic three autocompanies was Paul Volcker’s tenure at the Federal Reserve.Whether intentional or not, Volcker’s fight against inflationasserted the new automotive order in the US.

After Arthur Burns’ focus on a four percent rate of unemployment and George Miller’s refusal to raise interestrates during the final years of the Carter Administration, adouble digit rate of inflation became the political focus in thebeginning of the new decade of the 1980s.



76

The Great Auto Crash Jimmy Carter, under intense pressure from Wall Streetand financial interests, especially within his ownAdministration, appointed a career civil servant to thepost of Federal Reserve Chairman.

Paul Volcker immediately changed the focus of monetarypolicy from one that targeted unemployment and lowinterest rates, to one that restricted the fuel thatdetermined both of these targets.

Influenced by the Chicago School of free marketeconomists, led by Nobel Laureate Milton Friedman, thischange had an immediate impact on business and theformation of forward-looking scenarios by both businessmanagers, owners as well as labor.

The record twenty percent prime interest rates created a

spiral that was most unfriendly to industrial groups, suchas Ford, GM and Chrysler. A crash in growth, coupled byhigh financing costs and a huge overvaluation in thedollar relative to the yen; added one further element tothe gains that were being made by Japanese imports in thelate 1970s under the second OPEC oil shock.

An overvalued dollar ensured that very competitiveToyotas, Hondas and Nissans were another factor thatwould ensure the slow march to obliteration for Ford,GM and Chrysler. This currency event persisted from1982 to 1985, when the Plaza Accord or Agreementcreated a broad consensus to intervene in the currencymarkets to devalue the dollar and save the domesticindustry in the short term.

5. James Baker’s Fantastic Tenure at TreasuryProbably one of the most competent Treasury Secretaries inmodern memory was James Baker III. Appointed as TreasurySecretary by Ronald Reagan, Baker was the architect of policies that would offset some of the negative effects of

Japanese import competition.



77

Major Auto Transforming EventsHis move to offset the strong dollar was equivalent in effectto his move later in the decade to undo some of the stimulusthat the Reagan tax cut had caused.Baker’s move to meet the major Finance Ministers among thesix largest industrial countries in New York at the Plaza Hotel,formed what was now infamously known as the “PlazaAccord.”

This was basically an agreement in co-ordinating interventionin the world’s foreign exchange markets, by buying DeutscheMarks and Japanese Yen, and by selling the dollar. This effectwould reverse the incredibly competitive prices facing USconsumers on Japanese cars.

Further, Baker moved to persuade the Japanese groups toincrease 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 Nissanand Honda. Toyota was the very last player in thisdepartment, and they continue to lag the other two producersin their commitments to making more than half of all the carsthat they sell in the US economy.

By contrast, Honda’s commitment to direct investment hadpre-dated the Plaza Accords, and Nissan’s commitment toproducing vehicles in the US market had done likewise.

In the political sphere, this long term investmentcommitment and creation of jobs in the US, split the politicalconsensus geographically between Detroit and the southernUS states.

Since Nissan, Honda and Toyota had committed most of the new investment in the southern states, any moves toregulate imports on behalf of the domestic three, were metwith opposition in Congress. No longer were traderestrictions possible on a political basis, and the more that

depressed southern regions received wage-enhancing



78

The Great Auto Crashinvestment by the Japanese; created a natural barrier of support to the foreign groups in Washington.

6. Clinton and RubinThe 1990s were an impressive decade in terms of growth andstability. This was achieved with some good skill from the likesof Bill Clinton and Treasury Secretary Robert Rubin, butalso came about through a very lucky development of events.

Not only were oil prices being kept at bay and consumers wereenjoying historically low rates, something more pronouncedwas happening to the auto industry. Spectacular gains ininnovation and the digitization of the automobile was fastreplacing the “mechanically” produced vehicles whichreigned over the past half century.

When mechanical automobiles naturally drove sustainableproduction and employment through the three to five year scrappage cycle. A new instrument needed to be created thatwould continue this sustainability; when now, in fact, theaverage age of the car had jumped from three to five years,to something that was between five and ten years, if notlonger.

