Behind The Decline

...and some thoughts about the future

 

For much of the past century, the United States has been a world leader in manufacturing; now, suddenly, it is faced with the challenge of rebuilding its factories and retooling its production lines. How did it happen? And what is to be done? INC. spoke with historian Alfred D. Chandler Jr. of the Harvard Business School.

INC.: We know that imports have been clobbering many American-made products; they are often cheaper and of better quality. When did this begin? With the old Volkswagen beetle?

CHANDLER: Maybe so. Before the war, the Japanese never made cars. Even the Germans didn't do much; Volkswagen was a wartime project. In 1929, when General Motors was manufacturing 1.6 million cars and Ford 1.4 million cars, the biggest manufacturer in Germany made 26,000, and that was a subsidiary of GM. The competition just wasn't there. But the Marshall Plan and the coming of the Common Market helped the German and Italian auto industries, which then wound up with the newest equipment, and German auto producers began mass manufacturing. In Japan, once the domestic market was big enough to give them economies of scale, the auto companies could begin to move overseas.

INC.: What was the initial response from American companies?

CHANDLER: Nobody was paying much attention. In the dominant industries like auto, management and workers were just trading off, raising the price of the product. Suddenly, their competitors' costs were lower, even without a wage differential.

INC.: But surely the Japanese have competed on the basis of low labor costs.

CHANDLER: Only partly. They are superb at development; they'll take anything and make it work better. They know the importance of good products and good processes. But also, they are more efficient; they can run a business better than we can.

INC.: Why?

CHANDLER: For one thing, they aren't cursed with this odd belief of ours that the buying and selling of stocks is more important than making something. And conglomerates are a curse that the Japanese don't have at all. They rarely have an unfriendly takeover.

INC.: What's the connection between conglomerates or unfriendly takeovers and running a business effectively?

CHANDLER: Financial people -- those who run the conglomerates and the pension funds, and takeover artists like T. Boone Pickens -- teach you to read the numbers. They say, "This isn't making money; well, throw it out. Let's try something that's going to make more money." As opposed to asking, "What are we making, and why? What is the nature of our long-term market share and our long-term rate of return?" The purpose of any of the financial markets is to get a better rate of return, but that's short term. You need to run a business on a long-term basis, but that's very hard to sell to Wall Street. The Japanese and the Germans are more willing to wait.

INC.: What's your long-term prognosis? Some people say the United States will follow England into a prolonged industrial decline.

CHANDLER: I really don't think so. We're caught in our institutional rigidities, but the Japanese will be, too. I do think that what Boone Pickens and these people do shouldn't be allowed. Cut down on the takeovers and let people get back to work. Takeovers worry managers, take up their time; they may be replaced, so they get their golden parachutes and don't give a damn. But there is the technology, there is the ability, and we have a superb educational infrastructure that the Japanese still don't have.

INC.: Fair enough. But is there a moral commitment to rebuild our factories?

CHANDLER: No. That's the problem. We're still in a fortunate position with our resources, but that can be a problem indeed. We might not make it back into the boxing ring.