The Reckoning

What’s good for General Motors is good for America. The saying summed up the 20th century when the US, and its car industry, ruled the world. The invention of the car in Detroit and the discovery of oil in Texas changed the country forever, both in terms of its culture and economy. Henry Ford created the assembly line, and the assembly line created modern America. Ford, along with GM and Chrysler, was a shared monopoly, divvying up the car industry between them. However, within the span of two generations, the Big Three went from leading the world to barely staying afloat. Detroit became a graveyard, while the American manufacturing base hollowed out. The rapid rise and even faster fall of Ford is a story worthy of Edward Gibbon, the author of The Decline And Fall Of The Roman Empire. David Halberstam tells it in The Reckoning, a book written in 1986 that is still relevant today.

Halberstam parallels Ford’s decline with the rise of Nissan, one of the leaders of the Japanese car invasion of the 1970s. Japan and the US had been closely linked ever since American warships steamed into a Japanese harbor in 1854 and opened the islands to foreign trade. After 220 years of isolation, the Japanese had to quickly re-invent themselves to become a modern industrial power. They eventually became strong enough to challenge the US for control of the Pacific in World War II. It wasn’t a fair fight. They were a middleweight going up against a heavyweight. Once we survived their initial blow, there was only one way it could end. After the war, the Japanese were disarmed, and their islands came under the US military umbrella. We provided security and dictated how their economy would be rebuilt. The irony is the pro-corporate reforms we initiated crushed their labor movement, giving their car companies a huge advantage when competing with their American counterparts. Nissan controlled labor costs in a way Ford never could.

Japan is more hierarchical than the US. Obeying authority is the ultimate good. That’s how life works when so many people are crammed into a small land mass without many natural resources. The only advantage the Japanese have is their ability to work together. Everything is centralized. The International Bank of Japan and the Ministry of International Trade and Industry are more powerful than their equivalents in the US. Katsuji Kawamata, the head of Nissan for more than 30 years, came from the IBJ. The Japanese built their car industry almost from scratch after WWII. They learned everything they could from their conquerors. Hierarchical societies produce good students. Americans ignored in their own country, like quality control expert Edwards Deming, were revered in Japan and given free run to try their ideas.

No one in the US cared about car quality. They were making too much money to bother. The US was the only industrial power untouched by WWII, so no other country could compete economically. The war was a triumph of production and logistics. The Allies controlled 86% of the world’s oil. It was only a matter of time before the sheer number of ships, tanks and planes overwhelmed their enemies. The brains of the war effort weren’t the generals. It was the statisticians and analysts who ensured the continent-wide industrial machine ran at max efficiency. Modern analytics were born in the Pentagon. After the war, Robert McNamara and men like him brought systems analysis to the private sector. McNamara eventually became the head of Ford, before running the Vietnam War as LBJ’s Secretary of Defense.

The disputes between McNamara and the car people at Ford read like a mid-20th century version of the ones between the stat guys and scouts in Moneyball. There was an enormous class divide between the two groups. The car people were blue collar men who came up through the company. The analysts came from the best schools in the country. They didn’t have a technological background, but they didn’t need it. The numbers told them money was being left on the table. They were the first generation of consultants. They streamlined the manufacturing process and squeezed consumers for every dollar. Why build a car to last 20 years, when you could build one that broke in five and forced people to buy a new one? Why put money in research and development when people would buy whatever they put out?

So there were more people than ever from the business schools, and where they once had only slide rules for their calculations, now they had computers, which greatly increased their capacity to quantify any concept and to put those numbers to use. Computers were a powerful new weapon for the finance people. Every year now they had great access to financial detail and greater skill in using that detail within the company. With the coming of computers, the financial people were like prophets armed. 