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 wouldissues such as “rust” or “mechanical” defects matter anymore.When you create a product that naturally extends its lifecycleand practically doubles it, then sustainability in productionand employment become instant issues.

These were addressed, however, in the 1990s via RobertRubin’s deregulation of financial markets, which were nowcapable of producing all types of hybrid financialinstruments. This “financial magic” enabled new schemes todevelop by auto producers to the point where they hadbecome banks or finance companies in equal proportionsas they were designers and manufacturers of products.



79

Major Auto Transforming EventsWhat the Clinton Administration did, was to lay theframework for technological innovation in finance andbanking. De-regulation of Glass-Steagall, which separatedthe various channels of financial services were mergedtogether to produce a whole new set of instruments thatwould be available to dealerships that sold cars.

A buyer need not buy a car anymore, but could lease it. Theycould lease it for three, four or five years, or they could

terminate their lease even after one year and participate inthe new design sweepstakes that brought the most recenttrends to market.

Ownership was a thing of the past and consumer’s were literallybuying a range of miles or kilometers, but were also participatingin the new design age by changing products very frequently. Thiscutting edge culture, created by consumer financial innovations,ensured that new cars would sell fast and quick.Sustainable production has now been re-defined and wasno longer burdened by the old industrial age “scrappage”concept, where a car needed to be replaced based ondepreciation and malfunction.

The cars that were being replaced in the 1990s financialderegulation era, were cars that provided excellent product inthe used car market due to their lasting quality and durability.

Once again, policy had created a new scenario for theindustry, one that this time was favorable in its entirety andin support of sustainability across the entire industry.

7. Greenspan’s Contribution to SustainabilityFederal Reserve Chairman Greenspan was appointed byRonald Reagan in 1987. Just as Greenspan became FedChairman, the Volcker policy of controlling inflation bymoney supply control became a thing of the past. Greenspanis probably one of the most qualified Federal ReserveChairman ever from the perspective of his eclectic exposure

to both business and academia. Greenspan was also very similar



80

The Great Auto Crashin his approach to Treasury Secretary Rubin, who made adetermined effort to deregulate the financial markets in the US.

Rubin’s repeal of Glass-Steagall was welcomed by Greenspanat the Fed, who believed that qualified bankers and financierswere best left to regulate themselves. That they would havethe foresight to spot potential problem spots in the longer term horizon that regulators would not.

In this world of both Rubin and Greenspan, financialderegulation was the only natural way to address the fantasticgrowth in technological innovations; which more or lesswent hand-in-hand. Greenspan’s era was known for lowinflation, even though the Fed was nowhere near the strictmonetarism doctrines during Paul Volcker’s reign.

Also, it was an era where Greenspan practiced pre-emptive

policy strikes, which was later more formally exposed andextended by his replacement, Ben Bernanke.

Greenspan’s Fed used the Federal Funds rate in order toregulate what commercial banks charged themselves, as wellas 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 Greenspancould only play with the hand that was dealt to him after decades of globalization, free trade and rapid technologicaladvances.

The fact that real estate was left as one last “seemingly safe”sector for which to lend to and invest in was really anoutcome of the demise of a “mixed” economy in the USmore by accident than by design.

The rise of technology and the internet short circuited many“middle men” in the traditional economy, whereas dirtyindustry such as steel production and tedious productionwas encouraged to shift to China and India to take advantage

of the cheaper labor and tax regimes in these countries.



81

Major Auto Transforming EventsIn essence, the US consumer was left with only real estate andthe auto sector where they would make their incomes.Greenspan was constrained by the fact that any action toraise rates in the short term would have a far more detrimentaleffect on economic activity.

Much more vulnerable was the US economy now, than evenduring the reign of Paul Volcker’s regime at the Fed in the early1980s. The early 1980s era of a mixed economy needed a

rate in excess of twenty percent to ensure that price increaseswere managed effectively.

The economy that Greenspan managed, by contrast, wouldexperience a “nuclear winter” should rates rise to suchastronomical 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 towork with, ensured that the financially deregulatedeconomy 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 aswith Robert Rubin, Alan Greenspan worked to ensure

that sustainability for cars would continue under hiswatch at the Fed.

