Let GM Fail!
This is a reprise of a much older post, but it struck me as fairly timely.
I had a conversation the other day with a person I can best describe as a well-meaning technocrat. Though I am not sure he would put it this baldly, he tends to support a government by smart people imposing superior solutions on the sub-optimizing masses. He was lamenting that allowing a company like GM to die is dumb, and that a little bit of intelligent management would save all those GM jobs and assets. Though we did not discuss specifics, I presume in his model the government would have some role in this new intelligent design (I guess like it had in Amtrak?)
There are lots of sophisticated academic models for the corporation. I have even studied a few. Here is my simple one:
A corporation has physical plant (like factories) and workers of various skill levels who have productive potential. These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc. In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys. This is not the case - Just ask Ross Perot. You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.
All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA*. And DNA is very hard to change. Walmart may be freaking brilliant at what they do, but demand that they change tomorrow to an upscale retailer marketing fashion products to teenage girls, and I don't think they would ever get there. Its just too much change in the DNA. Yeah, you could hire some ex Merry-go-round** executives, but you still have a culture aimed at big box low prices, a logistics system and infrastructure aimed at doing same, absolutely no history or knowledge of fashion, etc. etc. I would bet you any amount of money I could get to the GAP faster starting from scratch than starting from Walmart. For example, many folks (like me) greatly prefer Target over Walmart because Target is a slightly nicer, more relaxing place to shop. And even this small difference may ultimately confound Walmart. Even this very incremental need to add some aesthetics to their experience may overtax their DNA.
Corporate DNA acts as a value multiplier. The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation. When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment. Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not. Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.
But things change. Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet. DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you. When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one. The corporation is killing the value of its assets. Smart people are made stupid by a bad organization and systems and culture. In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.
Changing your DNA is tough. It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years. One could argue that GE did this, avoiding becoming an old-industry dinosaur. GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough. GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do. If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.
So what if GM dies? Letting the GM's of the world die is one of the best possible things we can do for our economy and the wealth of our nation. Assuming GM's DNA has a less than one multiplier, then releasing GM's assets from GM's control actually increases value. Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value. Their output has more value, which in the long run helps everyone, including themselves.
The alternative to not letting GM die is, well, Europe (and Japan). A LOT of Europe's productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc. In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe's most productive human and physical assets into organizations with DNA multipliers less than one.
I don't know if GM will fail (but a lot of other people have opinions) but if it does, I am confident that the end result will be positive for America.
* Those who accuse me of being more influenced by Neal Stephenson's Snow Crash than Harvard Business School may be correct.
** Gratuitous reference aimed at forty-somethings who used to hang out at the mall. In my town, Merry-go-round was the place teenage girls went if they wanted to dress like, uh, teenage girls. I am pretty sure the store went bust a while back.
rüya:
thanks very good
November 11, 2008, 1:42 amxpatUSA:
Used to buy lots of stuff from Emerson. Mostly Rosemount instruments.
Not enough to bail out GM though ;-)
Been laid off more than once, as a victim of Companies failing/downsizing/etc, during the last years of working life. It's not pleasant and it does mess up one's finances big time if re-employment doesn't happen straight away.
If "they who control Congress" had allowed the whole mess just to collapse, would there have been a massive global run on the dollar - thereby reducing it to it's true value and sinking the boat as far as being the world's reserve currency is concerned?
If so, "they who control Congress" will probably bail out any enterprise whose failure would adversely affect their fortunes, reckon?
T.C.
November 11, 2008, 6:09 amJoshua Herring:
Completely agree. Whether or not GM needs to fail, it's clear that at the very least it's due for some radical restructuring. If the government wants to help, what they need to do instead of bailing out is make it easy for them to fire a huge amount of people and once and devote what remains of their assets to a slightly different set of priorities - like getting the Volt out, for instance.
November 11, 2008, 6:09 amJoshua Herring:
TC -
What does GM failing have to do with a run on the dollar? I think you may be overestimating its importance. If it's the financial sector you're talking about, I still doubt it given that the problems spread pretty quickly around the globe. Any run on the dollar would've been temporary and followed by runs on other major currencies (possible exception: JPY).
