Happy Bail-Out, Detroit. Sorry, But The Time For Action Was 20 Years Ago

  by Zack Urlocker

Zack Urlocker, a regular contributor to this blog and half of the creative team at the Disruption Brothers, offers his insights on the world of technology marketing and disruptive innovation.

I've been in Michigan recently and nowhere is the evidence of the the massive disruption of the US auto industry more obvious.  There are a dozens of plants that have been shuttered in the North America in recent years --a sharp reminder of the decline and fall of what was a once great industry.

Now as the Big Three begin the new year freshly armed with a few billions in loans, I can't help but wonder if this is the right course of action.  In Michigan and other auto-producing states and provinces, the effects of massive layoffs are significant.  Job losses are never easy and there will be long running impact on the local economy. But, that doesn't mean a bailout is the right thing.

If a company or an industry can no longer be competitive, for whatever reason, then bankruptcy may be the best choice.  Why invest taxpayer money in a business that is no longer working?  The auto industry has a strong legacy, but there's nothing in the constitution that guarantees it's ongoing operations.

Consider the op-ed piece "While Detroit Slept" by economist Thomas L. Friedman for the New York Times.  Friedman makes the case that a bailout is simply putting good money into an unhealthy business model --one that is destined to lose. 

Someone in the mobility business in Denmark and Tel Aviv is already developing a real-world alternative to Detroit’s business model. I don’t know if this alternative to gasoline-powered cars will work, but I do know that it can be done — and Detroit isn’t doing it. And therefore it will be done, and eventually, I bet, it will be done profitably.

And when it is, our bailout of Detroit will be remembered as the equivalent of pouring billions of dollars of taxpayer money into the mail-order-catalogue business on the eve of the birth of eBay. It will be remembered as pouring billions of dollars into the CD music business on the eve of the birth of the iPod and iTunes. It will be remembered as pouring billions of dollars into a book-store chain on the eve of the birth of Amazon.com and the Kindle. It will be remembered as pouring billions of dollars into improving typewriters on the eve of the birth of the PC and the Internet.

 

In the article "The Case Against a Bailout" by Jack and Suzy Welch at BusinessWeek, they make the case that the best course of action for Detroit is to go into bankruptcy in order to force significant change --change that will not happen with the "incremental" approach of a bailout.

A government handout, however, isn't the way to make that happen. Washington would impose conditions and promise strict oversight, but it simply can't push through the kind of transformative change the industry needs. There would be too much political opposition, and regardless, the bailout sums being bandied about—$25 billion of taxpayer dollars, for starters—would only keep the Big Three heaving along, basically as they are. It's a life-support solution, not a cure.

That's why the boards of the automakers should take the courageous step of putting their companies into bankruptcy... Talk about a fresh start. For more than a decade, U.S. carmakers have chipped away incrementally at massive legacy costs. But reorganization would open the doors to meaningful structural change through the renegotiation of contracts with creditors, dealers, and unions. And it would offer better odds of paying back taxpayers...

But for the U.S. industry to get from here to there—"there" being a globally competitive future—it has to get off the beaten path of incrementalism. With reorganization and a merger, a long and bumpy trip awaits, but the destination should make it worth the ride.

When a company or an industry can no longer be competitive the management and board need to make dramatic change. And let's be honest. It's not like this is the first time the U.S. auto industry hit the skids or that there were serious warning signs. Recall Chrysler? Remember the Japanese invasion of the '60s and '70s, led by Toyota and its innovative production system? Contrast that with the doped-out optimism of workers and managers at GM from that era.

Even Peter Drucker's classic 1946 study of General Motors, The Concept of the Corporation, hinted at the likelihood of failure ahead.  As Drucker wrote in the preface to the 1983 edition of the book, "And the reasons for General Motors' fumbling and inability to pull itself out of the mire are largely the problems... pointed out fiftyyears ago -- for which act of high treason I then became a 'non-person' for most of General Motors' top management."

The biggest management challenge illustrated by Detroit's downfall is that, unlike relatively rapid competitive setbacks (think of Motorola or Palm), gradual, long-term decline is hard to diagnose and easy to deny. It's like the onset of Alzheimer's.  Read the details in this tough insider's assessment of GM presented to the company's executive committee 21 years ago by Elmer Johnson, Executive Vice President and General Counsel.  Particularly notable is Johnson's desire to act with "a sense of urgency" on what he identifies as the company's "seeming inability to execute."  Six months later, Johnson left the company.  CEOs came and went, but the fundamental problems remained unsolved.

Unfortunately, as we enter 2009 it has become too easy for CEOs to blame the economy, Wall Street, or other external forces, when in fact the only thing that is keeping them from success is their own lack of action.  If you're in an industry faced with disruption, you better figure out a radical plan to change your business.  Otherwise, be prepared for a long-suffering downward spiral.  And don't expect a bailout will fix things.

Three important management questions arise:

• Are any of the following industries facing the same gradual decline that Detroit denied for 35 years: newspapers, television, telecommunications, computing?

• If you are a senior manager in an industry that might face a risk of disruption (denial may be a problem), what would be the warning signs you would watch for to signal emergency action is required?

• If you or your management team were presented with the same kind of well-articulated and dire warnings that GM received from Elmer Johnson, how would the organization react?

 More information about Elmer Johnson's career at GM is detailed in the 1995 book "Comeback" by Paul Ingrassia and Joseph B. White.  You can read portions of this book on Google. 

Zack Urlocker is a Silicon Valley software executive and regular blogger on open source technology at TheOpenForce and about music at GuitarVibe.