Browsing the blog archives for May, 2009.

Rebirth of the U.S. Auto Industry

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Chrysler and GM will rise again. I don’t make many predictions, but I’m comfortable with this one. But can this public-private partnership model really work? Is it possible for the U.S. government to run–more or less–a large manufacturer at a profit? The answer is yes, but you can pay dearly for their profits.

 

Consider that Washington is already providing these companies with an endless stream of taxpayer capital other carmakers cannot access. Government funds are also being provided to their finance wings to make it easier for their customers to purchase cars. Research grants and incentives indirectly fund the development of vehicles that will be required in Obama’s new “green economy.” Revised CAFE standards and other regulations will add production costs to all carmakers, while Chrysler and GM (and perhaps Ford) will have some of these offset by government subsidies. Government-run healthcare could transfer a huge industry liability to taxpayers as well. In addition, Obama’s weak dollar policy, which is supposed to promote exports by making U.S. goods cheaper abroad (a debatable proposition), will raise the cost of imports. In other words, steps have already been taken to make it easier for Chrysler and GM to compete in future years, while making it more costly for Toyota, Honda, and others. And if all else fails, another stimulus for federal and even state governments to “update their fleets” by purchasing new vehicles from the Big 3 will prop them up even further.

 

If you are a conservative doubting the efficiency of government-manipulated industry, you are right. But many of the long-term bailout costs will be hidden under the guise of economic stimulus, research incentives, environmentalism, and the like. The survival of GM and Chrysler will not mean that “business-government partnerships” work well, but instead that our government has both the power and audacity to spend enough of our money to keep them afloat. I expect socialists and some moderates to praise Obama’s business acumen when U.S. auto production appears to turnaround some time before the 2012 elections. I also expect to see a Heritage Foundation study that calculates precisely how much we spent—DIRECTLY AND INDIRECTLY—to save the carmakers and the UAW.

 

So here’s a word to the wise. When others laud the current administration for shaking things up at GM and Chrysler, don’t get caught predicting their demise. I suggest that you forecast their success. I can’t tell you what they will look like in a few years, but the political stakes are simply too high for the Obama administration to allow the perception of failure. Just don’t forget to keep track of what it’s really going to cost us when we’re done.

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The New CEO

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Once upon a time successful chief executives generated returns for shareholders by producing better products at lower costs. Along the way they created wealth, jobs, satisfied consumers, and even government tax revenues. This is how capitalism works—it’s a winning proposition for everyone involved. But times are changing.

 

Today, some successful CEOs are more like opportunists than fierce competitors, cozying up to government lest they be squashed by socialists intent on applying the type of central planning that has failed everywhere it has been tried. This is what we voted for when we elected change, and now we’re getting it. Its roots go back several decades, however.

 

The field of strategic management—how to run a company—was born about 50 years ago. It followed an economics tradition, emphasizing competition and the profit motive. But things began to change in the 1970s when the notion of stakeholder management became popular. Stakeholders include any group that holds a stake in an organization, such as suppliers, customers, employees, banks, and yes, government. Business schools began to emphasize the idea that organizations have responsibilities to a whole host of stakeholders, not just shareholders. According to this approach, the role of the CEO is to balance the sometimes competing interests of these groups. Focusing on maximizing profit alone is seen as shortsighted.

 

The stakeholder approach is not all bad. Maximizing short term profits at the expense of customers and employees can create problems in the long term. Taking care of your workers, providing customers with high quality and safe products, and even sponsoring a Little League baseball team can be good business. The proverbial used car dealer that hides mechanical problems in his vehicles from customers won’t stay in business for long.

 

The problem with the stakeholder approach is the notion that firms should satisfy all of these groups to some extent, at the expense of shareholders. The widespread acceptance of social responsibility—the idea that firms have a responsibility to BOTH generate profits and serve society—goes hand-in-hand with the stakeholder approach. Majorities of academics, business students, and even the public at large now accept this expanded role of business. Few have asked the obvious question: If firms have a social responsibility, then who gets to decide what it is? Obama is giving us an answer—the federal government.

 

Unfortunately many Americans just don’t understand capitalism. In a free market society, profitable firms—by definition—create satisfied customers, good jobs, healthy communities, and tax revenues. In other words, successful firms already serve society anyway. What we call social responsibility is not really about “balancing” the interests of profits and society, but about controlling corporate America and squeezing more out of business. Welcome to a world where the federal government defines each firm’s social responsibility.

 

GE CEO Jeff Immelt commented last week that the business-government relationship has fundamentally changed; firms must adapt to this reality to succeed. In other words, the successful CEO is no longer a fierce competitor, but someone who knows how to cut deals with Washington and balance profits with the supposed greater good. Immelt is an opportunist, not a capitalist. I wish I could say that his view is the minority opinion among CEOs, but I’m not sure it is.

 

We need to see some executives stand against this tyranny. Doing so invites the wrath of Washington, however, so we’re not likely to see many, especially from public companies. This means that the outrage over this type of government manipulation must come from the public at large. At present, most Americans seem OK with big brother forcing big business to “do the right thing.”  The idea that Washington is going to hold corporate America “accountable” for all of our economic and social problems sounds appealing to the masses. The real question, of course, is when will Washington be held accountable?

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