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Friday, July 5, 2013

Detroit's Biggest Mistakes

Detroit’s Worst Mistake Ever Nov. 7, 2012 by in Ward's Automotive Final Inspection

Detroit auto makers wasted at least $50 billion during the past two decades in failed efforts to impress Wall Street and raise their stock prices.

History of Automotive Boondoggles

I recently blogged about some of the auto industry’s biggest boondoggles of the last 25 years and asked readers to contribute their thoughts.

My email bulged with suggestions, especially related to the Detroit Three.

Many mentioned General Motors’ misguided attempt to reinvent itself with Saturn and ill-advised investments inFiat and Saab. Plus, there were vehicles such as the infamous Pontiac Aztek and the entire Hummer brand. Others mentioned questionable adventures at Ford, such as its purchase of Jaguar and Volvo, and numerous bad cars going back to the 1970s including the Pinto subcompact and Mustang II.

Readers also pointed to head scratchers at Chrysler such as the TC by Maserati, a gussied up K-car with a Maserati badge; the odd-looking Plymouth Prowler; and the disastrous “partnership” with Daimler that ended in divorce.

But to ferret out the absolute worst mistakes Detroit has made in recent history, I look to professional automotive observer and author Maryann Keller. She has been enormously influential since the early 1980s. After a 28-year career as one of Wall Street’s top auto analysts she now runs her own company, Maryann Keller & Associates. She is as tough and insightful as ever.

During a recent speech to the Society of Auto Analysts, Keller unleashes her own list of auto industry blunders, and her choices make most of the items above look like minor glitches.

Detroit auto makers wasted at least $50 billion during the past two decades in failed efforts to impress Wall Street and raise their stock prices, she says.

That incredible figure includes stock buybacks, excessive dividends and diversification efforts, all of which could have been spent making better products. GM alone doled out $20 billion from 1986 to 2000 on stock buybacks and actually borrowed money it did not have to pay dividends from 2005 to 2008.

Ford kissed off half the cash it had on hand in 2000 creating a special dividend of $10 per share, Keller says. GM and Ford also wasted billions buying rental-car companies that hid excess production capacity and threw away billions more for e-commerce efforts that looked sexy during the Internet bubble economy but ultimately yielded zip in revenue and profits. Also on her list are the names of financial-services companies, vehicle retailers, recyclers, junkyards and mortgage companies. All were purchased in an effort to add glamour and growth to auto maker bottom lines, but they did neither.

Of course, these strategies did not look quite so boneheaded at the time. In the late 1990s, auto companies were considered old-fashioned. No matter how many vehicles they sold and how much cash they raked in, their stock prices looked weak compared with the soaring value of technology and Internet stocks.

So auto makers tried to redefine themselves as something other than companies that built and sold cars and trucks.

And this was the Detroit Three’s biggest mistake ever: They tried to be something other than vehicle manufacturing companies. When they focused on being banks and mortgage lenders and impressing Wall Street, they took their eye off the ball of their core business. Design faltered, quality slipped and market share skidded. Disaster ensued.

Ford was first to see the error of its ways and avoided bankruptcy. GM and Chrysler were not so lucky.

But as Keller points out, “Wall Street didn’t make these decisions; the CEOs did.”

I currently am testing vehicles for Ward’s 10 Best Engines and as a judge for the North American Car and Truck of the Year awards. Detroit’s new products such as the Cadillac ATS, Ford Fusion and Dodge Dart are terrific. Detroit auto makers clearly have their eye back on the ball. It shows in vehicle sales numbers, on their bottom line and their stock price. Let’s hope they never again try to be something they are not.

dwinter@wardsauto.com