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We’ve All Caught the Detroit Disease

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Ward’s Automotive was for decades a major US auto industry trade publication. Each year, Ward’s published a yearbook, with a one-page market share table near the center.

Each year the book detailed share stats for not just GM, but Chevrolet, and within Chevy, Impalas and BelAirs. Plymouths, Dodges, Ramblers—all got detailed at the model level.

Except for one line.

Imports.

From the late 50s until the late 80s, the industry lumped together Rolls Royces and Volkswagens and Toyotas in one simple category. Imports.

Not until the late 80s—when “imports” finally exceeded 25% of the US market—did they get broken out. Last week, BusinessWeek reported that GM’s US market share was at 22.6% A reversal of fortune (in 1963, GM had 51% of the US market).

Over the years, Detroit came up with dozens of excuses. They blamed “deathtrap” used cars (whose only real threat, of course, was to prices of new cars). Roger Smith blamed technology. Detroit blamed fashion quirks in California. It blamed excise taxes. It blamed Japan, Inc.

As recently as May 8, 2005 (on George Stephanopoulos’ ABC News show), none other than Jack Welch blamed labor—high health care costs, “negotiated at a time of no competition”—and argued for a break. Welch conveniently forgets who negotiated all those contracts—Detroit. Without a gun to its head.

The truth is, Detroit had—and still has—an American disease. It has a few key symptoms:

• Belief that we are the biggest, standalone market—immune from global competition—and that the Big 3 had dominant market share

• Belief that GNP growth drives auto sales, that growth means growth in market share, and that buyers are price-driven

• Belief that, in the immortal words of Lee Iacocca, brought back a few years ago from the taxidermist to re-appear on TV, “the most important thing is—the deal!”

The Japanese in particular always believed it was a global market, far bigger than the US, and that they—including Toyota—were small players on a global stage. For them it was always about growth, not share. And for them, price was not something you jacked up with leader models and white-walls and radios—it was something you set low, for growth, and built in all the quality you could, until you earned the right to sell at higher price points. It was not "the deal"—it was, profoundly, the relationship.

They were—oh, what’s the word?—right.

So, perhaps we should go outside Detroit? Maybe tap the American zeitgeist and come up with—private equity, and an industry outsider!

And so we have Bob Nardelli, late of Home Depot fame, coming in as CEO of Chrysler for Cerberus Capital, Chrysler’s new private equity owner. According to Newsweek, Detroit insiders say they expect Cerberus to shake up the moribund American auto industry. Private equity has a lot going for it—but long-term thinking tends not to be part of it. Industry expertise isn’t all bad—and Nardelli has none of it. Pardon my scepticism in this case—I don’t see this ending well.

True, Detroit is easy to pick on. But you’d think the rest of US industry would catch a clue.

On Wall Street, a new phrase was invented only a few years ago—IBGYBG. I’ll be gone, you’ll be gone—so let’s do the deal and let the suckers pay for it.

Now consumers are suckered into no-income second mortgages (“hey they wouldn’t lend me the money if they didn’t think I could pay it back, right?”) which are then sliced and diced and tranched and resold and leveraged and omigosh, looks like a credit crisis! The spirit of Iacocca lives.

In Bentonville, they learned the volume lesson, but not the price/quality lesson. WalMart is teaching a nation that anything worth having is worth having at half the price and one third the quality so you can get more things worth having—to replace yesterday’s list. Planned obsolescence lives.

In Washington, the courage to face long-term financial issues is in short supply, and the belief that we stand alone—politically, militarily, culturally—is the reverse.

We’ve ended up with: here-now, cheaper by the dozen, do the transaction, no money down, quarterly earnings—and get your buyout package just before you default on the schnooks’ pension plans.

We’ve learned well from Detroit—the wrong lessons.

Update: "We”ve All Caught the Detroit Disease" is a featured post at the the Huffington Post.  Trust Matters readers may want to check out the discussion there as well.

Does Business Squeeze the Poor?

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BusinessWeek’s cover story of May 21 sounds a tad unusual. Titled The Poverty Business: Inside U.S. Companies’ Audacious Drive to Extract More Profits from the Nation’s Working Poor, it answers in the affirmative.

Unusual for a business magazine—perhaps. But BW’s right—It’s time to strip politics and ideology from the discussion of a serious issue—the dissollution of trust in an increasingly divided society.

If you think the gap between the haves and the have-nots hasn’t increased massively, you may be as lonely as the anti-global warming people. The data are not on your side, and the public increasingly knows it.

From BW:

“It’s not only that the poor are paying more; the poor are paying a lot more,” says Sheila C. Blair, chairman of the FDIC, talking about auto and mortgage loans.

“Having access to credit should be helping low-income individuals. But instead fo becoming an opportunity for upward social and economic mobility, it becomes a debt trap for many trying to move up,” says Nouriel Roubini of NYU’s Stern School.

BW describes a growing range of companies selling high-priced products to the working poor. You can yourself look up stats about the growing income gap; the growing wealth gap; the increasing employment gap; the CEO to average worker gap; and the declining rates of upward social mobility that exist in this country.

There is, of course, no shortage of ideologues who want to invoke Milton Friedman and a strict constructionist view of Adam Smith.
Their arguments have the sound of 18th century English political theorists writing about natural law. Free markets are god’s blessing upon us—they work only when producers are free to produce what consumers freely choose. Anything else is an abridgment of freedom for producer and consumer alike. And so on.

We have heard this logic applied to tobacco, and watched people die. To fast food, and watched a national epidemic of morbid obseity among children. To CEO compensation, and seen vodka-peeing ice statues. To credit card and subprime mortgagers, and watched people sign themselves into servitude and bankruptcy. Then we made bankruptcy harder to get.

The gospel of capitalism has been hijacked by frenetic ideologues who never outgrew their adolescent delight with Nietzsche and Ayn Rand. It’s time to take it back. We need a new, healthy, spirited, mature version of capitalism, one that doesn’t enslave society’s weakest to overly reward shareholders.

Laissez faire is not natural law. It was given by lawmakers, who themselves crudely approximated the will of society. It is not guaranteed by anyone.

Here’s what Daniel Yankelovich—a highly respected veteran of opinion research—had to say recently in McKinsey Quarterly (subscription only);

"Business doctrines have to change. Ideologies like shareholder value are being abused to rationalize and justify outrageous behavior. One of the tests for whether companies are aligning themselves with a broader social engagement is the extent to which the doctrine of shareholder value loses credibility.

"I don’t think it’s going to be openly repudiated, but I suspect that, gtadually, executives will stop making as much reference to it to justify their actions. It privileges one group, one constituency, over all the others, and it carries so much baggage now becaused it’s been so perverted and linked to short-term profits.

The social fabric depends on trust. Our ideologues don’t talk about that. We must take back the conversation.

BW is not alone. Consider this, from the NYTimes Dealbook blog:

John C. Whitehead, who retired as co-chairman of Goldman Sachs in 1984, called current compensation levels at the giant securities firm “shocking” and said he was “appalled” at Wall Street pay in general.

One healthy sign: my 30th reunion at Harvard Business School last fall. The most heavily attended lecture was by Professor Bruce Scott, who spoke about the global trend toward concentration of wealth. We’re moving toward looking like Rio de Janeiro—armed gated communities surrounded by violent gangs.

Scott’s lecture got a standing ovation—both in his lecture room, and in the audio-connected overflow room, hastily put together to accommodate the crowd.

This from the old school crowd at HBS—the West Point of capitalism. There is hope.