1979 oil shock meant recession for U.S., depression for autos

FROM THE ARCHIVES

This story originally appeared in 100 Events That Made the Industry, an Automotive News special issue published on June 26, 1996.

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Auto sales were off to a rousing start in 1979. Sales of domestic vehicles in the first 10 days of the year were up 23 percent.

Then all hell broke loose.

On Jan. 16, 1979, the Shah of Iran was overthrown, and the Ayatollah Khomeini came to power. He cut Iran's oil production, which reduced shipments of crude oil to the United States. Gasoline prices soared, and the American economy plunged into a recession. The threat of a gasoline shortage and rationing created long lines at gas stations. It was 1973-74 all over again.

The recession brought double-digit inflation and sent interest rates up to 20 percent. Consumer confidence evaporated. What was a recession for the rest of the nation was a depression for the car industry.

The oil crisis eventually forced the U.S. automakers to resolve their quality and gas mileage problems.

Practically overnight, consumer demand turned from gas-guzzling large cars - Detroit's specialty - to gas-sipping small cars, largely built by Japanese companies.

The recession was just beginning when dealers gathered in Las Vegas in February 1979 for the annual convention of the National Automobile Dealers Association. Automotive News said dealers at the meeting were uneasy. Their tension would increase; they had yet to feel the full impact of the recession.

A year later, at the 1980 NADA convention in New Orleans, the energy crunch, a sluggish market, unchecked inflation and general money problems dominated discussion.

The domestics' loss was the Japanese manufacturers' gain. Toyota, Honda and Datsun were already building small cars that were fuel-efficient.

General Motors, Ford Motor Co. and Chrysler Corp. came under fire for not anticipating the trend toward small, fuel-efficient cars. Pundits argued that American carmakers should have learned their lesson in 1973-74, when the Arab cartel of oil-producing nations cut off the U.S. supply of imported oil and created the first energy crisis of the 1970s.

Also hanging over the manufacturers' heads was the first set of federal corporate average fuel economy standards. They required a fleet average of 18 mpg by the 1978 model year, rising to 20 mpg by 1980. The average was 13 mpg in 1973.

U.S. manufacturers did begin downsizing their products in the early and mid-1970s. Chevrolet launched the Chevette in the fall of 1975, and Chrysler's subcompact front-wheel-drive Dodge Omni and Plymouth Horizon went on sale in January 1978. Earlier, in 1970, Ford had introduced its subcompact Ford Pinto/Mercury Bobcat twins; the AMC Gremlin and Chevrolet Vega also debuted that year.

In April 1979, GM introduced its X cars -*the Chevrolet Citation, Pontiac Phoenix, Oldsmobile Omega and Buick Skylark - its first fwd compact cars.

Still, most of the Big 3's offerings were big, rear-wheel-drive gas guzzlers.

Lee Iacocca, Chrysler president during the 1979 energy crisis, defended U.S. makers in Iacocca: An Autobiography . He said they sold big cars because that's what people wanted. 'We ourselves had thousands of unsold Omnis and Horizons. And our small Colt built by Mitsubishi was not selling even with a $1,000 rebate,' he wrote.

Big 3 plunge
1979 was bad...
 1979 car sales1978 car salesPct.change 1979 vs. 1978
Toyota507,816441,800+14.9
Datsun472,252338,096+39.7
Honda353,291274,876+28.5
GM4,887,2815,341,700-8.5
Ford2,101,5502,536,738-17.2
Chrysler909,0251,087,987-16.4
... and 1982 was worse.
 1982 car sales1978 car salesPct.change 1982 vs. 1978
Toyota527,158441,800+19.3
Datsun470,246338,096+39.1
Honda365,865274,876+33.1
GM3,515,6605,341,700-34.2
Ford1,345,6982,536,738-47.0
Chrysler793,9301,087,987-27.0

Robert Mallon, owner of Mallon Ford in Tacoma, Wash., agrees.

He remembers that one of the issues facing NADA at its February 1979 convention was stalled sales of import cars.

We were selling what the public wanted,' recalls Mallon, the 1978 NADA president. 'There were 100,000 Datsuns on the docks at Los Angeles. Datsun dealers were coming to us, worried about inventory. Ninety days later, that inventory had evaporated. Overnight, the demand changed to small cars.'