8. George W. Bush and the Rise of HybridsAfter September 11, 2001, the nature of the US economychanged radically from the 1990s defined by financialderegulation, open and emerging new markets and the rise

of an internet economy.The government of George W. Bush was much more focusedon geo-politics at the expense of the sustainable financialsystem that Clinton and Rubin had built throughout the1990s. The appointment of Dick Cheney as Chief of Staff andof Donald Rumsfeld as Defense Secretary ensured themarginalization of the financial system throughout this period.



82

The Great Auto CrashAlthough the system was assisted by a policy of deregulation,there was no underlying support for a mixed economy by thisAdministration that would underpin the sustainability of this system.

In addition, the increasing rise in oil over this decade at theexpense of consumer product manufactures such as cars andtrucks, was perfectly acceptable to Bush’s people. There wereno initiatives as in the Nixon Administration and in the

Carter Administration to attempt to address the skyrocketingprice increases.

Markets in oil were left to fend on their own terms and theoutcome for automotive was devastating. Not because of these oil price increases, although they certainly had someimpact (recall that the difference in oil costs from the mostfuel efficient vehicle to the largest SUV was just a fewthousand dollars per annum; indicating that US consumerswould not sacrifice their preference for larger vehicles over such minor differences in price, instead they would prefer toadjust other “discretionary” spending habits to offset anyOPEC oil increases), but because of the end to the systemof financial sustainability that began with problems withinvestment house Bear Stearns in New York in 2007.

If we summarize the events which led to the collapse of GMand Chrysler we can construct a chronological story whichmay follow this type of pattern:

a) Reliance on Security and the Threat of Terror fromSeptember 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 theexpense of domestic manufacturing and “dirty”labor intensive industries. This also leads to auni-dimensional reliance on housing and real



83

Major Auto Transforming Eventsestate, finance and to a lesser extent automotive.

c) The third remaining industry; automotive, issusceptible to the end of the Clinton/Rubin eraof creating a sustainable financial safety net.

d) Rapid technological advances in materials andthe digitization of new cars, extends their lifeorganically to a range of between ten and fifteen

years in many cases. Or to a point where they canbe reasonably expected to achieve over 300,000kilometers or 200,000 miles in their life cycle.Many cars and trucks coming off of a four yearlease, can easily be operational for an additionalfour to five years in the used car market.

e) The continuation of financial sustainability andfinancial innovation is key to get consumers to“roll-over” their cars and trucks after just two tofour years, even though their natural life is at least double or even triple this term. Any effect that would cripple this sustainable financialmodel would devastate the auto sector in theshort term.

f) Since real estate became the key sector, it wasnaturally susceptible to the concept of “marginalization.” This happens when more andmore employees are added to the mortgage orsales business, and where credit worthy buyersdiminish as more and more are drawn in toeither seek employment in this sector, or to buya house. This happens when there is no balancebetween sectors within an economy as is the

current case in North America.



84

The Great Auto Crash g) Alan Greenspan at the Fed understands that

to upend any cycle in a uni-dimensionaleconomy takes much less interest ratemovements than it did when Paul Volckerwas Chairman. From this rationale a twentypercent rate in 1982 is equivalent to a six orseven or eight percent rate underGreenspan’s tenure. It has become far easierto instigate a downturn in the Bush II era,than it has during the 1970s or when RonaldReagan was in office. On this basis,Greenspan was inclined not to attempt thisexperiment, so he kept rates low.

h) Wall Street reaches an end to financialinfinity. All of the “magic” that gave financeits innovative growth leading to thesustainability model in production andemployment that the auto sector craved inlight of the natural improvement in the life

of cars and trucks, came to an abrupt crashwhen real estate “marginalization” set in onthe real side of the economy. This onedimensional sector that everyone came tohang their hat on was being slowlytransmitted to a state of crisis on Wall Street

as early as 2005.Only a few analysts saw this, and these were not theones that had any kind of following or voice. Besides,even if they had the long term inertia began by Rubinin the 1990s through deregulation and the repeal of Glass-Steagall would be almost impossible to address or turn around in a few years.



