What Detroit could learn from Silicon Valley
Ever wonder what the American automobile industry would be like if it actually made good cars? ZDNet takes it a step further to speculate as to what GM would look like under Steve Jobs' guidance, speculation that is worth further discussion.
No one is suggesting that Steve Jobs has any interest in reforming GM and the U.S. automobile industry, but don't you wish he would? Or for the Microsofties among you, how about Steve Ballmer? Or Marc Benioff? Or anyone from the technology industry?
In technology, we don't have the benefit (and problem) of years of government subsidies, regulations, and unionization. If we don't deliver compelling products, we die.
Today politicians are trying to funnel mountains of cash to the domestic auto industry, conveniently overlooking the other U.S. automobile industry run by Honda, Toyota, and others that employs more than 100,000 people and makes much better cars. For what? To perpetuate its utter incompetence and pander to union votes. It's shameless and, frankly, shameful.
I don't blame Democrats or Republicans for this--both have their pet bailouts. But until the U.S. automobile industry learns how to innovate and make good products again, we should let it struggle to compete. Maybe Detroit will die and those jobs will move to the Honda factories elsewhere. Is that a bad thing?
The U.S. automobile industry could learn a thing or two from the technology industry, like how to compete without expecting a handout.
Matt Asay brings a decade of in-the-trenches open-source business and legal experience to The Open Road, with an emphasis on emerging open-source business strategies and opportunities. Matt is vice president of business development at Alfresco, a company that develops open-source software for content management. He is a member of the CNET Blog Network and is not an employee of CNET. Disclosure. You can follow Matt on Twitter @mjasay. 
Regulation and accountability would remove the issue of incompetent managers and developers.
However, the reality is stickier. It's not really the auto makers that Washington is looking to bail out (regardless the hype in the respected press) but their pension plans. As the auto makers have been allowed to structure it, their massive pension plans are, effectively, debtors. Meaning that, in bankruptcy proceedings, many, many debtors would be paid first ahead of the pension plans. Reason? They are insured against this kind of loss. Insured by, of course, the Federal Government. That insurance plan is largely a confidence game, though. There isn't enough actual cash-on-hand to pay the pension plans without sending a huge wrecking ball through the already-shaky halls of Federal finance.
Real estate speculators call this "being in bed with the bank". The bank has so much financial stake in your success that your failure is their failure. So it goes with Detroit and Washington: the auto makers are publicly pleading, but privately threatening. Forget all of the flag-waving and teary-eyed testimonials to the history of the American auto makers. That's pablum for the press and the masses. The financial reality is that Washington can't afford, quite literally, for the auto makers to fail.
Personally, I'm willing to risk it. Let them fail, let the chips fall, and sort it all out and clear the slate. That callous statement, however, represents a lot of potential individual and societal suffering. I'm not sure that we can afford that just now, and I'm quite sure that it's political suicide. The really tough road to walk will be figuring out how to get Detroit to be, as you have astutely pointed out, competitive with Honda or Toyota, while at the same time not bankrupting the country or hurting the pensioners and taxpayers who weren't consulted about this situation.
Artificially supporting an industry such as this is like replacing one bad habit with another.
"But state enterprises lack the forces of evolution that apply in a capitalist economy - state enterprises are rarely if ever allowed to fail. And hence bad ideas are perpetuated indefinitely, and an economy becomes dysfunctional to the point of systemic collapse. It is the fact that private enterprises fail which keeps industries vibrant. The tension between the imperative to innovate and the consequences of failure drives capitalist economies to evolve quickly."
Enterprises who do not perform well NEED to fail or it can lead to the entire ecosystem failing. Market economies function by rewarding good companies and removing bad ones.
This is not the end of capitalism
http://www.markshuttleworth.com/archives/227
Please go research the imbalance caused by the differences in how the US compares to the rest of the world w.r.t. the following:
#1 Retiree pension plan funding
#2 Employee benefits and health care costs
#3 (and this is the tricky one) US CAFE standards (supply side vs. demand side pressures to regulate fuel economy)
You might write a different article after learning how little the products produced in Detroit have anything to do with their economic situation. Sure it's popular to post the same story that every other journalist posts... that US automakers simply aren't competitive. But if you go look at the quality ratings from companies such as JD Power, you'll find that the US absolutely _is_ solid on quality. Quality and innovation aren't necessarily the problem.
On #1 (Retiree pensions), nearly $1500 out of the purchase price of every car made by the big three is going to fund the retiree pensions. These are costs which the competition largely do not have. When you're trying to sell a competitive car for $14k and consumers are comparing features, that $1500 makes a huge difference. OF COURSE the US car needs to be a bit more stripped-down to sell in the same price bracket as the import.