November 11, 2008, 6:12 amSteve:
Great post!
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November 11, 2008, 6:28 amRichard:
A brilliant article. Thousands of pages of analysis of this problem and you have it in a nutshell
My favorite part has to be
"The alternative to not letting GM die is, well, Europe (and Japan). A LOT of Europe's productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition"
Think Citroen, Peugeot and Renault. Utterly dreadful cars made from plastic and bent wire - especially the diesels. Not available in the US - the manufacturers would be sued out of existence. They exist only due to the massive subsidies they receive from the French Government.
November 11, 2008, 9:20 amJR:
Amen to that! It is a sad day in the US, when the government supports one private business over another.
November 11, 2008, 3:26 pmSusan:
I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
Susan
http://www.car-insurance-choices.com
November 11, 2008, 8:33 pmSusan:
I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
Susan
http://www.car-insurance-choices.com
November 11, 2008, 8:33 pmRichard:
Enjoyed reading this blog. Learn't from peoples comments and opinions, so thanks.
I tend to try and keep it relatively simple and amidst all of the for and against saving GM. I'm currently of the opinion of "let GM continue without government support". Now this may mean chapter 11 in a few months, the potential of massive lay off's and a down stream ripple effect that impacts suppliers/OEM's all the way down to the car yards. Pretty ugly thought, given the size of GM.
I'm looking at it from two angles. If the gov't props up GM with a loan, we the tax payer become silent investors in a company we will have little control over, and it still may fail. Reading about GM's internal structure and ability to change processes and optimize new technologies, seems pretty difficult given both thier size, infrastructure and union contacts.
On the other hand, allowing market forces to have it's will; could result in a failure the likes of which hasn't been seen before. Hence we the tax payer now support 1000's of people now claiming welfare.
Either way the options aren't good. I believe that laid off auto workers would eventually gain employment again as the likes of Toyota, Mazda, maybe Ford and other smaller manufacturers, fill in the gap left by GM's demise as the market slowly improves.
November 14, 2008, 10:07 amJens Fiederer:
You probably know each other already, and sound very much on the same page in this matter (as opposed to global warming). But just in case you don't -
Coyote, meet Jane
http://meganmcardle.theatlantic.com/
Jane, meet Coyote
November 14, 2008, 11:19 amhttps://coyoteblog.com/coyote_blog/
Jens Fiederer:
Oh, and I am sure I will be seeing a lot more of "Susan" on many other blogs, with exactly the same message.
November 17, 2008, 11:09 ammatt:
I would have to agree with you 100%, I own a '97 malibu. granted it is an older car, but the build quality of these cars are just not what they were in the past. Things break the should last a live time. interior panel just pop off. there are gaps in the body lines that don't match the other side. and door handles rattle after 30000 miles. I have be a GM person for many years and I still own an '85 and an '87 Z-28.
One more thing that jerks my chain is with all three U.S. auto makers is the cheap plastic they use. It seams that they make no effort to make it look good. I'm not looking for leather dash boards but come on, they have synthetics that feel like leather.
what these companies need to do is not make 4 different versions of the same car. they have gotten to big and and yes they feel because the are huge and own a lot of other foreign companies that they can still be competive in the auto world... but reality
sucks because you need to produce a product at a fair price. All they have done is make crap and selling it for a huge profit.
ATTENTION ESCALDE OWNERS:
did you know you paid 77,000 dollars for a suburban, yes they look a LITTLE different but but I don't think it 30,000 dollars different.
I believe it was 1999 I almost bought a caddy catera until I refused to pay 35000 for a malibu. different badges and slightly different body panels don't convince me that is is better.
it's things like this is why I think these companies are failing, and I refuse to bail them out. It is unfortunate that so many will loose there jobs and I don't wish anything bad for them but if I owned a business that was going under I wouldn't get a dime from the government.
November 24, 2008, 7:27 amAnonymous:
Great post. One flaw. VW, BMW, and Porsche are all from Europe. Though Porsche has outpaced Lower Saxony in its controlling interest in VW, the State is still omnipresent. People want these cars.
December 4, 2008, 8:05 pm