85

Major Auto Transforming EventsFree trade, rapid technology and uni-dimensionalmarginalization combined to administer an ultimateblow that would send auto sales cascading downwardfrom a perch of some seventeen million units to ninemillion units, wiping out all of the benefits of financialsustainability that was started in the early 1990s.

9. Obama’s Quick Surgical BankruptcyBear Stearns implosion in 2007 brought down LehmanBrothers, Citigroup and AIG. Some of the most vitaland important organizations that enabled theimplementation of the financial sustainabilityexperiment which in turn would ensure automotivesustainability in production and employment.

The final two years of the Bush II years were ominous

for the auto industry domestically and for the geographicseparation of Detroit from the southern tier states inthe US. Republican sympathies were more aligned withTennessee, Louisiana, Mississippi, South Carolina andTexas than they were to those of Detroit.

Needless to say, these were also the locations of thenewer Japanese factories and assembly plants. Thesenewer investments had a natural advantage over Detroit;they were not burdened by labor legacies and they hada far younger workforce that was more flexible andquicker 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 basedcompanies, than they would for the more flexible Japanese producers in the southern states.

On the one hand, it was the cumulative effect of decadesof detrimental policies combined with the naturalevolution of technology which had more to do withformer GM CEO Rick Wagoner’s forced resignation,



86

The Great Auto Crashthan it had with his shortcomings as the leader of thelargest domestic car company.

GM was a legacy company, and as a consequence of this, itwas naturally inclined to move very slowly under periods of rapid change in geo-politics and geo-economics. In the shortto medium term GM just had to accept the hand that it wasgiven by these events and try to work around them the bestthat it could. In retrospect, it was a bad judge of these geo-

political trends as well.Barrack Obama’s election came because of the collapse of thisera of financial sustainability, which in turn created asustainable auto industry from 1991 to 2007. Obama’s actionsaddressing this abrupt change in the fortunes of the USeconomy were more in favor of a “reality check.”

His administration has primed the domestic auto sector toaccept the reality of rapid technological change in cars andtrucks to a point where his is the first Administration to callfor outright forward policies on green technology, hybrids andthe overall fragmentation of the auto industry.

An alternative strategy to this would have been some formof fiscal policy that would aggressively have used incentiveschemes to get sales back on track to attaining the sixteenmillion unit point that had existed before the collapse of financial sustainability.

Also, Obama, Summers and Geithner have moved to ensurethat financial deregulation will end. Their promotion of moreregulation in response to the crisis and witch hunt of

derivatives traders, will ensure that the financial sustainabilityera is a thing of the past.

The other major challenge of the Obama administration willbe in addressing the crisis in housing and real estate. Thegranting of credit for cars and trucks was very much a featureof this system of consumer borrowing, where housing equitywas transferred over to secure a vehicle.



87

Major Auto Transforming EventsWith the onset of financial re-regulation, how can thisAdministration ensure that production and employmentsustainability in the auto industry will achieve the sales trendsthat it achieved pre-2006?

Or, will sustainability in auto production and employmentreally become a thing of the past? Will this Administrationadopt a more defensive posture to the benefit of Detroit inthe form of more protectionism and the regulation of free

trade in cars and trucks?Or will the presence of Japanese and Korean plants in thesouthern tier of the U.S. work to offset any of these movesin Washington where they will work to assert their regionaldevelopment interest, as well as the interest of the foreignproducers in the US?

One thing is for certain in the short term, or in Obama’sfirst term; and that is that sustainability in the auto sector hascome to an end, or has been radically redefined. In other words; will financial sustainability be finally replaced bysome form of protectionism and the fine-tuning of the modelof 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 thepost-war Roosevelt era?



88



89

Addendum:



90

European SustainabilityThis book has mainly been about how Japanese autocompanies came to share a large component of America’ssustainability in production and employment in this, oneof the most important sectors to its economy.

European producers have been largely absent from our analysis and discussion of random political events that haveseen the fortunes of GM and Chrysler collapse in the greatauto crash of 2009.

As a footnote, what can be said about Europe and its autoindustry? Since the US is mainly a market for Germanproducers such as Mercedes Benz, BMW, VW and the Audibrands, 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 EU’sindustry country by country and see how many vehicles aresold in the country in question and just how many areproduced locally in the country.

