18.6.13

CREATIVE DESTRUCTION.

Summertime is for cleaning out the files, and in the archive of unpublished posts was a work in progress from four years ago, on the failure of the U.S. legacy car companies.  The Economist characterized General Motors as Detroitosaurus.
The divisional structure [Alfred Sloan] created in the 1920s, with professional managers reporting to a head office through strict financial monitoring, was adopted by other titans of American business, such as GE, Dupont and IBM before the model spread across the rich world.
I recall from college references to GM's use of linear programming to allocate resources, and one radical teaching assistant who noted that the USSR's attempts to use the same sorts of algorithm simply established the capitalist nature of the Soviet Union. I think the more telling flaw with business in those days was conglomeration, the conceit that professional managers could manage everything. General Electric seems to have learned that lesson, confining its diversification only to products in which it has the hopes of being the leading or second producer. At General Motors, not so much.
Although this model was brilliantly designed for domination, when the environment changed it proved disastrously inflexible. The problem in the 1970s was not really the arrival of better, smaller, lighter Japanese cars; it was GM's failure to respond in kind. Rather than hitting back with superior products, the company hid behind politicians who appeared to help it in the short term. Rules on fuel economy distorted the market because they had a loophole for pickups and other light trucks—a sop to farmers and tool-toting artisans. The American carmakers exploited that by producing squadrons of SUVs, while the government restricted the import of small, efficient Japanese cars. If Detroit had spent less time lobbying for government protection and more on improving its products it might have fared better. Sensible fuel taxes would have hurt for a while, but unlike market-distorting fuel-efficiency rules, they would have forced GM to evolve.

As for the health and pension costs which have helped sink GM, the company and the government bear joint responsibility for those too. After the war GM rejected a mutual scheme that the unions wanted because it smacked of socialism; and around the same time, the company agreed to give retired workers full pensions and health care for life. But if successive administrations had dealt with America's expensive and inadequate health care—a problem with which Barack Obama is now wrestling (see article)—the cost of those union demands would have been far lower. None of GM's competitors has had to shoulder costs per worker anything like as heavy: until an agreement in 2007 with the union, each car in Detroit carried about $1,400 in extra pension and health-care costs compared with the foreign-owned competitors in America.

GM, Ford and Chrysler tried to improve: by 2006 they had almost caught up with Japanese standards of efficiency and even quality. But by then GM's share of the American market had fallen to below a quarter. Rounds of closures and job cuts were difficult to negotiate with unions, and were always too little too late. Gradually the cars got better, but Americans had moved on. The younger generation of carbuyers stayed faithful to their Toyotas, Hondas or Mercedes assembled in the new cheaper car factories below the Mason-Dixon line. GM and the other American firms were left with the older buyers who were, literally, dying out.
In a separate article, the magazine expressed scepticism about the company's future.
The question is whether the new, smaller GM can succeed on its own more modest terms. Without doubt, its structural costs will be much lower: $23.2 billion in 2010, against $30.8 billion in 2008. With fewer brands and dealers it will be able to focus marketing and advertising more effectively. GM also retains the design and engineering resources to develop competitive cars, although the good ones are still outnumbered by the dross. The new-model pipeline has enough in it to keep buyers interested. Its successful operations in China should continue to grow rapidly with the market there.

But several doubts remain. The first is that although Mr Wagoner has gone, there has been no cull of GM's leaders—who helped to get it into this mess. Mr Henderson is an experienced financial manager, but GM may need someone more inspiring to shake it out of its consensual, bureaucratic ways. Senior members of the auto task-force found Chrysler to be better run in some ways than GM.
And an automobile columnist identified "a rogue's gallery of unloved and unlovely" vehicles.

Fast-forward to today, and note what's selling, despite the high gasoline prices.
Models such as GM's Cadillac ATS sports sedan, Ford's Fusion family car and Chrysler's Jeep Grand Cherokee are turning heads and stoking sales.

On the strength of stylish new showroom offerings, GM, Ford and Chrysler all gained market share in the first quarter for the first time in 20 years. Meanwhile, Toyota Motor Corp.'s staid standard-bearer, the Camry, has endured three months of declining sales as the automaker ceded U.S. share this year.

Detroit's joy ride demonstrates that style now sells. Consumers, coming out of a deep recession, are driving cars that average 11 years old and they're looking for more than just a new set of wheels. They want a car that looks new.

"Safe is out," said Jeff Schuster, an analyst with researcher LMC Automotive in Troy, Mich. "Instead of your bread-and-butter car that just gets you from Point A to Point B, buyers are looking for something with more individual appeal."

Detroit is delivering in a way it hasn't since GM's original design chief Harley Earl put the first tailfins on a 1948 Cadillac and his successor Bill Mitchell carved gills into the side of the 1963 Corvette Stingray.

"The industry got away from design and what really sparked growth and passion and connection to vehicles in the '30s, '40s and '50s," Schuster said. "Detroit is trying to make that connection again and their designs are doing that."

It took nearly going out of business for GM, Ford and Chrysler to change their conservative ways and return to risk-taking, Schuster said.
Perhaps so. There's still room for improvement in the aesthetics. On my recent road trip to Wisconsin, I had trouble deciding whether to give the Rolling Mud Fence Award to the Cadillac crossover, or to the large Chrysler sedans.

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