Month: May 2021

I continue with the automotive industry to illustrate how the management thinking of US business schools, from the elite schools to the humblest community college, practically destroyed US manufacturing, including high tech manufacturing.

In another post I will discuss how US schools of public administration undermine, and are unable, or unwilling to fix US democracy.

What happened to cars, happened to most of US manufacturers. It happened to low-tech, mid-tech and high-tech companies across all industries, and continues to happen because most American management has fallen behind. It has happened because American business training, from executives to the most junior worker, has fallen behind in most industrial sectors.

The US still has some exceptional companies, even in the high-tech industry, but they are an exception. Most Americans know and suffer the problem, many lost their jobs and earn now lower wages, therefore the country is now in and ever worsening political and economic crisis.

American car companies lost market share because they fell behind in the design and manufacture of components and in the design and manufacture of the vehicles themselves.

It happened because the business schools preached “profit is the primary goal”. To motivate the managers to produce higher profits, the boards of companies tied the pay of the managers to the profits.

Managers soon figured out that the best way to increase their pay was to maximise short-term profits. Profits 5, 10, 20 or more years down the road lost importance. After all, most managers stayed in the same company for just a few years.

To maintain profits down the road, you need to reduce profits and invest in research, in development and in training. But American managers were and still are, motivated to generate profits right away.

Slowly at first, the “results” of the approach came in.

American cars fell behind in technology, in performance, in quality and in sales.

At first, Mercedes Benz took away market share from GM´s Cadillac, Fords’s Lincoln and Chrysler’s New Yorker. The American owners of Mercedes Benz experienced more advanced features, better handling, better quality of materials, and finish. Soon the “luxury car to have” became Mercedes Benz. BMW did the same; it placed itself as an alternative to Mercedes. To many people, a Cadillac became “a Chevrolet with leather seats and a few gimmicks, not real luxury.”

This is how Cadillac manages destroyed Cadillac; in 1980 Cadillac sold 33% of luxury cars sold in the US, today its share is 7%. In 40 years, American managers were unable, still are, to match their competition. But it was not only the Germans. In 1989 Toyota launched its luxury brand Lexus. This made things even worse for the Americans.

But even more important economically for America was what happened to the American popular car brands.

When oil crisis hit in the 70s, the price of gas forced many Americans to consider compact cars. They bought imported Toyotas, Hondas, Nissans (then called Datsun) and Volkswagens.

The new owners were surprised, not only the imported cars consumed less gas, they were put together better and were more reliable. They noticed that in particular in the Japanese brands.

The owners raved about their Toyotas, etc. Soon the car magazines made everybody aware of what was happening; the sales of the Japanese brands grew even faster at the expense of US brands.

American managers and the American business schools never considered that perhaps the Germans, particularly the luxury brands, and the Japanese had better managers, it never crossed their minds.

To them it would be impossible that Toyota or Mercedes-Benz would have better managers. How could it be?; the Harvard Business school, and the rest of the World’s “top” business schools were all in the US. Nobody ever heard of German or Japanese business schools“comparable” to Harvard, etc., they had none then, they have none now. The Germans and the Japanese do not believe in the MBA, etc.

American managers “reasoned”; “if they trained us in the best business schools it is obvious we are the best managers.”

Because American business schools and American managers thought they were the best, they looked at other factors to explain the success of the Japanese. The Germans bothered them less because Volkswagen was not as successful, and the luxury market was much smaller than the mass market.

The Americans “assumed” the Japanese advantage was due the much lower wages (at the time) of the Japanese auto worker, the “docile” Japanese unions and the diligent Japanese worker.

The American “experts” convinced themselves, and convinced the politicians and the unions, that if the Japanese had to make cars in the US their competitive advantages of lower wages, docile unions and diligent workers would evaporate and, given the “superior” business skills of American managers, the Japanese would be toast in no time.

The American government told the Japanese; “look fellows, you have to manufacture cars in the US if you want to sell cars here. If you don’t, we will slap huge tariffs on the cars and you will have no market.”