As the table below shows, Germany, France and Spain all

produce much more than what they buy in their localmarkets. The auto sector, therefore, is much more importantto the national economies of Germany, France and Spainthan it is to their fellow EU colleagues. Germany, by far thelargest producer, sells much of its production globally andespecially to US based consumers. Of all sales directed to theUS market, it has only been BMW, with its Spartanburg

South Carolina assembly plant, that has produced any luxurybranded product in the U.S. (first its Z3 and Z4 models andthen its SUV version branded the “X5” has been producedat Spartanburg).

From a US based perspective, EU production which is mainlydirected to a “niche” luxury segment, was exempt largely frominitiatives in lobbying for investment in the domestic market.



91

European SustainabilitySince Japan’s producers were much more “mass market” itcame out of logic, that policy during the Reagan years of the1980s was directed aggressively towards their gains in the massmarket over those of GM, Ford and Chrysler.

This fundamental fact and feature of the trade and commercialrelations between the EU and the US over the auto sector, willensure that very little EU investment will be targeted andlevered into the US economy in the hopes of maintaining

domestic sustainability harmony. Daimler’s foray into theUS market after it bought Chrysler, is one further reason whypolitical actions will not encumber EU production, andmainly 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 gainedhandsomely from their memberships in the EU. All of theseregions produce many more vehicles than they consumelocally, but more of their parts are imported into theproduction chain than in the mature EU member states suchas France and Germany.

However, overall, these new member states have gained insustainability through their EU memberships over the past

decade. This is in contrast with the UK, Netherlands andItaly. These countries are mature founders of the EU, withperhaps the minor exception of the UK.

Their contribution to overall EU sustainability comes at theexpense of their local markets. In the case of the Netherlands,almost all auto sales are imported, with the exception of a fewminor parts producers domestically. Italy also buys morevehicles than what are produced locally with the Fiatconglomerate. In the case of Italy, its locking of the lira toform the Euro has greatly benefited its domestic consumersby allowing them to import product at an economical level.

The case of the UK is interesting from the perspective thatlike the policy in the US of levering Japanese investment, the

UK followed a similar strategy throughout the 1990s. With



92

The Great Auto Crashmany Japanese producers insistent that sterling join theEuropean Exchange Rate Mechanism, its ejection out of thisframework in 1992 did not harm the progress of Japaneseinward investment.

Despite the setback to sterling and the addition of instabilityto Japanese exports to the EU, the UK has provided a sound“historical” location to produce with a vast automotivehistory 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 itsparticipation in the EU.



93

European SustainabilityCountries 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 domesticsustainability in employment and production since theyassemble 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 inauto assembly since they buy much more than what theymake in their domestic economies.

Non-EU Evidence

• US buys far more than it produces• Japan produces much more than it buys



94

The Great Auto CrashEvidence in EU Passenger Car Market(in millions)

Sold ProducedGermany 3.5 5.4France 2.0 2.7Italy 2.3 0.9Spain 1.6 2.0UK 2.5 1.4Netherlands 0.6 0.2Austria 0.3 0.25Denmark 0.15 0Sweden 0.27 0.29Finland 0.14 0.032

Totals 13.36 13.17

Non-EUUS 13.2 8.7Japan 4.2 10.0



Renault and Daimler in Action

In 1990, both a French and a German auto company decidedto do something that was only practiced in Anglo-Saxonstyled economies. Renault’s acquisition of Nissan and

Daimler’s takeover of Chrysler were as much reactions togeo-politics within Europe, as they were attempts to asserttheir respective might in the global automotive markets.

In the late 1960s, German Chancellor Willy Brandtbecame the voice in favor of a controlled system of exchange rates which would regulate wild swings in localEuropean currencies to the benefit of trade and investmentwithin the region.As the global system of finance broke down with the formalending of the Bretton Woods system during RichardNixon’s presidency in the early 1970s, the European’smoved to create a regional system that would serve theinterests of their auto producers.

