Overhaul (51 page)

And yet those invisible benefits of globalization are often overshadowed by its ugly and painful costs—high unemployment and stagnant real wages for too many Americans. Based on Census Bureau data, the wages of middle-class Americans have declined by 0.2 percent a year for the past decade, after adjustment for inflation.

The challenges of manufacturing in America hit home for me on a March afternoon early in my tenure on the auto task force. We were in a routine meeting with the parts producer Delphi. Delphi looked and smelled like a quintessential American company, with its Troy, Michigan, headquarters and its management team of mostly plainspoken midwesterners. The executives had come in that day to plead their case for a supplier rescue program.

As they went through their pitch, a question suddenly popped into my head: "How many people do you employ?" I asked.

They told me they had 146,600 workers.

"How many of them are in the U.S.?" I asked, suspecting that the number was low.

The quick answer—18,900—exceeded my pessimistic expectations. Most of Delphi's labor force, it turned out, was in Mexico, Brazil, and China.

"There's nothing we can do for you," I announced. Delphi flunked my
Washington Post
test: How could we use taxpayer money to help a company 87 percent of whose employees were outside the United States?

The bigger question posed by Delphi hasn't gone away. Here was a red-blooded American company with roots going back a hundred years that had, for all practical purposes, become no more American than all the manufacturers that had sprung up throughout Asia in recent decades.

While I have always been an ardent supporter of
NAFTA,
a casual conversation one day with Fritz Henderson after he became GM's CEO gave me pause. The company had three assembly plants in Mexico, at which it paid its workers a little over $7 per hour.

"How is the productivity in Mexico?" I asked Fritz.

"At least as good as in the U.S., maybe better," he replied. With American workers receiving $55 per hour, even after the changes to the UAW contract, it's not hard to see that downward pressure on wages could continue, notwithstanding the greater costs of importing the products. (In China GM pays workers about $4.50 per hour, and in India a bit more than $1 per hour. In both countries, as well as in Mexico, GM is considered a high-paying employer.)

Of course, history sides with free trade. Countries, states, and regions had all seen it help their economies successfully evolve. When I lived in Britain thirty years ago, coal and steel were major industries. Today they are essentially gone, and yet Britain is far more prosperous now than it was then.

This process of "creative destruction," famously articulated by Joseph Schumpeter, has also been, in fact, the engine of economic development for the older parts of the Northeast, where I've lived nearly all my life. Take Long Island City, a section of Queens just across the East River from Manhattan. Well into the twentieth century, the area was a center of American manufacturing, home to industrial businesses that made chewing gum, pianos, batteries, glass, chemicals, and many other products. There were even oil refineries and a Packard auto assembly plant.

I had a personal connection to this forgotten bit of history: my family's paint business there was one of a dozen similar ones within a short distance of each other. Today every one of those companies is gone, and yet, after a somnolent period, Long Island City is vibrant with new housing, restaurants, and service businesses, including the world headquarters of the discount airline JetBlue.

Manhattan itself has been through an equally dramatic evolution. When I was a boy, from my father's factory I could see across the river the gleaming United Nations buildings in Manhattan, built on the site of cattle yards and slaughterhouses. Those enterprises, and the jobs that went with them, moved west long ago. Farther up the East Side, a large structure housing several big-box retailers such as Target and Costco recently opened for business on the site of Washburn Wire, the last true industrial business in all of Manhattan.

Trumpeting creative destruction is easy until your own business or community gets in the way of it. The evolutionary process that worked so well for New York City has to date been a formula for extinction for Detroit and Buffalo and many other hard-hit cities. But as Diana Farrell said in the context of rescuing Chrysler, we need to be careful about how many "old jobs" we try to preserve if global competitive dynamics have overtaken them. Or as Larry Summers put it in one of his colorful metaphors, "It's like a hotel that tries to raise its occupancy by not letting people check out."

