How Ford and GM Turned a Corner

The Detroit automakers are bouncing back faster than expected.

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Ford Fiesta driving along a windy road.

Behold the Ford Fiesta. The newest addition to Ford's fleet is cute and perky, with solid handling and gas mileage that will make greeniacs grin. Japanese automakers have been building quality subcompacts for years, and while vehicles like the Honda Fit, Honda Civic, Toyota Corolla, and Nissan Versa typically earn strong reviews, they don't usually mark a crowning corporate achievement.

For Ford, however, it's different. For years, the No. 2 Detroit automaker turned out bland compacts and subcompacts, while focusing heavily on trucks and SUVs that were far more profitable. Neglecting the bottom end of its lineup nibbled away at Ford's customer base, then became a full-blown crisis when gas prices hit $4 per gallon in 2008 and buyers shunned the big vehicles that Ford was overdependent on. The new Fiesta—ranked first out of 31 vehicles on U.S. News's list of affordable small cars—shows that Ford got the message and finally stopped papering over the holes in its lineup. The prodigal automaker has returned to the fold.

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Ford has the profits to prove it. After years of steep losses, the automaker turned a $2.7 billion profit in 2009—a horrible year for car sales—and earned $4.7 billion in the first half of 2010. And Ford's not the only comeback carmaker. Barely a year after its humbling bankruptcy filing and $50 billion government bailout, General Motors has returned to profitability, with a public offering likely this fall. That will allow it to start buying out Washington's 61 percent stake in the company. Even Chrysler, which got its own bailout last year and is considered the most endangered big automaker, has been cutting costs and boosting cash flow ahead of schedule.

President Obama is so confident in a Detroit turnaround that he recently pledged that U.S. taxpayers would "get all the money back that we invested"—a hefty $85 billion for the industry as a whole. The domestic auto industry, he said, "tells a good story." There are still many chapters left to be written, but revival is emerging as a dominant theme. Here are some of the factors that have helped Detroit get its groove back:

Better cars. Financial engineering might help banks burnish their luster, but automakers rise and fall based on the quality of real products driven by ordinary people. And tangible improvements are finally paying off for Ford and GM. In J.D. Power's rankings of initial quality, the domestics, driven by Ford, are now slightly ahead of imports. David Champion, director of automobile testing for Consumer Reports, says that Ford's turnaround actually began several years ago with a gradual but steady improvement in reliability. "The Flex, Taurus X, Focus, and Escape all came up from disastrous levels to become reliable cars," he says. Ford's overall reliability, according to CR's methodology, is still middling, due to weaker models like the aging Focus compact and the old Explorer SUV being replaced by a brand-new version out this summer. But the Fusion is CR's highest-rated sedan, and a shining star for Ford.

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GM's overall reliability is still near the bottom on CR's list, although a rush of new models could pull that up if the company proves itself over time. But GM has earned style and performance points with vehicles like the GMC Acadia crossover, the Buick LaCrosse, and Cadillac CTS sedans and the Chevy Camaro muscle car. "They're doing it with charismatic cars," says Champion. Chrysler, with a dearth of new vehicles, is still languishing at the bottom of the reliability report card. But its new Jeep Grand Cherokee has at least impressed critics with its plush, Teutonic interior and rugged capabilities.

Better reviews. Detroit executives complained for years that the improving quality of their cars went unnoticed by the press and the public. That's changing, possibly with the help of some sympathy points granted to the Detroit 3 as they recover from their troubles. A recent issue of Motor Trend, for instance—not usually soft on Detroit—declared on the cover that "Buick is Back!" Kelley Blue Book's recent list of the "10 most comfortable cars" includes two Buicks, two Chevys, one Ford, and one Chrysler. And the automotive journalists who vote on the North American Car and Truck of the Year awards gave both to Ford this year: for the hybrid version of the Fusion sedan and a nimble, multipurpose van called the Transit Connect.

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Outsiders. The conventional wisdom in Detroit long held that only automotive insiders could run an American car company. Wrong. Bill Ford took the leap first with one of the most selfless acts in the history of CEOs: Essentially firing himself in 2006 and finding somebody he thought was better qualified to turn his company around. He hired Alan Mulally from Boeing, who has turned out to be one of the most successful CEOs in corporate America.

At GM, it took the government to fire Old Guard CEO Rick Wagoner, who was replaced by fellow GM insider Fritz Henderson, who was replaced a few months later by current CEO Ed Whitacre—the former head of AT&T, who admitted he knew little about cars when he came to GM. Whitacre has since hired a chief financial officer from Microsoft and sent more than a dozen longtime GM executives packing. Chrysler, now part of Fiat, is run by the Italian lawyer-accountant Sergio Marchionne, who drifted into the car business after stints at several Canadian and European companies. These outsiders are leading a renaissance in Detroit after insiders presided over the 25-year demise of the domestic auto industry.

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Downsizing. GM spent nearly a decade insisting that its eight brands were the right number, even though no other automaker had more than three. That ended with bankruptcy, when GM shed its Hummer, Saturn, Pontiac, and Saab divisions. Lo and behold, concentrating its resources on half as much bureaucracy has helped GM improve profitability with barely a dent in its market share. Some critics think GM should go even further by rolling GMC into Chevrolet and Buick into Chevy and Cadillac. Ford, meanwhile, is finally phasing out its moribund Mercury division, in an effort to refocus on Lincoln—one of its weakest links—and revive its luxury division.

Lower labor costs. Bankruptcy allowed GM and Chrysler to slash their labor costs, which are now close to the levels at non-union "transplant" factories run by foreign-based automakers, mostly in southern states. The two automakers could even end up with lower costs than the transplants as they hire new workers who will get paid a lot less than longstanding union members. Ford, which avoided bankruptcy and never sought a bailout, got fewer concessions from workers but has still been able to lower costs. As the fortunes of the Detroit 3 improve, unionized workers could demand that some of their recent concessions be reversed. But for now, Detroit has largely overcome a longtime labor-cost disadvantage.

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Toyota's implosion. One automaker's pain is another's gain, and Ford was an early beneficiary of the GM and Chrysler bankruptcies, since buyers seeking a domestic car from a solvent company had only one choice. Then the Toyota recall scandal arrived like a winning lottery ticket, causing buyers to flee Detroit's biggest overseas rival. Toyota's market share has dropped from 16.8 percent at the end of 2008 to 15.1 percent today, according to J.D. Power, while Ford's share has risen by 1.9 percentage points, to 17.3 percent. GM's share, at 19.1 percent, has fallen just six-tenths of a point since 2008, which is remarkable given that GM has axed half of its brands and closed hundreds of dealers. Chrylser has been the biggest loser since 2008, falling to just 9.4 percent of the market as dealers desperately wait for fresh products, like the Fiats that will start to arrive late this year.

Toyota, with deep pockets and ample talent, will reverse its slide and become formidable once again. Korean upstarts Kia and Hyundai will keep undercutting competitors on price, while Honda, Nissan, Volkswagen, Subaru, and the German luxury makes continue to raise the bar on quality and design. And cheap Chinese cars will probably land in the United States within a couple of years. The Detroit 3 still face some tight curves, but at least they're catching up to the pack.