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Can the Government Manage Car Companies Without Micro-Managing?

John Paul MacDuffie of the University of Pennsylvania and and Susan Helper of Case Western Reserve University filed this guest post. They both work with the International Motor Vehicle Program.

Today, two Obama administration officials will be called before the Senate Banking Committee to discuss the impact of federal assistance to the auto industry. The administration has been working hard to convince the public that the government intends “a hands-off approach” that will end with “getting out quickly.”

There is peril here. Two issues have received the most attention as conflicting with a desire to have a speedy return to profitability: How many small cars should General Motors build? And where should it make them? (GM would like to build small cars in Mexico and possibly China for import to the United States, but agreed to a United Auto Workers condition of having one more U.S. assembly plant continuing to build those products.) Smaller issues also abound -- there are already tales of political pressure around keeping certain plants or dealerships open.

The issue of the risks of government involvement hovered above the work of the automotive task force from its inception. A curious mix resulted. Task force members had little or no knowledge of the auto industry, and this was presented as a good thing (not beholden to industry stakeholders; not inclined to micro-manage). Also, the task was presented simply as a financial restructuring (hence not requiring industry expertise), and the whole activity was time-limited (get GM back on its feet and get out of the way). But now it’s the morning after, the U.S. government owns 60 percent of GM (and the Canadian government an additional 12%), and it’s hard to see how these premises can hold up in this indefinite phase of government intervention.

But there is opportunity here as well as risk, as James Kwak and one of us have pointed out. Taking advantage of this opportunity will require the government to find a pragmatic middle way -- in between “hands-off” and “micro-managing.” Let’s remember that GM’s problems extend back for decades, and the dramatic changes in the “new GM” – a smaller company, focused on fewer brands, with an improved cost structure -- are possible only because of active government intervention. The worst thing would be for the auto task force to behave the way financial dealmakers typically do when the deal is closed -- celebrate, catch up on sleep and move on the next deal.

What’s needed is a patient, informed, ready-for-action-yet-content-with-observing stance that occasionally applies a “nudge” to keep GM on the path to recovery. (The same is true of Chrysler; in addition, careful monitoring will be needed to avoid actions that unfairly help GM and Chrysler while hurting Ford.) These nudges could be directed both to GM’s management and to the various government agencies whose actions affect the auto industry.

The government can commission analysis of the high-level problems GM faces, like quality and inflexibility. Then, via the government’s appointed representatives on the new GM board, GM executives can be directed to develop action plans to fix the biggest problems.

For example, we have argued that the key issue GM faces is a price problem, not a revenue problem -- its cars sell for $2,000 less than comparably equipped Japanese cars.

A key driver of this price gap is quality, and the board should set broad targets for improving it. For example, it could direct management to work with relevant suppliers and workers to come up with action plans to reduce the top 10 sources of warranty claims by 30 percent -- and then hold them accountable for carrying out the plans. Meeting these targets would involve fixing the root causes of quality problems, like poor relations with suppliers.

These goals should be set not solely in financial terms, but also in terms that consumers care about, such as quality targets. If quality improves, consumers will be willing to pay more for the cars, and profits will improve. Focusing first on financial targets, as the string of bean-counters at the helm of GM has long done (not to mention the automotive task force), will not yield the operational improvements needed to drive long-term viability.

Nudges also need to be directed to government agencies whose actions affect the auto industry. For example, the government can mandate increased supply of small, fuel-efficient cars in various ways, but this won’t necessarily boost demand -- and the specter of dealer parking lots filled with unsold gas-sippers subsidized by taxpayers is an unhappy one.

A higher gasoline tax would be the most effective way to do this, but if ruled out for political reasons, other policies can shift consumer demand in the same direction: national fuel economy standards that set a high bar; cap-and-trade policies that gradually shift incentives toward lower carbon emissions; subsidies for new fuel-efficient technologies; the application of readily-attainable efficiency gains for internal combustion engines to fuel efficiency (rather than greater power, the main obsession of recent years); and, possibly, programs to encourage replacement of “clunkers” with newer vehicles -- all could move the U.S. fleet toward greater fuel efficiency, slowly but steadily. Even if the speediest path to profitability were a return to a high reliance on truck and SUV sales, it would be reasonable for the government, as a patient long-term investor, to push for a different product mix.

In short: Keep the auto task force going, and make sure it is staffed with strong people who engage in proactive work to anticipate trouble spots at the interface of government policy and private company action. Have a “Not To Do” list that keeps a bright line around the most politically tempting steps towards micro-management. And, most important, remember that being too hands-off and getting out too quickly would imperil what should be the most important set of changes in the U.S. auto industry in the past fifty years. How would you avoid micro-managing the auto industry? Put your ideas in the comments section.

-- John Paul MacDuffie is a management professor at the University of Pennsylvania's Wharton School and co-director of the International Motor Vehicle Program. Susan Helper is an economics professor at Case Western Reserve University and a researcher with the IMVP.

By Tim Lawson  |  June 10, 2009; 7:13 AM ET
Categories:  Autos , Nationalization  
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Professor, how can we take you seriously when you continue to repeat the myth that American cars lag in quality? There is no longer a statistically significant difference in quality between domestic and foreign vehicles. There hasn't been for decades.

You and all the others who repeat this myth help contribute to the quality "problem" by creating the perception of one with the public.

It is irresponsible, and needs to stop.

Posted by: tonyw44 | June 10, 2009 2:34 PM | Report abuse

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