Wharton Gets It Right On Detroit

We’ve taken the top business schools to task in the past for their views on outsourcing and leadership, but I’m happy to report that for once at least one of them got it right.  The latest Knowledge@Wharton published today by Wharton has an interview with professor John Paul MacDuffie titled The Auto Industry: On the Road to Disaster or Recovery? 

They begin from an unexpected angle by discussing the strike at Harley-Davidson, where the York operations general manager said

… the concessions were necessary now, despite the motorcycles maker’s currently strong performance, because we don’t want to find ourselves in 10 years in the same position that the Detroit auto industry is in now.

We told you about this a couple days ago, concluding that it did represent forethought and therefore some semblance of leadership on the part of Harley, and Professor MacDuffie agreed.

Are there some badly managed auto companies? Absolutely. Are some of the issues that they deal with common across other U.S. manufacturing industries? Absolutely. Could better anticipation of particularly some of these labor-related costs have helped? I think also absolutely. So Harley-Davidson is probably right in trying to deal proactively with some of these things.

They return to the issue of "legacy costs" later on in the interview, where MacDuffie correctly describes how leadership, or the lack thereof, caused those problems.  The union understandably took advantage of that lack of leadership, but now has a hard time recognizing their compensation is not realistic in a competitive environment.

I do think that the U.S. industry could have seen this coming — and the Union. And perhaps they could have done a number of things years ago, particularly on the health care cost side. Perhaps, in a way I would criticize the Union’s strategy of allowing all sorts of concessions on pay [and] insisting on protecting every aspect of that health care contract as if it was sacred. This is because there are a number of gold-plated features [in that contract] that really almost no one in America still has — which now, as they get ripped away, Union members feel that this is a great betrayal. But it is, in a way, an overdue waking up to some of those realities.

The conversation then turns to sales, where the interviewer asks a question typical of traditional media.

Apart from costs, the more fundamental problem also seems to be sales.

No, the problem isn’t with sales, it’s with profits.  It’s with value from the perception of the customer.  GM thinks that sales is the all important metric, which is why they’re thinking about buying an unprofitable Malaysian automaker just to keep their sales volume above Toyota’s.  Professor MacDuffie turns the question around a bit to partially make that point.

One thing that made the January numbers stand out is that GM, Ford and Chrysler are trying to break a bad habit of selling a lot of vehicles to the fleets, to the rental car companies. This is a great way to boost your monthly sales numbers, but this conceals perhaps a bit the realities of how appealing your vehicles are to the general public. So they keep promising to break this habit, and they seem to be doing that, at least right now. That causes these big year-on-year drops. But this shift of market share has been happening.

And then later on in the interview he reinforces that point.

All of the incentives that they were placing on the other vehicles to move them, to achieve certain economies of scale, to keep their factories operating at certain levels — there was a sense that volume would solve most everything. It would certainly buy them time for the next wave of fantastic products that they were telling themselves would win over consumers.  I think that is also a kind of addiction that’s hard to break. And of course you train consumers to expect you to pay them to take your vehicles.

We’ve often harped on the fallacy created by traditional accounting methods that let companies lay off thousands of years of experience and knowledge in order to save a few labor dollars.  Knowledge and experience and creativity are not represented on a traditional balance sheet.  But Professor MacDuffie recognizes the danger in this thinking, particularly for Ford which gleefully accepted the buyouts of almost 30,000 experienced workers.

I would warn him [Ford CEO Mulally] — and he may not need to be warned — that the loss of a massive number of experienced employees from their factories and many other parts of their organization is something to be careful about. This is because even with good new products, they could suddenly hit terrible quality problems or terrible problems with meeting the dates of their project launches … or tackling operational things that people expect in this industry — [so] it could all be undercut. They have a brief window to reestablish themselves, and they’ve lost a wealth of organizational knowledge and that’s a risk.

The interview also discusses topics such as product design, the impact of Korean manufacturers such as Hyundai, and the impact of upstart Chinese and Indian automakers.  Take a look at the article for some insight into those areas.

So we have to give Wharton some kudos.  Kellogg may be next as yours truly has been asked to be part of a project that promotes onshoring… successfully competing globally from U.S.-based factories in industries that tend to flee offshore.  More on that in the upcoming months.