Reviewed by Michael Fatsi

What happened to the American car-manufacturing business during the economic collapse of 2008? If this question piques your curiosity, read on.

Bill Vlasic, the Detroit bureau chief of The New York Times and a respected automobile-industry insider, has written Once Upon a Car: The Fall and Resurrection of America’s Big Three Auto Makers — GM, Ford and Chrysler. In his captivating new book he painstakingly chronicles the events leading up to the collapse of the American automobile industry.

When picking up this book I had to wonder if the story would be told as a morality tale — the auto industry as a metaphor for the United States government, for example. It’s hard not to see the similarity: huge bureaucracies, generous health plans and pensions for union workers, and yet, despite billions of dollars in revenues, monumental debt. Sound familiar?

High labor costs in the United States were making it impossible for auto firms to make any money. During the previously profitable decades, these companies had given the UAW huge concessions that were coming back to haunt the bottom line. Unsustainably generous work rules, health insurance and pension benefits were becoming a noose around the neck of an entire industry. What would happen next is the question that no one wanted answered.

The crux of the problem could be summed up in one concept: jobs banks. Car manufacturers were required by the UAW to fund jobs banks for laid-off union workers. The snag was that the auto industry was producing more cars than the market required. This overcapacity was identified by management, yet the solution, as simple as it seemed, remained impossible to achieve. Shutting down an assembly plant that employed thousands of workers was impracticable, since idled workers would still be collecting nearly all of their wages while waiting in a jobs bank for months or even years for other positions to open. As a result of this bizarre policy, the Big Three kept factories running producing extra cars, which then had to be sold at a loss to simply clear stock so that more loss-making cars could be produced.

The plight of GM encapsulated the troubles of the entire auto industry. For years GM had been attempting to deal with its unsustainable (I don’t ever remember hearing this now ubiquitous word the first half of my life) business model. In 1999 GM spun off Delphi, its loss-making components maker. Unionized Delphi workers were being paid more than twice what nonunion workers were making; worker benefits were even more generous. In spinning off Delphi, GM figured it could save billions of dollars, but Delphi’s 2006 bankruptcy required GM to bail out the company or else face the wrath of the UAW. GM was losing $24 million a day and was now forced to pony up $11 billion dollars to pay for Delphi’s bankruptcy.

This was just the beginning of GM’s woes. It was losing money on every car it sold in the United States. When a strike occurred at an assembly plant, GM executives actually calculated that this strike helped the bottom line by preventing GM from producing more loss-making cars. To reverse this precipitous decline, GM needed to shed workers, but traditional layoffs were not possible due to costs of the jobs banks. GM took the radical step of offering buyouts of $135,000 to any union employee with more than 10 years’ experience. GM needed to cut 30,000 union jobs and was willing to spend over $4 billion to do this. It also let go of  30 percent of its white-collar staff.

We all know what happened next. The housing bubble popped, Lehman Bros. failed, banks all over the world stopped lending money. Americans stopped buying cars, and within only a few months GM collapsed. Chrysler was failing as well. Ford was safe, thanks to a bold (or was it desperate) earlier move to hock the company to secure financing.

Lame-duck President George W. Bush was ideologically opposed to bailing out the auto firms. According to Mr. Vlasic, the president was approached by newly elected Barack Obama, who asked him to keep the car companies going until the new administration could decide what to do. President Bush complied.

The Obama administration acted decisively to salvage GM and Chrysler. The companies were led into cleverly designed prepackaged bankruptcies. The bond holders were wiped out, and GM ownership was assumed by the U.S. government, and strangely enough the UAW. In the hyper-competitive world auto market, the future of these companies remains far from certain.

One can certainly read Vlasic’s fine book as an allegory of what happens when a large organization keeps spending more money than it has. The lesson to be learned here is that size, cash flow and good intentions are not enough to guarantee success. The American automotive business model failed because during the fat years, manufacturers agreed to ceaseless union demands for ever increasing benefits. When any organization is required to consistently pay out more money than it takes in, insolvency cannot be unexpected. When vested interests prevent an organization facing this dilemma from controlling its costs, failure and bankruptcy becomes inevitable.

Michael Fatsi did his post-graduate work in Byzantine and American industrial history at Yale University. He restores and races vintage British and Italian cars in Richmond, Va.