On #2, go to Wikipedia.org and look up both "health care" and "universal health care" (these are different, but related articles). It may be a real eye-opener for you when you realize that pretty much every westernized nation has some form of it EXCEPT the US. Put aside politics and whether you LIKE the idea of universal health care... I'm just talking about playing ***-for-tat. When the imports don't have to fund health care because their government pays it for them, while the US automakers have to somehow manage to price health-care into the window sticker in order to maintain a work force it's a competitive problem. The auto-companies can "solve" this imbalance by sacking their entire US workforce and doing all their research, design, engineering, testing, and production engineering overseas (just like Honda and Toyota) where the government picks up the costs. Is that what you REALLY want?
On #3, you might notice that even during the enormous gas price spike of the past year, we in the US were still paying considerably less than those in Europe. Why do you think this is? It's not like the oil companies hate Europeans and love Americans so they decide to charge them twice as much as us... rather it's because in Europe the government uses "demand side" pressures to incentivize buyers to purchase a fuel efficient car. With enormous taxes per liter, they then use the revenue to fund a very nice mass-transit infrastructure. In the US, on the other hand, most US cities and towns have pathetic mass-transit (and are absolutely dependent on the car to get around) and we stick the auto-companies ("supply side" pressures) to make cars that are more fuel efficient. This may come as a shock to you, but did you know that most of the low-end cars (the least expensive models which are usually also the smallest but ALWAYS have the highest fuel economy of any car in the model-year lineup) are sold at a LOSS? Why would they do this?
Much of the cost of a car isn't the car. It takes a car company some 3-5 years to bring a car from concept to production. During this time, armies of people must be employed. Everything from research, design, vehicle engineering (the car), production engineering (all the specialized machines and assembly lines needed to build the car in volume), testing (crashworthiness safety, emissions, etc.) and the list just goes on and on. After all of this, compare the cost of a $14k Ford Focus to a $19k Ford Mustang. A Mustang doesn't actually *cost* Ford an extra $5k to build (considering that the employee salaries, benefits, etc. for all of that R&D, etc. was the same for both models) ... the Focus is sold at a loss in order to improve Ford's CAFE rating. This gives them the right to sell a few more profitable Mustangs which make up for the loss they took on the Focus. If they didn't sell the Focus at a loss then it wouldn't sell at all (thanks to problems #1 and #2 above).
Honda, Toyota, etc. are NOT the "US auto industry". Some of those products may be "assembled" here, but the bulk of their cost is overseas where their design, R&D, etc. takes place.
BTW, I don't work for the auto-industry (neither the "formerly" big three nor any of their suppliers), so I have no "horse in this race". I'm just sick of seeing article after article written by people who haven't bothered to do any serious research.
My own home country, Britain, made autos once. Quite good ones, with innovative designs and the kind of engineering-first thinking that makes for a first-rate auto. MG, for example, incorporated design and safety elements (break-away motor mounts and corrugated body assemblies - today we call them "crumple zones" ) in the late 1950's that are today considered standard, but at the time were unheard-of. Despite producing good cars, Britain's auto industry is no more, and it is an illustrative example for today's American auto makers. Isolated, subsidised, unionised and straightjacketed by government management, the British auto industry first withered and then self-destructed in the face of global competition. When Margaret Thatcher de-socialised it in the 1980's, the entire industry collapsed. For anyone living in Covington, Abingdon, Manchester or Leeds during that time, it was dreadful ... for a while. They struggled ... then re-tooled, re-thought, and although the auto industry in toto never recovered, yet parts of it did. Lucas Electronics, who made some of the (deservedly) much-maligned electric parts of British cars, now makes the avionics systems for the US Air Force.
I think what Matt's article was getting at was really the core of this, and tcampb01 makes the point without (I think) really intending to. Large industry in America could benefit from a bit of guerrilla thinking, the kind fostered and evinced by Silicon Valley. Though IT"s product lifecycles are shorter and more intense than those in heavy industry (and perhaps thereby more focused or, perhaps, the focus is only more obvious), yet the kind of thinking and innovation required to succeed in a global economy, the pattern if you will, might benefit the auto industry here. No one ever said the auto industry was fair or easy; no one ever even thinks of saying it about the tech industry. The tech industry is market capitalism at its most brutal and intense, in timeframes that our poor monkey brains can scarce grasp. No one pitied the MSP's at the end of the tech bubble; they simply had the wrong model, and paid the price (as did their techno-serf employees, of which I was one) in the market.
Perhaps Detroit needs to give up making cars, and instead make innovative parts for Honda cars. Or perhaps it needs to adopt a Japanese model, and do its R&D in Brazil or Mexico but make the cars here. Or something I haven't thought of at all ... I'm a systems admin, not an auto executive. Whatever the outcome, the idea of propping up poor market strategies and lousy business decisions, however good the engineering, historically doesn't work, and a bit of Steve Jobs in Detroit would go a long way.
- by adam_hartung November 16, 2008 7:15 PM PST
- GM needs new leadership that is not committed to old Lock-ins if it is going to ever be a viable competitor. Only someone from outside the industry will be able to implement necessary Disruptions and create White Space that will allow GM (or Ford or Chrysler) to address long-term shortcomings. I don't know why Jobs would take the job, but someone who is Jobs-like is necessary. Read more at http://www.ThePhoenixPrinciple.com
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