INDUSTRY ISSUESHarvard Business School Examines the U.S. Auto Industry BOSTON (April 10, 2006) - Several Harvard Business School (HBS) professors - experts in management, operations and product innovation - have taken a close look at the U.S. automotive industry. In a article titled, "Drive-In Nation: Judgment Day for the U.S. Auto Industry," published in the HBS Alumni Bulletin, the professors compare U.S. automakers to their foreign peers, and they found the Big Three lacking. The automotive industry has ruled America's economy and shaped the country's development, culture and social mores for decades. Yet, the pressure of globalization and other powerful forces have forced a moment of truth: It is expected that sometime this year, in one of its many factories, Toyota will move ahead of General Motors as the largest automaker in the world. For a domestic industry beset by falling sales, staggering financial legacy obligations, and the market erosion from globalization and foreign competition, the professors looked at what went so wrong, so relatively quickly. In addition, they considered whether the trend can be turned around, and does it matter if it can't?
Talking turnaround verses walking it "For the six decades preceding the second oil shock in the 1980s, the United States was a highly protected market," declares HBS professor Malcolm Salter, who has tracked the auto industry for years. "That wasn't because of trade barriers, but because gasoline prices were so much lower than in other auto-producing countries. With no serious challenge from abroad, and only relatively benign competition among themselves, the Big Three and their stakeholders were all happy and doing well." It led to an environment where stagnation was rife, and not rocking the boat was the modus operandi, adds the report. The authors contend that the domestic automakers neglected to watch for advancing, but unseen, threats in regards to their industry. Japanese automakers that had staked a toehold nearly 40 years ago with economically priced, and more fuel-efficient vehicles, benefited from the surges in oil prices in the early 1970s and again in the 1980s. While American automakers remained blindly mired in their inefficiencies - in manufacturing, supplier and employee relationships - the Japanese carmakers were more responsive to shifting consumer demands, less rigid in their thinking and practices, and were able to gain traction. Today, GM and Ford are closing plants, cutting jobs and production, and trying to deflect talk of bankruptcy, all the while walking legacy tightropes, losing money and U.S. market share. Chrysler went through its own woes earlier, culminating in being acquired as a part of today's DaimlerChrysler, headquartered in Germany. In the case of GM lately, the recent consumer headlines extolling the virtues of GM's recent actions provide lots of good press, while masking today's harsh realities. Selling off a majority position in GMAC, its dominant North American money-making division, translates a cash-generating gem into cash reserves. In addition, the automaker's actual vehicle sales are less than it and others projected. When revenues are lacking, reserves get spent. All the talk aside, if revenues, like rubber, don't hit the road soon, the traction needed to turnaround, let alone rise again to dominance will be lost. HBS professor Stefan Thomke put it succinctly by saying, "Rather than competing on the basis of discounts, U.S. carmakers need to get to the point where people want to buy their cars. The companies can't simply restructure their way out of their difficulties." Thomke pointed out that, compared to their many of European and Japanese competitors, the culture within American firms seems different: "less passion about their products, poorer relations between their organizational functions, and a reactive rather than proactive product-design process."
Capitalizing on the blind spot Professor Kent Bowen, who has studied Toyota, explains: "The Japanese are very good at two things that are key to success in the auto industry: refreshing their products and having the flexibility in their factories to do that quickly and economically. These are essential capabilities because the industry's competition is so intense." Domestics have been hobbled by labor agreements that are more financially generous but tightly restrict worker activity and hinder innovation and executive vision. He maintains that Toyota took advantage of this Detroit "blind spot": "While less generous in its compensation packages for workers, Toyota strives to use its labor force in flexible, creative and collaborative ways," Bowen says. And Toyota's biggest worry, he adds, "is getting too big, too fast, which they feel would make it hard to find enough good managers, thereby jeopardizing the company's legendary quality." For some U.S. automakers, adopting the latest high-quality technology in vehicles and factories is often put forth as a solution. Assistant professor Daniel Snow, who studies the application of new technology, offers a caveat, pointing out that technological advances are a plus only if consumers accept them. As an example, he cites an instance when GM and Ford customers rejected upgrades in the rear suspensions of Camaros and Mustangs because aficionados liked the feel of their "ride" just the way it was before. "It can take generations for a customer base to change," Snow says. By way of contrast, Japanese plants are in a state of continual improvement and repurposing, with input from everybody, including customers. In addition, Snow notes, the Japanese use technology not only in the manufacturing process, but also in engineering and designing for "buildability." While U.S automakers retrench, Toyota is aggressively building American factories and, with other foreign automakers, adding billions of dollars to the U.S. economy while creating hundreds of thousands of jobs. Despite these new plants and jobs, globalization all but assures that the U.S. auto industry cannot continue to offer its employees the standard of living it once did. It's a portent for all of American industry and its workers. Yet, despite investing in the United States, Toyota and others turn a bottom-line profit, where the Big Three can't. Salter commented, "The industry is at a fragile point right now. But there's evidence that folks in the U.S. firms are now building cars as well as anybody else. Yes, the Japanese have a lead in hybrids, but it's possible that some other technology will be the better way to go. Things change in this industry. American firms may currently be overburdened by legacy costs, but I think they are undervalued by consumers and by the financial markets." Colleague Richard Tedlow added, "The Big Three once seemed untouchable, so their troubles today are like a shot across the bow for other companies. The ripple effect is going to be emotional and intellectual, not just financial." Old thinking should be jettisioned, leadership needs to see the new economy through its consumers' eyes and find the means to develop traction towards customers. Simply put, for leadership, innovation and technological change to work, say the authors, it must be aligned with consumer, not boardroom, aspirations.
(Source: HBS) 