We also must be mindful that the declining employment rate in manufacturing is, perversely, due in part to success in becoming more efficient. As in farming, productivity has been growing faster in manufacturing than in service businesses, and is likely to continue to do so, meaning that, in any scenario, manufacturing will continue to shrink as a percentage of the U.S. employment pie.

We need to be hardheaded about what kinds of new jobs can be successfully nurtured. An advanced industrial economy competes best in jobs that involve high levels of skill and intellectual content, like technology and financial services. We simply cannot win with prosaic, commoditylike products that require large numbers of low-skilled workers. As tough as recent decades have been for Detroit's Big Three, the car industry is better positioned to compete than many other U.S. manufacturing businesses because labor is a relatively small part of the cost of building a car—only about 7 or 8 percent.

Our current economic problems—and the massive doses of government stimulus spending in response to them—have brought back occasional mentions of an almost forgotten phrase, industrial policy. When the American economy was floundering in the late 1970s, Japanese-style intervention in the industrial sector was all the rage. Advocates mistakenly assumed that experts and policymakers had the sagacity to spot winners and losers among businesses and to allocate government support accordingly.

We've veered dangerously close to that discredited approach again. In our well-intentioned effort to jump-start the economy, tens of billions of dollars in stimulus funds have been disbursed without anything like the rigor that private equity or venture capital investors apply. When the dust settles, we will be disappointed by how little lasting benefit we get for those dollars.

Energy technology has been a particular beneficiary of federal largess. In summer 2010, eager to claim credit for ending America's recession and to bolster his flagging standings in public opinion polls, President Obama visited projects around the country that owed their existence to dollars from D.C.

Advanced car-related facilities, like battery plants, were high on his list. But mixed in with the evidence of progress were telltale signs of waste. While there's a healthy debate about the future prospects of the industry, the
Wall Street Journal
quoted one expert, Menahem Anderman of Total Battery Consulting, as estimating that the capacity to produce batteries for electric cars just from stimulus-funded U.S. plants will be three times greater than global demand by 2014.

On a trip to Michigan in July 2010, the President roughly duplicated the trip Team Auto had made back in March 2009. He visited a traditional Chrysler assembly plant, and he drove GM's Volt—about ten feet. While the Secret Service dictated the short distance, it nonetheless symbolized for me the limitations of the Volt. There is no scenario under which the Volt, estimable as it may be, will make any material contribution to GM's fortunes for many years. "Green" jobs may be the fad of the moment, but in supporting them we need to forgo irrational exuberance.

When we succeed in making a manufacturing enterprise competitive again, as I believe we've done with the Detroit auto companies, we have to be vigilant about not allowing that accomplishment to be diminished. It was dispiriting to watch what happened at Ford in November 2009. The company had asked the UAW to adjust its contracts to match the improvements won by GM and Chrysler. Ron Gettelfinger and his leadership team agreed; it was only fair. But when the proposition was put to all of the Ford UAW workers, they voted it down.

A few months later, Gettelfinger's successor, Bob King, delivered his first formal address, getting a standing ovation for his call to "win back the concessions and sacrifices we made and win more than that." While I can understand why King felt a need to start from a hard-line rhetorical stance, the Detroit Three cannot possibly reinstate old wage rates or labor practices and remain competitive.

In talking with Ron Bloom as he plunged into his new assignment as the administration's "manufacturing czar," I found that, as with so many issues, Ron saw the picture clearly. Manufacturing jobs as a percentage of total jobs were inevitably going to decline; the more reasonable objective—still tough—should be to try to maintain and, ideally, to expand the absolute number of these jobs.

In Ron's mind, this means concentrating on high-productivity work, with a lot of intellectual and physical capital, meaning that labor is a relatively small part of the total cost of the item—like a car! Germany, for example, has remained a very successful exporter of manufactured goods by concentrating on high-end products like sophisticated machine tools.