The analysts told the owners what they wanted to hear. Henry Ford II, the grandson of the company’s founder, had taken Ford public after WWII. It made the family incredibly wealthy, but it also tied their fortunes to the stock market. The business changed. Ford went from selling cars to selling stocks. The goal was maximizing short-term revenue. They had to impress Wall Street with quarterly profit numbers. There was no pressure to innovate. The barriers for entry were too high for new domestic companies to compete. GM set the market. Ford and Chrysler followed. Follow the pecking order and they would all get rich.

The Big Three were slaves to the numbers. When the numbers didn’t correspond with reality, they questioned reality, not the numbers. Their researchers knew the tastes of their consumers were changing, but the bosses weren’t listening. They couldn’t. Their business model was built for a world where the size of your car determined your social status. That changed for the generation who grew up after the war. The first yuppies were more sophisticated than their parents. They were born with money, and they signalled status through food, lifestyle and politics, not consumption. A forward-thinking company would have tried to change, but the Big Three needed the higher profit margins that came from bigger cars. The executives had annual bonuses, and they had negotiated generously with the UAW knowing they could pass on the costs to the consumer. Their cars were getting worse and more expensive at the same time. Something had to give.

The worldwide supply of oil gave in the 1970s. The economic boom of the 20th century was built on cheap oil. Technological advancements came from the labor-saving power of machines, and the machines ran on oil. The Japanese didn’t have as much, so they used it more efficiently than the Americans. In 1973, OPEC, a cartel of the world’s biggest oil producers, created a panic when they restricted supply. With prices rising and lines stretching around the block at every gas station in the country, US consumers began focusing on mileage. Toyota and Nissan were ready to pounce. Domestic competition in Japan was much fiercer than in the States. It was natural selection 101. Companies fighting for their lives make better cars than ones protected from competition. The Japanese pushing their way into the US car market was a stark reversal of what happened in 1854. It was like introducing an invasive species to an environment where they had no natural predators. The Big Three couldn’t react fast enough to how the market was changing.

What makes the book so interesting is that it also tells the story from the perspective of the Japanese. From the American point of view in the 1980s, they appeared to be an unbeatable industrial machine. However, there was just as much infighting and dysfunction at their companies. They just did a better job of hiding it. The power struggle between Takashi Isihara and Ichiro Shioji at Nissan was almost a carbon copy of the one between Henry Ford II and Lee Iacocca at Ford. Yutaka Katayama, the trailblazing executive who popularized Nissan in the US, was resented by his bosses for his success. Not even being right could save him from being marginalized. The same thing happened to Hal Sperlich, the chief architect of the Ford Mustang and Chrysler Minivan. Once an organization gets large enough, advancement and survival within it depends on playing politics. It’s Robert Conquest’s Third Law of Politics in action: The simplest way to explain the behavior of any bureaucratic organization is to assume it is controlled by a cabal of its enemies.

The human heart is flawed. Our greatest strengths are also our greatest weaknesses, and every revolution contains the seeds of its own destruction. That was the story in the US just as much as it was in Japan. The more successful people get, the more arrogant they become. By the end of his life, Henry Ford had nearly destroyed the company he founded. After being pushed out of Ford, Iacocca took over Chrysler and slowly turned into everything he hated about Henry Ford II, who was essentially Bruce Wayne without Batman. The second generation of Japanese factory workers, just like their US counterparts, didn’t want to follow their parents into such demanding jobs. The final few chapters of the book show Korea doing to Japan what Japan did to the US. Nothing stays on top forever. It’s worth remembering in an era where a few companies control the online economy. Apple and Google will get fat and lazy, just like Ford and Nissan. What comes up must come down.

There is a time for everything, and a season for every activity under the heavens: a time to be born and a time to die, a time to plan and a time to uproot, a time to kill and a time to heal, a time to tear down and a time to build, a time to weep and a time to laugh, a time to mourn and a time to dance, a time to scatter stones and a time to gather them, a time to embrace and a time to refrain from embracing, a time to search and a time to give up, a time to keep and a time to throw away, a time to tear and a time to mend, a time to be silent and a time to speak, a time to love and a time to hate, a time for war and a time for peace.  

Ecclesiastes 3:1-8