Sunday, August 28, 2011

Chart of the Day: Consumer Sovereignty Rules in the Long Run and Competition Breeds Competence

The data in the chart above come from a fascinating 2007 Bloomberg article "The Fall of Detroit: An Insider's Tale," by John Lippert, chief of Detroit' Bloomberg New bureau, and formerly a GM employee from 1973 to 1981. Customer complaints were so high for Ford and GM in 1980 because they were both selling everything they could produce, and so it was quantity of production that mattered, not quality.  According to John Lippert, "For labor and management alike, moving iron out the door trumped everything," and "We didn't emulate Toyota sooner because we didn't think we needed to."

What are the economic lessons here?

1) Although "labor sovereignty" and "management sovereignty" may have prevailed in the auto industry in the short-run as they ignored quality and consumer complaints, that outcome was not sustainable over time in a competitive market.  Ultimately it was "consumer sovereignty" that prevailed in the auto industry over the long run, as the dramatic improvements in quality and customer satisfaction demonstrate.

2) The intense competition from Japanese automakers was the best thing that ever happened for American car consumers, because it was that competition that restored American consumers to their rightful throne as the kings and queens of the market economy. Adjusted for quality and price, American car consumers today have never had it so good. Ever. They can thank international competition from Toyota, Honda and VW for that. 
 
HT: Chris Douglas

18 Comments:

At 8/28/2011 9:44 PM, Blogger VangelV said...

Detroit's problem was not quality because great strides were made on that front. The problem was mediocre design and a lousy cost structure that made the average vehicle a loser.

 
At 8/29/2011 6:28 AM, Blogger Walt G. said...

Nice article. It brings back many memories. My struggle was with 100 F. degree working conditions and 60 pound car frames. Gotta love those robots we used to hate.

I noticed the mention of GM, Ford, Chrysler and Toyota, Nissan, Honda compensation disparity is always between the hourly workforces. My research shows most CEOs outside of the U.S. make 10-13 times what their average worker makes. In the U.S. that number is 200-400 times as much. Is a U.S. CEO really worth that much difference?

Should CEO and executive pay be a bargaining point if a company initially asks for shared sacrifice or parity with other companies? If not, why?

 
At 8/29/2011 6:51 AM, Blogger juandos said...

"Should CEO and executive pay be a bargaining point if a company initially asks for shared sacrifice or parity with other companies? If not, why?"...

Well Walt G though I most definitely sympathize with your (our) viewpoint the fact is that CEO pay is actually calculated by the board of directors as a rule, right?

Sadly the unions never seemed to want to get in on that end of the action, to put enough of their own people (via the purchase of common stock etc.) in enough numbers to be on the boards of these automobile companies...

You know what the unions' excuse was, right?

The unions didn't want to be in the position to 'negotiate against themselves' in manner of speaking....

 
At 8/29/2011 7:00 AM, Blogger Larry G said...

well my understanding (perhaps an urban legend) was that if something was wrong on the Toyota assembly line - they'd fire you for not stopping the line but in America they fire you for stopping the line.

no mention of Dodge which according to Consumers R has not made the same strides that GM/FORD have made and yet are selling well because many Americans continue to buy on style and not reliability.

there are still some pretty badly made cars in the world...and Toyota did not change them.

 
At 8/29/2011 7:17 AM, Blogger Walt G. said...

No, juandos. Executive pay is largely determined by executive compensation committees made up of CEOs from other companies. That's like a UAW worker at Ford determining a UAW worker at GM's pay. The board of directors usually follows the executive pay committee’s recommendations since they are the ones who hired them. There is strong evidence high performance and high pay is not necessarily correlated.

My question is still, once it is brought up by the company, whether shared sacrifice and parity includes executive pay. Exactly when and where should we compare these companies? If certain areas are off limits for discussion, why?

I realize the internal union and company struggles do not play well with the general public, but it is a difficult sell to the membership that we are in a desert with no water in our canteens when our leaders have barrels and barrels full of water for themselves.

 
At 8/29/2011 7:26 AM, Blogger VangelV said...

No, juandos. Executive pay is largely determined by executive compensation committees made up of CEOs from other companies. That's like a UAW worker at Ford determining a UAW worker at GM's pay. The board of directors usually follows the executive pay committee’s recommendations since they are the ones who hired them. There is strong evidence high performance and high pay is not necessarily correlated.

First, there is no evidence that the pay of car company CEOs are out of line when compared to the rest of American industry. Second, in the end it is the shareholders who are responsible and have to live with the consequences. Third, if those consequences mean that the Detroit companies go bankrupt those companies should be allowed to be liquidated, something that you are against.

 
At 8/29/2011 7:39 AM, Blogger juandos said...

"Executive pay is largely determined by executive compensation committees made up of CEOs from other companies"...

Really Walt G and the board of directors (which have been determining compensation in the airline industry) have NO say on whether to accept the advice of an outside committee?

"There is strong evidence high performance and high pay is not necessarily correlated"...

Well Walt there's no doubt in my mind that CEO competence in minding the store seems to have in all to many instances very little to do with performance of said store...

"Second, in the end it is the shareholders who are responsible and have to live with the consequences"...

Personally I think vangIV's point here is pretty much on target...