Robert Casey, auto historian and curator of the Henry Ford Museum in Dearborn, Mich., said the events of 1979 were about more than just fuel economy.

From the end of World War II to the 1970s, the U.S. auto industry prospered. Casey said the industry paid good wages, built what it wanted, didn't worry much about quality. It was complacent.

The oil crisis brought quality problems and gas mileage to the forefront, Casey said. People who made the switch to Japanese cars found they were better built than American cars. American auto companies were in trouble. They would have to shape up or disappear.

In 1978, before the energy crisis, subcompact cars made up only 10.65 percent of the domestic market; in 1979, subcompacts shot up to 16.46 percent of the domestic market. Overall new-car sales for the Big 4 plunged 10.66 percent in 1979.

The Big 4, caught with their collective pants down, took a beating.

Chrysler, worst off of all, nearly died from its wounds. Hemorrhaging red ink, Chrysler had to turn to the federal government for help.

Congress passed the Chrysler Loan Guarantee Bill on Dec. 21, 1979: The government would guarantee loans for Chrysler up to $1.5 billion.

Iacocca, who had been fired by Henry Ford II as president of Ford Motor Co. in July 1978, joined Chrysler as its president before the end of the year.

Chrysler reported a record second-quarter loss of $207 million in 1979. Iacocca's autobiography indicates that he didn't realize the extent of Chrysler's woes when he signed on. Right after I came in, our share of the market headed due south, the book says. We started to hit numbers as low as 8 percent, which was pretty dismal even by Chrysler's modest standards. I was beginning to realize that it might take years before this company was back on its feet. Chrysler began lopping off limbs to reduce costs and raise money. It sold its operations abroad, closed several plants and asked for and got concessions from its unionized workers.

Former UAW President Douglas Fraser recalls that time as desperate. Between 1979 and 1981, (Chrysler workers) gave up about $1.1 billion in concessions, says Fraser.

While most of the attention in 1979 was on Chrysler, other U.S. makers also were in trouble. Some 200,000 workers were pink-slipped in 1980.

Ford lost $3.2 billion from 1980 to 1982.

In addition to the recession and invasion of importers, Ford's product line, headed by the boxy Granada and Fairmont, was not well received by the public, and its reputation for quality was lousy.

Ford had to remake itself.

In 1980, under the direction of Red Poling, newly appointed executive vice president of North American Automotive Operations, Ford cut production by 1 million units and laid off 60,000 employees, according to Robert Shook in Turn Around: The New Ford Company. In 1980-82, Ford closed nine factories.

Ford studied Japanese auto workers and found that they were given more responsibility and were involved in problem solving and decision making. Ford adopted the process at its plants. Slowly but surely, Ford was getting its act together,' Shook writes. 'Costs were coming down, efficiencies were being realized and a feeling of teamwork prevailed.'

General Motors suffered during the recession, too, but it was bigger and stronger than Ford and Chrysler, and thus better able to weather the storm.

In 1978, just before the start of the recession, GM profits totaled $3.5 billion. They skidded to $2.9 billion in 1979 before bottoming out with a $763 million deficit in 1980.

GM tightened its belt. In 1980-81, GM laid off some 200,000 UAW workers, got concessions from its other employees and canceled its S-car project, a four-passenger minicar that was projected to get 50 mpg.

GM's answer to the Japanese was to produce overpriced, cookie-cutter cars of questionable quality. A case in point was its stable of four-cylinder, compact J cars: Chevrolet Cavalier, Pontiac J2000, Oldsmobile Firenza, Buick Skyhawk and Cadillac Cimarron.

Introduced in May 1981, the cars were heavily equipped and ranged from $6,966 for the Cavalier to $12,131 for the Cimarron. Consumers and dealers were appalled by the steep price and sluggish performance. By January 1982, GM decontented the cars and reduced their base prices.

Despite GM's problems, it returned to profitability with profits of $333 million in 1981, $962 million in 1982 and $3.7 billion in 1983.

AMC, which would close shop in 1987 when it was purchased by Chrysler, was still in trouble and ended 1983 with a net loss of $146.7 million.

But for the Big 3, the recession had lifted, and they enjoyed strong sales through the mid-1980s.

You can reach Arlena Sawyers at asawyers@crain.com.

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