'I'm Lovin' GM'
The Wall Street Journal, Nov. 7

Ten years ago we quoted a famed short seller from the 1980s who, in a casual meeting at a dinner, shared the insight that made him rich: "People always underestimate how bad things can get."

Our subject at the time was McDonald's.

Since then, the world's biggest restaurant chain has committed one of the great turnaround stories of the business world, with most of the gains coming in a U.S. market saturated with competitors (everyone from Subway to Starbucks).

We'll save the burger-by-burger account for another day. If McDonald's can do it, so can the Detroit-based auto industry.

When large established businesses go bad, look at internal incentives. McDonald's operated for decades under a royalty system that rewarded the company for opening more and more stores. This approach worked for 40 years, until the new stores began cannibalizing the old ones and antagonized the existing franchisees, who tried to keep their heads above water by cutting back on service, cleanliness and quality.

Eventually the stock market had its way and a new leadership took up the chant "better, not bigger." McDonald's realized an additional dollar of sales from an existing store could be more profitable than a dollar from a new store. It rediscovered its customers: They were getting up earlier for breakfast, so McD started opening earlier. They were big fans of McD coffee. Now coffee became a major marketing point. The chain concentrated on making McDonald's again an appealing place to come and spend money on food.

Yet the bad news continued for a while. The company reported its first-ever quarterly loss in 2003. It took major PR hits from the book "Fast Food Nation" and the movie "Super Size Me." But the public was already being won back.

The news out of the Big Three has not been pretty in the past week. Chrysler announced another 10,000 layoffs and five factory closings.

Especially sad was its dumping of three models -- the Dodge Magnum and Chrysler Crossfire and Pacifica -- that had shown exceptional promise but came up short because of insufficient investment (a failure that occurred under DaimlerChrysler, which ought to dispel any notion that Daimler was underpaid for giving up control to the new majority owner Cerberus Capital).

Look past the headlines, however, and the Big Three have just engineered a sweeping overhaul of internal incentives. Out goes the UAW's ability to dictate headcount, wages and benefits. Out, therefore, goes the financial imperative that for decades kept the Big Three churning out unprofitable cars to cover a "fixed" labor bill. Let's admit the truth: Detroit designed many of its cars to be sold at a loss.

The change is already visible. GM is now free to protect the desirability and profitability of its hot-selling new Buick Enclave by not overproducing them. Chrysler is free to protect the image of its future designs by pulling the plug on poorly performing existing models rather than keeping its factories humming and dumping the output on rental fleets and unhappy dealers.

Not all McDonald's franchisees were up to spiffing up their stores. Likewise, the Big Three have design, engineering and marketing departments that are used to pushing out low-cost fodder for volume sales. They'll need a new mindset to go with the new economics: Aiming for designs that stand a real chance of becoming winners in their categories.

There's another similarity. McDonald's bears a special curse as the most visible of the fast-feeders. Hence its moves to festoon its menu with salads and "healthier" foods even though these account for less than 10% of sales.

An unusually candid analyst, David Kolpak of Victory Capital, once explained that McDonald's invests heavily to put such items on the menu "because they're an effective shield from a PR standpoint -- and maybe, down the road, from a legal-liability standpoint. I don't think [CEO] Jim Skinner is all that concerned with how these products actually sell."

Yet the healthier fare also helps bring the moms back and encourages better feelings about the chain even among customers who order the same old delicious Big Mac and fries.

Auto makers face their own curse. They're Congress's main target for empty gestures on global warming, hence the billions the auto makers are spending to develop hybrids, diesels and electric vehicles in hopes of preserving their regulatory freedom to sell the large, powerful pickups, SUVs and crossovers that Americans actually want.

They also hope a green halo will help solve a tough marketing problem they face: A sizeable contingent of U.S. car buyers simply won't consider a U.S.-branded car, believing them to be inferior and déclassé.

Cadillac, which has a new Bob Dylan commercial out, has led the way in trying to overturn the "import bigot" syndrome in a niche where the formidable competitors are Mercedes, Lexus and BMW. The results so far have been so-so (though the cars are excellent).

Unlike Volkswagen or BMW or Toyota, the U.S. Big Three have been singularly unsuccessful in creating a central branding image to let customers know what a GM or Chrysler or Ford vehicle is all about. McDonald's got back in touch with the idea that a trip to the Golden Arches was a treat with its "I'm lovin' it" campaign. It will take better marketing brains than ours to solve this problem for the Big Three, but we'll offer one prediction: Look for GM to show the way, as it has at every other stage of Detroit's epochal effort to right itself.