Academic journal article The Economic and Labour Relations Review : ELRR

Seeds of Destruction: The Decline and Fall of the US Car Industry

Academic journal article The Economic and Labour Relations Review : ELRR

Seeds of Destruction: The Decline and Fall of the US Car Industry

Article excerpt

1. The Past is Prologue

It has been said that though God cannot alter the past, historians can; it is perhaps because they can be useful to Him in this respect that he tolerates their existence. (Samuel Butler, Erewhon Revisited)

The origins of the near collapse of the US car industry in 2009 can be traced back to the seventies and eighties. This period's deus ex machina arrived in the form of the first oil shock, bestowing a golden opportunity upon Japanese carmakers. Fortunate in having developed the right mix of cars and organisational structure, Toyota, Nissan, Honda and the rest were able dramatically to expand their share of the American market, forever changing the face of the US car industry.

This article examines why the US carmakers during this period were vulnerable and how the Japanese were able to exploit their own technical and organisational strengths. An understanding of this key period in the history of Detroit's 'Big Three' reveals why more than two decades later these companies found themselves on the brink of corporate ruin. Unfortunately, despite persistent setbacks, a succession of corporate executives failed to draw the appropriate conclusions from a continued series of shortcomings. Instead, General Motors and the others seemed mesmerised by past formulas of success. Instead, events of the seventies sent a behemoth like GM on a trajectory leading to its recent, near death experience.

The problem lies in the US car industry's pursuit of a more obvious and pressing objective to the detriment of a less apparent, or at least, less demanding, one. Efficiency, in the evolutionary sense of being finely geared to a particular business environment, is almost by definition time and place specific. Given that the longevity of such an environment must inevitably be uncertain, competition will tend to lead firms to heavily discount the future. In the battle for market share, corporate focus centres on heavily exploiting current opportunities if firms are to survive and succeed in the short run. This strategy will lead such organisations to lose the ability to respond to unanticipated economic changes (shocks). The result of competing in uncertain environments then is an observable herd-like behaviour, with corporations chasing each other's strategies.

In boom times, a firm will perpetually double down its bets on successful strategies until it is essentially staking its survival on the continuing existence of an economically conducive environment. In the aftermath of the recent financial crisis, it has been easy to identify this trend, which led financial firms to trade off the flexibility to adapt effectively to change for a short run, but very profitable, form of efficiency (closely aligning itself to the prevailing environment). Many of these financial organisations became increasingly overextended by assuming that the price of assets on which these derivatives depended, such as houses, could only continue to rise. Without an expanding market for these complex financial products, the whole structure came crashing down. Financial markets had become closely tied to a very narrow set of fortuitous circumstances.

Though less dramatic, the near collapse of Detroit's car industry, including the bankruptcy and government bailout of General Motors, once the glory and bulwark of American industry, reflects much the same story. The firm's ability to survive came to be overly dependent on a specific market context. To understand the origins of the persistent failures that define some forty years of the US car history, one would best look back to the first post-war crisis in the seventies. This unambiguous wake-up call to an overly complacent industry would turn out to be only partially heeded at best.

At the very start, we need to make clear a key distinction between the occasion for the difficulties of the US automobile industry and the cause of them. …

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