Time to Split Up the Big Three

By Samir Junnarkar

Employing 3 million people directly and roughly 7 million more indirectly, the domestic auto industry is a vital part of the United States economy. In light of the recent near death experiences of the Big 3 auto manufactures, it is about time that we acknowledge the risk inherent in safeguarding nearly 10 million American jobs with three corporations—all of which have nearly gone under multiple times over the past several decades. It is about time that we attempt to reduce this systemic risk.

No one can deny that General Motors broke the 10 million mark in annual car sales because it had done something right in its past. However, I feel that such immensely successful corporations (regardless of whether they are American or not) have a nasty tendency to fall victim to their own success; this is especially the case in the auto industry. Many innovative companies that have made risky decisions and profited enormously in the past tend to gradually become risk averse as they come to realize how much they could lose if they happen to bet incorrectly. After great success, there simply is much more to lose. This explains why Ford cashed in on its profitable sports utility vehicles, yet then it failed to develop a long term strategy in regards to fuel efficiency. This explains why Toyota profited immensely from its Prius, yet then it failed to maintain its lead by adopting more efficient Lithium-ion batteries and introducing plug-in hybrids. Now it is  trying to play catch up. No one likes to take the punch bowl from the party, but in an industry where the mantra is “adapt or die,” it is absolutely absurd that we trust three corporations with the wellbeing of 10 million employees, and simply hope that they dial back near-term profit making and invest in strategic future growth. What’s more, we’re trusting only three corporations to make the right bets.

On the topic of making the right bets, the decisions made by the Big 3 over the past several decades are very telling of their judgment. Let me prove this point with a woeful tale of corporate negligence. In the 1990’s when Porsche faced rampant reliability problems, its management brought in industry leading quality engineers to revamp its entire manufacturing process. In the same period, when American automakers were facing similar problems, they failed to be proactive. Thus, whereas Porsche soon topped the charts in reliability, its American counterparts continued to grapple with quality problems. All the while, General Motors killed the electric car, and Ford cashed in on inefficient sports utility vehicles as their Japanese peers developed a diversified portfolio of fuel efficient vehicles. Indeed these strategic missteps are indicative of poor corporate management, and yes management comes and goes. However, Ford, Chrysler, and General Motors most recently were too far along with their poor strategies before they changed their management.

Ford was lucky, as its new CEO, Alan Mulally, aggressively cut costs, improved quality, sold off less profitable brands, and focused on its core lineups. Chrysler, however, still required substantial government assistance despite being injected with fresh capital and blessed with new management. General Motors lost much of its market cap and market share before the White House eventually intervened and booted its long standing chairman and chief executive. In essence, these corporations continued with the same bad strategies until death was knocking on their doorstep. And in waiting until death was in sight, the auto industry forced the United States government to intervene, for failure to do so would have dealt an unbearable blow to the industrial sector.

Alas, we reach the crux of the problem: is it in our nation’s best interest to hinge 10 million jobs on the well-being of three corporations when the shuttering of even one of the Big 3 would have long lasting consequences for decades to come? Is it not distinctly unsafe and unhealthy to have a company so large that the government is forced to intervene, lest unemployment rates in certain states reach Great Depression levels?

A simple and elegant solution to the bind we are in is to break up of the Big 3. If each of General Motor’s eight brands were their own unique entity, then if one were to fail by virtue of massive strategic missteps or incompetent management, then seven would remain. What’s more, the death of a weak corporation is healthy for the industry. Indeed, detractors of what I am proposing would point to the very valid fact that the automobile industry is very capital intensive, and the cost of developing vital parts such as engines hovers around $1 billion. However, high research and development costs can be circumvented by adopting an easily scalable model that is currently used by smaller manufactures such as Tesla Motors, Aston Martin, and Lotus. Tesla gets its frames built by Lotus. Lotus sources its engines from Toyota. Aston Martin and Mercedes Benz are collaborating on developing new frames and engines for their high end vehicles. In fact, larger more mainstream manufacturers such as Toyota and Volkswagen are also in discussions about sharing parts. By engaging in strategic partnerships with automobile companies with certain core competencies, higher quality parts can be shared while permitting R&D costs to be spread out.

By severing the Big 3 into smaller more nimble operations, risk is spread out, and no longer would 10 million jobs secured by only three companies. No longer would the government be forced to inject billions of dollars into a firm because inaction would devastate an entire economic sector. When choosing between maintaining an inherently unstable system that forces government intervention and stifles economic Darwinism, and opting for short term immediate government maneuvering to break up three industrial behemoths, the lesser of two evils clearly is the latter. Paradoxically, at times massive government intervention is in fact needed to ensure that further intervention and bailouts no longer are necessary—this is one of those times.

This entry was posted in Articles for Volume 3, Issue 1, Fall 2009. Bookmark the permalink.

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