What happened next is fascinating I will discuss in my next post. Movies should have been made about the abject failure, then and now, of the American business schools and the managers they “trained”, ans still “train”.

Victor Lopez

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

 

 

 

I am not American, but I am very interested in what happens in America because if America continues its decline, democracy will die. If US democracy collapses, democracy in other countries is doomed too.

The root problem with US democracy is that, like all representative democracies, it gives too much power to politicians and to the Supreme Court. In the US, and in all other representative democracies the politicians, as a class, they have all the political power; besides making all the political decisions, without the people having the power to stop them, they also appoint the Supreme Court judges; they have total control, the people control nothing, this has to change, it is killing democracy.

In the US, and in all other representative democracies, the citizens, the voters, only have power to elect politicians, they do not have the power to stop the policies and laws the politicians make. Nor do the people in representative democracies have the power to introduce on their own policies, new laws or changes the constitution.

The politicians know they have power, but to get elected they need the vote of the people. This requires a lot of money, particularly since the US Supreme Court made the democracy-undermining decision in 2010 of allowing unlimited contributions to political campaigns by corporations, unions, professional associations and individuals.

This has created the crazy situation where politicians need the money of big donors to get elected. If a candidate turned down money from those entities, his or her campaign will not be competitive; with lots of money, a much worse candidate will obliterate a better candidate.

This means all candidates have to accept as much money as possible from the big donors. The donations of ordinary wage earners do not really mean much any more, their vote at election time is all that counts.

Because for politicians their main goal is to get elected and they need lots of money from big donors, they can not consider what is good for the people over the long term. They promise a lot and do some things to please the voters “now”, even if those decisions are bad for the future of the voters, their children and the country. But let us not blame the politicians; they behave in the way the system forces them to behave. Let us change the system so that politicians have no choice but to make decisions for the long term and for the majority, not for the donors.

In the current situation  candidates are in a Catch 22  situation; “if I reject the donations, in order to represent the will of the average voter, I will lose the election for lack of money and staff, if I accept the big donations the interests of the voters will have to take a bad seat at the back seat”.

This dynamic has effective destroyed the basic idea of democracy; “government of the people, by the people, for the people”.

As a result of the current system, politics in representative democracies gradually deviate from the will of the people, from government of the people, by the people…, etc.

In the US, the situation is worse than in other democracies because, besides the terrible decision of the US Supreme Court, other factors already made money a decisive factor in American politics. But all representative democracies suffer “deviation from the will of the majority”. In other words, they do not really practice democracy much beyond freedom of speech.

This means than in the US executive and legislative key policy decisions, laws and regulations cater to the interests of lobbies and pressure groups, not to the interests of most voters. Sometimes the people inm power favour one lobby over another lobby, they do not put the interests of the people ahead of everything else.

To get elected and use their power, US candidatesb also have to fight like hell. Republicans and Democrats have to destroy each other’s credibility. Inevitably, this polarises the parties, the candidates and the voters. It is absurd to expect democracy to work with such bitter polarisation.

It is not then surprising only 30% of the American people trust politicians. Compare that to the 90% support level they get in Switzerland, higher than anywhere else; it is one of the positive effects of direct democracy.

Anyone can understand that with only a support level of 30% no democracy is solid.

Riots on American streets, the assault on the Capitol, etc., are just the symptoms, not the problem. The problem is that US politicians do not adequately represent the people, because they can not, even when they want.

The remedy for the US, and for the rest of us? Direct-representative democracy. In direct-representative democracy Americans will still elect politicians, but there will be a crucial innovation; if 1% of the voters demand a referendum on any decisions of the executive or the legislative, a referendum will take place. The decision will bound government and parliament. Nobody can overturn the decision, not even the Supreme Court; only the people, in another referendum could overturn the results of a previous referendum.

In my next blog I will discuss how prevalent US corporate management practices are also undermining the US economy, American wage earners and, as a result, US democracy too. Make no mistake, democracy is sustained on the shoulders of the political intelligence of the common citizen, not on the shoulders of politicians, scholars, entrepreneurs, etc.

Victor Lopez