I do not know when American management thinking went off the tracks, but perhaps it happened soon after 1945.
I do not know what caused the shift to put short-term profits ahead of anything else; ahead of employees, ahead of the community, ahead of customers, even ahead of shareholders.
Every year since the 50s, and as the industries of Japan, and of Central and Northern Europe recovered from WW II, it is clear most of US industries lost the huge competitive edge they had at the end of the War.
For a while after WW II, American manufacturers ruled the World; they built the best cars, the best home appliances, the best air conditioners, the best tractors, the best heavy machinery, the best telecommunication equipment, the best chemical industry, the best oil industry, the best civilian and military aircraft, the best marine motors, the best pharmaceuticals, best rockets (although in this area they piggy-backed on the German engineers who developed the V-2 guided rockets during WW II, the best railways and on and on.
But something happened; except for some specific fields, like computers, European and Japanese industry first caught up with, then surpassed the Americans.
Let me give you a few examples; Bayer and BSF have become much larger than Du Pont and Dow Chemical. Toyota, Honda, Nissan, Mercedes-Benz, Volkswagen and BWW soundly defeated GM and Ford. Airbus, despite being a slow semi-government bureaucracy, has caught up with, even surpassed, Boeing. In heavy equipment, years ago the Japanese Komatsu and Hitachi have caught up with Caterpillar. Even in the “hyper American” oil industry, Schlumberger, a French company, is the World leader. Today the top air conditioning brand is not Carrier, but Daikin, Fujitsu and Mitsubishi.
I could go on and on.
All this happened while American companies had to themselves the huge American market with unmatched economies of scale. I mean, it is unbelievable that companies such as Toyota, Mercedes-Benz, etc., with domestic markets much smaller than the US, and with buyers with far less money than American buyers, could defeat American companies around the World and even in the US, in quality and technology.
Today, the US balance of trade in manufactured goods speaks for itself. Even in high tech goods, it is huge and negative. This was many years before the Chinese came into play.
I hear people refer to Google, Amazon, Microsoft and Facebook as high-tech companies, in some ways they are, but they are software companies; the high-tech hardware running their software is no longer made in the USA.
Good software is difficult to develop, and the Americans have many excellent software engineers, but we also know making software does not require the investment, the multitude of technologies and the number of jobs that making high tech hardware requires.
We all know also that software exports are important but do not even come close to the value of high.tech and mid-tech goods and their associated services.
But, why has the US lost its technology and market leadership in so many areas?
This happened; first, the “bean counters” took over most of US manufacturing companies, low tech, mid-tech and high tech. Instead of engineers and scientists with managerial skills in the top jobs, the “bean counters” took charge. For the “bean counters”, “we can make anything a little cheaper and a little worse, without the consumers noticing, in order to increase profits”.
This happened in the 1970s. It is about the same time that American business schools started to “preach” shareholder value as the top priority for managers. “Shareholder value” was a deceiving expression, what it means is: “maximize short-term profits, profits above anything”.
The Nobel Prize winner Milton Friedman was the major pusher of this terrible idea. I hopehe won the Nobel for something else…
To stimulate managers to produce short-term profits, corporations introduced “short term compensation”. This meant managers could earn money when their compensation was tied to quarterly profits.
Soon managers saw, for example, that there was not much point in reducing profits, and their pay, to invest in long-term research. We all know, the managers knew it too, that the long-term health, and profits, of a company depend on research and technology but managers, like most people would, followed the path that made them wealthy “now”.
Initially, American companies were so far ahead that the change in American management philosophy did not seem to make much difference, but not before long it did.
In time, the public noticed US made goods were of worse quality and were behind in technology. Naturally, sales and profits fell.
The “answer” of US managers?; “let us ship the jobs to low wage countries”. That fixed, somewhat, the issue of costs (lower costs-higher profits), but not the low quality and obsolete technology. Low-cost production was not enough to return the companies to their previous success; any unbiased person would have seen that, but money biased the managers.
I use the Automotive industry to illustrate the tragedy, but practically all US manufacturing lived, and still lives, the same disaster.
Because of its size and because it uses lots of high tech and low tech, the car industry is a good example to illustrate what happened.
Cars include a lot of high-tech people do not see. For example, the computers in today’s cars are far more powerful than a PC. Furthermore, to enable the computer to do its job, cars come equipped also with many high-tech sensors. The sensors convert changes they detect in the car and the environment into digital signals for the computer. The computer then activates the many devices that control the car, for example, the stability control system.
Today’s car is far more complex and far more high tech than a smart phone or a laptop, but most people do not consider a car a high-tech device, but it is.
American auto companies fell behind in technology in the late 60s.
As they fell behind, they lost market share, jobs and even profits. Such losses have bad effects on society and undermine democracy.
In my next blog I will continue with the story of American managers and how they undermined, and continue to undermine US democracy, although that is not their intention.
Victor Lopez
