How the mighty have fallen

This little fact: General Motors (GM), the US car maker of which it was once said that if they sneezed, the American economy would have the flu, now is almost on it’s knees. Goldman Sachs, the only investment bank escaping the subprime crisis, cut its rating to a “sell”. GM’s market cap is now below that of… Hersey (yes, of the coockies). 

This market cap is just $6.5B, an amazingly low figure for one of the largest corporations in the world (in terms of employment, revenues). Compare that to Toyota, which has a market cap of $150B, that’s more than 20x as much..

Toyota, of course, is the company that revolutionized car manufacturing with a series of practices that combined the economies of mass production with the flexibility of “mass customization” and the frugality of “lean production”.

At the core is a learning mechanism which improves production processes at a steady pace, involving the rank-and-file workforce, enlisting their local knowledge. Quality is aimed at production processes, not at products. The simple philosophy is that better processes lead to better products, although this philosophy does not originate at Toyota, but funny enough, with Deming, an American, the father of Total Quality Management (TQM).

TQM was taken up in Japan after the second world war, and only came back to the US via an increasing onslaught of imported Japanese cars. Only then did the US car manufacturers show an interest in the new Toyota paradigm, but since much of the knowledge is tacit and cultural, rather than explicit formulas, change has been very difficult.

For instance, Japanese car manufacturers have much more cooperative relationships with their parts suppliers, enlisting their specialist knowledge and cooperating closely which enables the “just-in-time” (JIT) inventory management philosophy, in which parts are supplied at the place and time of need, reducing costly inventories. (JIT is much more than that, but this is not the place to elaborate).

The rise of Toyota and it’s new production philosophy, together with the American discard for fuel efficiency, have led to the demise of Detroit. The big three are a mere shadow of their former self. In a way, American energy policy must also bare some blame though.

Where fuel in other parts of the world is expensive due to high taxes, creating incentives to build and buy fuel efficient cars, fuel is much cheaper in the US (energy efficiency overall has stagnated in the US, in stark contrast to Japan and Europe), so there was never really any incentive to build (nor buy) fuel efficient cars.

This is now changing rapidly, and the behemont structures like GM are on their back foot. In fact, this could be a critical time, because the general car market is very weak due to the economic problems, and demand is shifting away from the US cars because of fuel efficiency.

Could we actually see GM falling over? Chrysler has already been saved (by the Fed!) in the early 80s. It’s going to be agonizing times for US car manufacturing.