Why We Lose
Stories from behind the front in America's trade wars
Not to take anything away from Ken Follett and Tom Clancy, but the stuff of their books -- submarine chases and espionage -- just naturally makes for gripping yarns. You don't expect the same kind of edge-of-the-seat narrative in a business book, especially not in one written by a management consultant whose objective is to make an ideological point. But darned if Ira Magaziner, with help from journalist coauthor Mark Patinkin, hasn't written a nail biter in The Silent War: Inside the Global Business Battles Shaping America's Future (Random House, 1989).
Magaziner, a veteran business consultant and a promoter of government activism in trade strategy, tells nine different stories. In one, General Electric's major appliance group has what it believes is a sturdy lock on a comfortable share of the domestic refrigerator market. But profits are sagging, so group management orders designers to add a few new bells and whistles to the existing product line. That will allow GE to raise its prices. Wait a minute, someone suggests. Maybe the profit problem isn't our prices, but our costs. Nahhh, management replies. Nobody knows how to manufacture better than we do. But soon the reader learns that in fact someone does.
GE, it turns out, was paying better than $17 an hour to workers in its domestic compressor plant. Never mind that Matsushita, a Japanese company, was paying $1.70 an hour for labor in its new Singapore compressor factory and that Whirlpool was paying less, $1.40 an hour, for labor in its plant in Brazil. "Even more astounding," writes Magaziner, as he sets us up for the story to follow, "was the difference in productivity. It took GE sixty-five minutes of labor to make a compressor, compared to forty-eight minutes in Singapore, thirty-five minutes in Brazil, and under twenty-five minutes in Japan and Italy. A company that's paying higher wages for lower efficiency doesn't have much of a chance."
Its competitors were massing for an assault on GE's turf from their overseas plants. What does the giant company decide to do?
Competitive battles like this are eventually won on the front line, where salespeople battle for the hearts, minds, and cash of consumers. But they're lost in the rear, where engineers design and manufacture the products and managers plot strategy. Magaziner, who consulted for GE, takes readers behind the lines to watch the company's managers painfully make their decision to go on the offensive and then try to gear up the corporation's creaky war machine. Like any good story, this one is told mostly through people, and Magaziner is better than Clancy in his character development.
Entrepreneurs will especially like another of Magaziner's nine stories. This one is about A. T. Cross Co., which in 1965 was a century-old, family-owned, low-tech business. Its products were the fancy ballpoint pens that every executive has gotten as a gift at one time or another, and it had annual revenues of approximately $20 million, practically all domestic. But that same year John Lawler, fresh out of college, was hired to expand the company's minuscule international sales. Magaziner tells us how he did it, and the story reads like a thriller. We hear of Lawler's adventures in riot-torn Hong Kong, the Shah's Iran, Beirut just before the Six Day War, and Athens during a coup. We hear how he stumbled onto sales in Costa Rica, in Israel, and on board Sabena Belgian World Airlines planes. And we watch him figure out how India may be the shortcut he's looking for to reach the Kremlin.
Little A. T. Cross, with perseverance and cunning, manages to overcome competitors, trade barriers, and cultural prejudice to become an example to us all. Today it does almost $200 million annually, and more than a quarter of its production is sold in better than 150 countries outside the United States.
Magaziner's point, which you've probably guessed by now, is that U.S.-based companies don't have to abandon manufacturing to low-wage plants in the Third World and don't have to concede their markets to European or Asian competitors. Sadly, however, six of the nine adventures he spins out in The Silent War wind up the other way or promise to do so in the future. The only hope, Magaziner warns, is for American managers and government officials to come to their collective senses.
His other stories show us how domestic manufacturers will lose the rest of the U.S. microwave-oven market to the upstart Koreans, what remains of their machine-tool business to the innovative Germans and Japanese, and even a huge chunk of the world market for commercial jetliners to the persistent European Airbus consortium. We may not fare any better in future technologies either, if our experience with photovoltaics is any indicator. U.S. industry, way ahead in the race to develop commercially viable sunlight-to-electricity converters, got two flat tires when the Reagan Administration recoiled at continuing to spend taxpayer money aiding for-profit enterprises that aren't in the defense business. Guess who is about to catch up and overtake us in the international photovoltaic market.
Whether you find these tales discouraging or challenging, they're nonetheless fascinating for the insider's knowledge that Magaziner brings to their telling. It's exciting to read about real people in real companies strategizing, planning, and finally (in some cases) duking it out across international borders.
Another nice thing about The Silent War is that Magaziner doesn't preach. You can read the book as nine good business yarns and still enjoy it. But it will be almost impossible for any reader to ignore Magaziner's purpose in telling these tales. U.S. companies will continue to lose battles and eventually the war, he believes, until government and industry join forces and start working together, just as they would in a shooting conflict.
"Beginning just a few years ago," he writes, "Europe's governments started earmarking billions of dollars to spur the development of commercial technologies, something America still shies away from. . . . There's no doubt that Airbus is indeed playing by different rules. Boeing and Douglas are being forced to compete on their own against the combined power of six foreign firms backed by governments with deep pockets."
But governments shouldn't be in the business of subsidizing private companies, you might argue. In America we believe in free enterprise. We have faith in the wisdom of the market. We think that government's role should be to establish a minimum set of rules and then get out of business's way.
"But who is to say," Magaziner asks, "that America's rules are the only right ones to play by?"
Good question. American political conservatives may argue all they like about how the world of international trade should work. Magaziner tells us how it does work. Once upon a time we could call off the game if we didn't like how it was played, but the United States no longer owns the ball.
KNOWING WHEN THE JIG IS UP
"Roger Schipke, the head of the GE Major Appliance Business Group, decided to go to South Korea. He was walking down a Samsung corridor with his hosts when a crowd of white coats came bustling the other way. He had to stand against the wall to let them by. There were dozens of them, all very young. When they'd passed, he asked who they were. 'Those are our new microwave-oven engineers,' his host told him. There were more of them than Schipke had working in his whole microwave division, and these were just Samsung's newest hires. Louisville, he realized, was probably outengineered ten to one. He asked where the new hirees had been trained. The answer came back: Purdue, University of Southern California, University of Washington.
'I'm a simple guy,' Schipke would say later. 'I just looked around. And I said, "Wow, I'm not getting into that game." '
In June 1983, management in Louisville decided to begin sourcing microwave ovens from the Far East. . . .
-- from The Silent War by Ira Magaziner, with Mark Patinkin