Sunday, February 25, 2007

The Reality of Creative Destruction

Posted by Jeff Lipshaw

As someone who grew up in the Detroit area, and who worked as a lawyer in the auto industry for some time, it's painful to read stories about the current state of the industry and its impact on myDaimlerchrysler_2 hometown.  Today's New York Times business section has a long feature on the current travails of Chrysler, now a unit of Germany's DaimlerChrysler.  Chrysler's modern history began at the same time as my legal career - in 1979, when Congress bailed it out of likely bankruptcy with a package of federally guaranteed loans.  By the mid-1990s, when I was the general counsel of a first-tier auto supplier, Chrysler had paid back the loans, become a model of enlightened OEM-supplier relations (largely through the leadership of Thomas Stallkamp), and, because of Bob Lutz's leadership, had the best designs of the American cars (the minivans, the Concorde, the Sebring convertible, etc.)  I remember playing golf in 1995 or so at our local muni course with a young Chrysler design engineer, in which we talked about what a fun place it must be to work.

The Times article talks about Chrysler repeatedly misjudging the market, but I think misses the structural point.  The creation of a new model, at least when I was in the business, was a process of design and tooling involving an investment of over a billion dollars and three years or more.  While gasoline prices or consumer tastes could turn on a dime, manufacturing of cars could not.  And the question was whether the American companies ever really got the idea that Toyota (now the world's leader) invented and mastered - lean design, tooling, and production that shortened and made significantly more flexible the offering of cars to the market.  The reality is that American companies are still hugely invested in antiquated industrial plants (see the travails of Visteon and Delphi, for example) that are relics of almost a hundred years ago. 

Yet no workers' council nor social collective is going to recreate the material engine that was.  It seems to me the hard truth for policy in a mixed economy is that we need to acknowledge the reality of creative destruction - in this case, of the automotive dinosaur - far more than we do, accept that it will always take a human toll, and put our efforts behind ameliorating the human effect, rather than try to turn back the tsunami.

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Well put Jeff. With the number of small companies who are now engaging in producing new cutting edge car designs (e.g. Tesla) perhaps it is best to let the market decide. I would imagine that the former big 3 if steered correctly could finally one day come back leaner and meaner and well prepared to take on the market full steam ahead. The smaller companies given the chance to grow could produce a much more diversified and competitive market.

If for some reason the government were to get involved it would be a huge disservice to the innovation that is currently emerging from the small engineering firms trying to create the cars of the future.

Posted by: Jack S. | Feb 25, 2007 8:45:19 AM

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