 
At 8/29/2011 7:54 AM, Blogger Walt G. said...

Vange, "there is no evidence that the pay of car company CEOs are out of line when compared to the rest of American industry"

Why are we limiting the discussion to American industry for globalized companies? Where does "global" stop and start? What are shared sacrifice and parity, and who gets to define them?

I am against the short term pain the bankruptcies would have caused. I agree it would have possibly been better if the bankruptcies had occurred in the long-run for those not in the industry. A lot of people think the bridge loans were financially a good idea for the U.S. now. I am too close to the issue to say.

juandos, too many Golden Parachutes for low performance cancel out the pay-for-performance goals of the other ones. I am for enhanced profit sharing myself.

As a rule, the board accepts the compensation committees’ recommendations, and the committees are made up largely of colleagues. That’s a sweet deal.

 
At 8/29/2011 9:24 AM, Blogger juandos said...

"As a rule, the board accepts the compensation committees’ recommendations, and the committees are made up largely of colleagues. That’s a sweet deal"...

Yeah, sometimes being a member of the 'old boys club' has its upsides...

All Golden Parachutes Are Equal

 
At 8/29/2011 11:55 AM, Blogger sethstorm said...

This comment has been removed by the author.

 
At 8/29/2011 12:03 PM, Blogger sethstorm said...

Not so. The more global the car gets, the more bland and un-American it becomes.

The only thing we got out of it is the foreign brands imposing a "tons of golfcarts for the masses, few underpowered exotics for the few" model from outside the US.

At least with GM/Ford/Chrysler, they still have larger *cars* in mind per dollar - and not simply for fewer people. Targeting the Third World and only customizing up for the First lowers quality and choice to bland golfcarts.

The only upside is that all the irrational hate for GM made it easier to buy into their upper tier cars.

 
At 8/29/2011 1:33 PM, Blogger morganovich said...

walt-

i think you are misunderstanding how pay works.

there is no committee of other CEO's that determine your paycheck.

it is done and approved by the board in the name of the shareholders.

they look at a set of comparable for other CEO's to get to a number (find the market rate), but other CEO's do not somehow vote on or approve it.

this does have an inherent inflationary bias however.

you never want to offer a below median pay rate. so you offer median + x. that makes the next median level higher and causes an upward spiral.

regarding relative pay for US re ROW - it's not entirely apples to apples.

our CEOs get much of their pay in equity, which is riskier.

second, they tend to work much harder, at least relative to europe.

third, they have far less job security. our CEO's turn over much more frequently. that risk requires compensation. having a job for life tends to get you less money per year (except in government).

i have no issue with C level paycuts when times are tough. i think it's not an unreasonable thing to look at. but at a big firm, it rarely makes much difference. it's mostly symbolic. cutting C level compensation to zero simply does not move the needle much at GM.

further, in a downturn, as a shareholder, you want the kind of CEO who will make the right decisions and emerge stronger. you could argue that competence is even more important in recessions and that it's the wrong time to slash pay and risk them leaving. this may not always be so, but it's another consideration.

 
At 8/29/2011 4:01 PM, Blogger Walt G. said...

morganovich,

Symbolism is important from the leadership. Things like taking private jets to Washington to ask for help and giving CEOs huge bonuses, even deserved ones, while asking for concessions from workers are not good business policies. Labor contracts are often hard sells for the membership, union leaders could use some help. If workers are being asked to sacrifice, they will expect their leaders, both union and corporate, to do the same.

I agree CEOs can make or break a company, and as someone who has a few investments, I want a great return on my money. It’s difficult to please everyone, isn’t it?

 
At 8/29/2011 4:13 PM, Blogger Anthony B said...

Title on the chart should read per 1000 vehicles?

 
At 8/29/2011 4:30 PM, Blogger Mark J. Perry said...

According to the data in the article, per 100 vehicles is correct.

 
At 8/29/2011 5:12 PM, Blogger Mark J. Perry said...

Note: I think there can be more than one complaint per vehicle, which helps explain the number of complaints per 100 vehicles.

 
At 8/29/2011 6:55 PM, Blogger Walt G. said...

Looks like J.D. Powers' data to me. In 2011, Lexus leads at 73 complaints per 100 vehicles short term (90 days) and 107 complaints long term (3 years). The average industry short term complaints are 107 per 100 vehicles.

All the automakers have made great strides in the last few years, but I doubt that few people will not have at least perceived problems with purchases of increasingly complex machines that cost tens of thousands of dollars.

Just think about this: That complaints are way, way down with standard and optional equipment additions such as GPS units, rear-view cameras, and cars that park and almost drive themselves with cruise control radar is amazing.

 
At 8/30/2011 10:01 PM, Blogger VangelV said...

Why are we limiting the discussion to American industry for globalized companies? Where does "global" stop and start? What are shared sacrifice and parity, and who gets to define them?

Because we have to do an apples to apples comparison.

I am against the short term pain the bankruptcies would have caused. I agree it would have possibly been better if the bankruptcies had occurred in the long-run for those not in the industry. A lot of people think the bridge loans were financially a good idea for the U.S. now. I am too close to the issue to say.

Lousy companies need to go bankrupt so that the good ones can be rewarded. Keeping bad companies alive with taxpayer dollars only subsidizes incompetence.

 

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