Not only did each major European country have its ownauto producer (Italy had Fiat, France had Renault and PSV,Germany had BMW, Daimler and VW, Sweden had Volvoand Saab and the UK had Rover and numerous smaller andmore diverse producers) but they were increasingly accessingthe markets of neighboring countries not to mention thosethat bordered the closed east bloc communist states.

95



Just as the Plaza Accords, and initially, Paul Volcker’sappointment as Federal Reserve Chairman, did politicallymove exchange rates in opposite directions in the US, theEuropeans disdain for this kind of uncertainty in commercialrelations quickly tabled a framework in the 1970s to combatwild currency fluctuations. This being consistent to their Social Democratic tradition in both France, Germany andthen in the Benelux grouping of states.

Although the European Monetary System of regulatedexchange rates was first promoted by German Chancellor Willy Brandt in the late 1960s, it was not until the electionof Helmut Schmidt in Germany, and Valery GiscardD’Estaing, as French President, that a formal system of regulated financial relationships within Europe took holdthrough the European Monetary System and more

specifically, the Exchange Rate Mechanism or ERM.From the view of European auto producers, sustainabilityand growth in the auto sector in their home countries couldonly be insured through an aggressive push into foreignmarkets 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 aswell as the emerging Chinese market.

However, stability in the exchange rate and a harmonizedcentral bank under the new European Central Bank or ECB,would also fortify their regional base and quickly add to thegrowth in sustainable domestic production. Daimler’s moveto acquire Chrysler in 1998 was a move to diversify its marketpresence 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, butdecided in favor of acquiring Nissan from a purely defensivegesture. As France was being further drawn into the EU, andas France was in the process of losing the franc as a vital

financial tool that defended sustainability in its own market


96



among domestic producers, Renault was unleashed by itsgovernment to aggressively insure its domestic market sharefrom mainly EU based auto predators, especially the powerfulproducers that were pursuing an EU-wide policy in Germany.

In a way, Renault’s successful acquisition of Nissan to now,was attributable to its fear of an EU-wide automotiveonslaught on the French market. In retrospect, this moveworked to Renault’s benefit.

Conversely, Daimler strayed too far from its traditional“niche” market in the US and was ultimately forced to retreatto a segment that it truly understood- the luxury market inthe US. The challenge of selling to an American market thatwas mass and at the lower end of the scale of mass retailingproved to be fatal to its growth plans and also a setback ininsuring sustainability both in the US and in Germany after it was forced to abandon Chrysler.

Renault and Daimler in Action

97



AAIG 85American Economic Review xiiAudi 70-71, 90, 96

BBaker, James 22, 27, 33-34, 40,

46, 53, 59-61, 63, 65,

67-68, 71, 76Barro, Robert xiiBear Stearns xiii, 60, 82, 85Berlin Wall 36, 40, 87Bernanke, Ben 45, 65, 80Big 3 xiii, 11-12, 19, 23-30, 33-34,

37, 39, 46, 63-64, 75BMW 13, 26, 70-71, 90, 95-96

Brandt, Willy 95-96Bretton Woods 67Buckley, William F. 25Bundesbank x-xiBurns, Arthur Frank 10-11, 65, 74-75Bush, George H.W. 35-36, 44-45, 84Bush, George W. 4, 46, 49, 66, 81

CCarter, Jimmy 16, 18-19, 24-25, 36,

65-67, 75-76Cash for Clunkers 51Cheney, Dick 15, 81Chicago School xiv, 76Chrysler Corporation xii, 1-2, 18-19,

23, 25, 35, 39, 44-46, 48, 61,65, 75-76, 82, 90-91, 95-96

Charger 25Cordoba 25

Citigroup 85Clinton 4, 37, 39-40, 43, 45, 47, 49,53, 59, 62, 65-68, 71, 78-79, 81, 83Cold War 12-13, 23, 33, 52, 59-60,

62-63, 74

DDaimler 91, 95-97Datsun 12-13, 19, 23Détente 17Dot Com Bubble 43

EEuropean Central Bank x-xi, 96

European Currency Union xiExchange Rate Mechanism 19, 71,

92, 96

FFederal Reserve x, xvi, 4, 11-12, 20,

24, 26, 43, 59, 67, 75Federal Reserve Chairman ix, 16,23, 31, 33, 65-66, 68, 74-76, 79, 96

