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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

April 30, 2009 at 9:53 AM

Chrysler’s long, sad road to bankruptcy court

Top of the News: Chrysler’s filing for chapter 11 bankruptcy protection is a bookend on the tragic fall of the American auto industry, one that began in the 1960s.

Then, a powerful industry became complacent, auto moguls and union bosses together ignoring quality, competitiveness, innovation and flexibility. The trouble began with the 1973 oil shock and rising xompetition from Japan. The Big Three never really addressed its weaknesses, even though by the late 1980s, unions were continually giving ground.

But the bosses kept building boring cars. They became ever-more prisoners of the bean-counters and anodyne models that seemed to promise steady, large sales — but still eroding against better-quality and more innovative imports. Chysler, as much as its brethren, received a temporary boost with unsustainably low gas prices in the 1980s and 1990s — and Ram trucks and minivans propped up profits. The old executive complacency was merely reinforced.

The profit margins that these vehicles delivered for a few years left management unprepared for discontinuity: higher gasoline prices, changing tastes, a new world of competition and a historic recession. Meanwhile, basic good management was ignored, with vast debt accumulated and poor stewardship of the pension plan. (And, yes, lack of national healthcare put the Big Three at a disadvantage).

But what about Lee Iacocca, the savior of the early 1980s? He was a “car guy,” the man behind the Mustang who was driven from Ford by the beancounters, or so went the mythology. Iacocca’s K Car did improve quality, but the K’s stacked up poorly against Hondas or Toyotas. Iacocca developed the minivan — a big hit, but one of the gas guzzlers that would set Chrysler up for this fall. I’ll leave it to business historians as to whether Iacocca did enough, or built a deep enough bench, to address the competitive challenges ahead. Or whether, like the Detroit culture, he was mostly inward looking, a fatal sin in business and much else.

One sure thing about bankruptcy court: The workers will be hurt worst — and since the late 1980s, they had the least to do with the decisions that landed Chrysler into a succession of disinterested owners, and now the judge. A sad day for America.

The Back Story: If history is a guide, Ken Lewis’ demotion from chairman and CEO to “just” chief executive will be the first step to his eventual ouster — with the shareholders he has so ill-served footing the bill for a generous golden parachute.

Yet if the bank had previously had a separate chairman and chief executive, it might have avoided some of the worst missteps that landed it in its current mess (effective regulation and prevention of it becoming “too big to fail” would also have been helpful).

The chairman of the board is the chief steward of the shareholders. The CEO is the head of management — the people who work for the shareholders.

The two jobs should be in tension, if not sometimes in outright conflict. The chairman should be there to, for example, say “no, we’re not buying Merrill Lynch and paying for John Thain’s pricey trashcan and bag o’ bonuses.” Unfortunately, most American companies combine the two positions, and we wonder why corporate governance repeatedly fails.

Today’s Econ Haiku:

Consumer spending

Is that a green shoot I see?

Or a debt statement?

Comments | More in Auto industry, Banking

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