In December 2008, the US Congress was debating whether the Big Three automakers of Detroit was worth saving from the looming threat of bankruptcy, and the CEOs of GM, Ford and Chrysler were summoned to Washington to plead their cases. In the run up, the US had witnessed the collapse of many once seemingly infallible banking giants in the Wall Street. Their country deep in economic recession, the popular mood in the US was gloomy and bitter. Writing in The Detroit News in October 2008, veteran US columnist Nolan Finley had characterised the build up of hostility towards the executive class in America as the one ?starting to take on a French Revolution feel?.
In a twist on the familiar argument that it was a corporate, non-negotiable decision to have their chief executives fly on private jets, the CEOs of the three automakers went in luxurious jets to make their case that their companies were running out of cash and needs $24 billion in taxpayer money to avoid going bust. This at a time when these corporations were laying off their workers to cut costs, while flying to Washington at a cost of that equated to an entire year?s salary for an ordinary employee making $10 per hour.
The irony was remarkable.
In fact, the episode bore all the hallmarks of arrogance and hubris that led to the fall of Detroit automakers in the first place. At a time when the very term CEO was a pejorative, the lavish jetting had, albeit briefly, changed the public focus entirely from compensation abuses to privilege abuses. There is a strong argument to be made for allowing the market to determine salaries and privileges. But with this risible bonus and privilege system, Detroit?s Big Three were merely rewarding failure even as the companies said they were on the brink of going belly up.
Detroit?s situation had certainly worsened in the face of the economic crisis that combined a ?perfect storm? of factors, such as high fuel costs, tight credit, job losses and rising commodity prices. But the story of decline goes back at least 30 years.
In the 1970s, despite the Big Three?s control of more than 85% of the US domestic automobile market, there was a mounting threat to that dominance presented by Japanese and European automakers. In essence, Detroit?s foreign competitors were making cars more suited to the growing interest of American consumers in smaller and more energy-efficient cars. At that time, the opportunity knocked for Detroit to expedite the development of cars that could answer the competitive threat of the future and to deemphasise the making of its gas-guzzling SUVs and trucks. However, the reaction from the Big Three was callously indifferent, but the self-righteous disregard for market trends came across as nothing less than self-delusion. The plain refusal to produce and sell cars more efficiently inevitably set in motion a three-decade slide in marketshare?40% now and dropping further?from which the Big Three never recovered. The widespread belief in Detroit?s auto executives that as long as they advertise, consumers will buy their products was misplaced.
The message was as simple as it was brutal: people will buy the car that represents the greatest value. If any US automaker can produce such vehicles, they can maintain the lead. If not, people will head to another showroom.
But by 2008, the situation for GM, Ford and Chrysler had deteriorated so much that they were all but facing an imminent collapse. But for the Federal bailout that came after much finger-pointing in Washington, they would have gone under. President George W Bush diverted $24 billion to Detroit from bank bailout funds, and later in 2009, President Barack Obama added $60 billion in taxpayer dollars to the bailout.
Upbraided by lawmakers and the administration, the carmakers were forced to make changes to the way they do business. These ranged from the symbolic, such as eliminating chief executives? salaries, to the substantive, such as dumping entire brands and thousands of loss-making dealerships. One autumn later and after much restructuring?the US administration is now the majority shareholder in GM and the United Auto Workers Union the majority shareholder in Chrysler, along with Fiat?s 20%?the once-dysfunctional Detroit auto industry is scripting the second incredible comeback, following one that was spearheaded by Lee Iacocca about 30 years ago that saved Chrysler. Ford, which shed many of its foreign subsidiaries to raise money, has just posted second-quarter earnings of $2.6 billion. GM and Chrysler are also gradually moving back to the profit mode.
Yet, the story of the rise and fall, and then the rebound of Detroit?s Big Three is more than the tale of one company. It is a parable of companies that were incapable of sustaining innovation and enduring escalating competition, It is also the story of a system disorder: of complacency and the resistance to sustaining a sound business model. The lesson is that, unless companies innovate and adapt to the real economic world?the one which emphasises cost control, product development, customer choice and fuel-efficiency cars, as in this case?they are soon going out of business.
The earlier revival of Chrysler under Iacocca is part of the management studies in B-schools already. But what we make of Detroit?s nascent second coming? ?Any blame for the problem faced by the US auto industry has to be shared by the arrogant and myopic companies, the inflexible labour unions, the greedy, short-term oriented financial system, the complacent and pliable government and a dominant segment of US customers who helped create the appeal for SUVs and MUVs. After all, the same auto companies gave us wonderful products like Mustang, Taurus, Jeep, Saturn, and leaders like Iaccoca, just to name a few,? observes Mithileshwar Jha, professor of marketing at IIM Bangalore. If the downsizing and painful restructuring have worked for Detroit, he attributes this to cost control and conscious product development.
As Prafulla Agnihotri, professor of marketing at IIM Calcutta, puts it, ?The lesson is simple?if you design your product?without understanding the wants of the consumer it is going to satisfy, you are making the same mistake which the American automakers did.? He believes B-schools should stress the point that advertising alone won?t get you buyers.
In the 1950s, GM chairman Charles Wilson proclaimed that ?what is good for country is good for General Motors, and vice versa.? It?s a cocky belief that failed. Detroit?s resilience after the restructuring in 2009 and the subsequent comeback is a reflection of that reality.
rajiv.jayaram@expressindia.com