Federal Reserve System xiii, 15Fiat 13, 41, 48, 91, 95Ford Motor Company 1, 23, 25, 35,

39, 45-46, 54, 61, 65, 75-76, 91Lincoln 26Mustang 25Tempo 25Topaz 25

Ford, Gerald 15-16, 65Foreign Direct Investment 20Free Trade Agreement 4, 37, 41,

54-55, 62Friedman, Milton 76

GG7 2, , 27, 34, 62Geitner, Paul 86General Motors Corporation ix, xii,

2-3, 23, 25, 35, 39, 44-46, 48,58-61, 65, 75-76, 82, 86, 90-91

Buick 26Cadillac 26Chevelle 25

98

INDEX



Corvair 13Chevy 1

EV1 39Pontiac 25Giscard D’Estaing, Valery 96Glass Steagall Act xiv, 42, 60, 79-

80, 84Globalization xiv-xv, 4, 12-13, 35,

39, 42-43, 45, 80, 87Greenspan, Alan ix, xii-xiii, xv-xvii,

4, 15, 22, 26, 35, 43-44, 46,65, 68, 79-81, 84

HHarvard University xiiHonda 12-13, 23, 26-29, 32, 35, 39,

45-46, 53-54, 56, 60, 63, 76-77Hyundai 46

IIacocca 18, 25

KK-car 25Kantor, Mickey 66, 68, 71Kemp, Jack x

LLaffer, Arthur 25Lehman Brothers xiii, 44, 60, 85LIBOR xiiLouvre 22, 27, 34, 62Lucas, Robert x-xi, xiv

MM3 Money Supply xiMartin, William McChesney10, 66, 74Mazda 54, 56Mercedes Benz 13, 26, 70, 90Miller, George William 18, 65, 67,

70, 75

NNader, Ralph 13

NAFTA 41-42, 53-54Nissan 12, 19, 23, 26-29, 32, 35,

45-46, 53-54, 56, 60, 63,76-77, 95-96

Nixon, Richard Milhouse 10-12, 16,32, 36, 52, 59-60, 63, 65,

74, 82, 95North American Free Trade

Agreement See NAFTAO

Obama iv, 48-51, 58, 65, 85-87OPEC 1-2, 10-11, 16, 21-24, 27, 29,

32, 43, 46, 50, 55, 59-60,67, 69-70, 72, 76, 82

PPeugeot 13Plaza Accords22, 27, 34, 46, 53-55,

59-60, 62-63, 67, 69-70, 72,76-77, 96

PSV 95

QQuarterly Journal of Economics xii

RReagan, Ronald xvi, 22, 25-26,

52-53, 59, 62-63, 65-68, 70-71,76, 79, 84, 91

Regan, Donald 27, 33, 66Renault 13, 41, 95-97Roberts, John Paul 25Rover 95Rubin, Robert 39, 42-43, 49, 60,

62, 65, 78, 81, 84Rumsfeld, Donald 15, 81

Index

99



SSaab 95

Schmidt, Helmut 96Scrappage 7, 78-79September 11, 2001 ixShadow Banking 43Shelby, Richard 44Shultz, George Pratt 10, 15, 33, 65Simon, William E. 10Stockman, David 25Sub Prime Mortgage 44Subaru/Isuzu 54Summers. Larry 86Sustainability 3-4, 40-41, 48, 52,

56, 79, 90SUV 1, 36-37, 40, 60, 82, 90

TTARP 48, 50Thatcher xThatcher, Margaret xvithe Great Depression 24the Greenspan Fed xi-xiii, 1The National Review 25Townsend Greenspan 26

Toyota 12-13, 19, 22-24, 26-29, 31,35, 39, 45-47, 54-56, 60-61,

63, 76-77Prius 47

Trickle Down Economics 26Trudeau, Pierre Eliot 12

UUAW 11

VVietnam War 17, 74Volcker, 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 95VW 95

WWage and Price controls 12Wagoner, Rick 46, 58, 86Wall Street ix, 84Weinberger, Caspar 15World Trade Centre ix, 45


100



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the great auto crash

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