Ron has searched for ways that government can help—for example, by providing tax incentives for investment. With other countries providing such incentives, particularly for the "renewable economy," Ron believes that we need to do more to be competitive. But so far, progress has been slow.

We can't blame the problems of American manufacturing entirely on the cost of labor. Management matters too. Even at a very large company, individuals can make an incalculable difference. In April 1981, not long before I arrived on Wall Street, Jack Welch became CEO of General Electric. At that time, GE and Westinghouse were archrivals. While GE's revenues of about $27 billion were substantially larger than Westinghouse's, both companies made light bulbs, appliances, turbines, and nuclear equipment and owned television stations and credit companies. The two corporations could not have been more similar if their founders had set out to accomplish that goal.

Yet, two decades later, Westinghouse was gone and GE was regularly listed among the most admired and most valuable companies. In the fourteen years before Westinghouse sold its industrial businesses, its stock rose 126 percent (mostly in the year of the divestitures) and GE's rose 931 percent. What was the difference? GE had Welch, and Westinghouse had a series of mediocre CEOs. In years of occasionally interacting with GE, I never failed to be amazed by the difference that one man made.

Disney's is a similar story. In 1984, it looked much like GM two decades later: foundering with an inadequate CEO and under attack from activist shareholders. To achieve peace, Disney brought in the Bass brothers as investors, who recruited Michael Eisner and Frank Wells to the top jobs. I had just joined Morgan Stanley, which was representing the company, and none of us would have bought Disney stock on a bet. We saw no way that it could be rejuvenated. Boy, were we wrong. Over the following ten years, Disney stock rose by nearly 30 percent per annum.

For those inclined to accept Rick Wagoner's explanation that everyone and everything was to blame for GM's problems except its CEO, consider Ford. The number two U.S. automaker faced an identical set of challenges: the same Japanese transplants, the same cost of oil, the same UAW. Indeed, by many measures Ford was in worse shape than GM in 2006, when SUV sales plunged.

But the company was lucky to have Bill Ford as chairman and CEO. As market conditions worsened and Ford's results deteriorated in 2006, he realized that he was not the man to run his company. That was extraordinary by any measure, let alone Detroit's. But Bill Ford is an unusual guy. "We're an insular company in an insular industry in an insular town," he had told an interviewer in early 2006 when the company was just beginning to show signs of financial trouble. Bill Ford's humility extended to recognizing the risks that his company faced and making the decision to pledge all its assets to borrow the $23.5 billion that arrived three months after Alan Mulally became CEO.

"I thought that I would have been absolutely the wrong person to lead a major restructuring," Ford told me as we sat at a small conference table in his Dearborn office on a warm May day. "I needed to do two things. One was to go out and find that person, and the other was to raise the money so that he would be able to restructure the place."

As a result, Ford not only weathered the crisis without bankruptcy, but as the market began to turn in early 2010, the company became solidly profitable. In fact, in the second quarter, Ford reported net income of $2.6 billion, while GM—notwithstanding its larger size and the bankruptcy scrubbing of $65 billion of liabilities—earned $1.3 billion. Clearly, GM's new CEO and his team had some catching up to do.

A key component of management failures like GM's is almost always the board of directors, historically the weakest link in American corporate governance. Ironically, GM was once considered an exemplar of board practices. In the early 1990s, after one of the company's periodic near-death experiences, the board fired the CEO, appointed a nonexecutive chairman, and developed twenty-eight structural guidelines for ensuring board independence.
Business Week
hailed the plan as a "Magna Carta for directors." But the board's assertiveness and vigilance soon lapsed. In 2003, it made Rick Wagoner chairman as well as CEO, a fateful step backward.

Wagoner proved more adept at manipulating the board than at running the company. In early 2006, after many quarters of disastrous earnings, board members began to grumble about Rick. Though he enjoyed the staunch support of his lead outside director, George Fisher, the dissidents took advantage of a meeting that Fisher missed and agreed to hold an executive session in which to discuss the CEO.