Martin Saffer, associate dean in the CBE and former executive at Ford Motor Company, discussed problems in the auto industry.
Wight Martindale ’60 first visited Lehigh University in 1955, an era marked by the dominance of the U.S. steel industry. Bethlehem Steel was the eighth largest company in America at the time and had an industry training program that was considered the premier program in the world.
McClinton-Marshall, the construction arm of the company and the namesake of two Lehigh civil engineering students, built skyscrapers in New York City and the Golden Gate Bridge in San Francisco. Bethlehem Steel’s shipyards turned out 1,127 fighting ships during World War II.
It was a time of unparalleled success for the company. But for a variety of reasons, it has “become a hollow shell of a once great steel mill … It now lays motionless, moribund, rusting, a testament to the fragility of greatness,” says Martindale, executive-in-residence at the College of Business and Economics (CBE).
Unfortunately, Martindale and his colleagues in the CBE see history repeating itself. Once the pride of Detroit—and America—the U.S. automobile industry is facing a collapse similar to that of the steel industry.
“America’s original automobile industry, which we know today as the ‘Big 3,’ is following the footsteps of Bethlehem Steel and the steel industry,” says Martindale. “The door of history is closing on them, too.”
It was a message discussed at length during the business school’s latest installment of its lecture series on the financial crisis. Titled “GM relives the steel crisis of the 1980s,” the discussion included Martindale and Martin Saffer, associate dean for graduate programs in the CBE.
During his 30-year career, Saffer held senior positions at Ford Motor Company, which gave him insight into the Big 3’s culture and business mindset.
According to Saffer, Detroit manufacturers have long suffered from a failure to successfully modernize and adjust to changing market needs. Their leadership was insular and internally-focused, and their global outlook was too regionally focused.
For example, Ford has 35 different regional Web sites to search. Toyota, alternatively, has just one. Ford has 10 platforms on which it builds its line of vehicles. Toyota has only four.
The problem comes down to streamlining and efficiency, says Saffer. The Big 3 are only truly profitable during high volume years because the cost of running their business is so high.
This troubling financial situation becomes even more worrisome during a global recession. Ford’s stock is selling at just under $2 per share—the same level it did in 1975, more than 30 years ago.
“Sure, they make money three years out of five. But they need high, high volume to make a profit,” Saffer says. “Their profit margins? [The Big 3] make 1 ½ cents per dollar of revenue in an average year. Toyota makes 10 cents per dollar during an average year.”
When foreign competition ramped up, the U.S. automobile industry became solidly protectionist – just as the steel industry did years earlier. Both industries were slow to change, and Martindale argues that they were quickly overwhelmed by smaller, more nimble international manufacturers.
Also, Bethlehem Steel and GM traditionally relied heavily on cash. When budgets tightened, this became a problem that neither could effectively overcome.
The parallels don’t end there.
“All managements always have been—and always will be—subject to this self-recreational blindness,” says Martindale. The Bethlehem Steel was manly, corrupt and defiantly self-centered, he explains.
Unfortunately, auto companies cultivate their own cultures, too.
“Guys like [Chairman and CEO Rick] Wagoner at GM are smart, sincere, diligent, modern-day Eagle Scouts. Executives at GM prefer stability over conflict, continuity over disorder. And GM’s way over everybody else’s,” he says. “They believe hard work can overcome anything, and that the next year will be better.
“This, despite four decades of evidence to the contrary.”
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Posted on Tuesday, February 03, 2009