An Alternative Auto Industry Bailout

Events in the U.S. auto industry continue to unfold at a dizzying pace. But there's reason to worry that the government's current approach to the problems of General Motors (GM) and Chrysler remains too conventional.

For example, Steven Rattner recently described his job as head of the White House automotive task force. "It is very similar to what we do in private equity," he said to The Wall Street Journal. "You take a company, you analyze it inside and out, you break down all its components, you evaluate the management, you evaluate its competitive position—and you decide whether to invest in it or not."

Mr. Rattner is approaching this job like the investment banker he is, describing an approach that epitomizes a "decision attitude," in which problem-solving is taken to be the application of analytic tools to select the best from an available set of alternatives.

Unfortunately, the current situation faced by the U.S. auto industry doesn't offer clear alternatives. Not only is there no obvious solution to the crisis, but its stakeholders have conflicting objectives, and each proposed initiative constitutes a high-stakes gamble.

Inventing Alternatives In this instance, we may be better served by a "design attitude." This assumes new alternatives may need to be invented. It looks to engage conflicting values directly and is always looking to improve on any solution. One way to move from a decision to a design attitude is to reconsider the system in question.

In this instance, a reframing could position automakers as part of the ground transportation system. They are members of a long supply chain that starts with minerals being extracted from the earth and ends with people being moved from place to place. They are also part of the research and development infrastructure of the U.S.; they are part of the labor movement. The automobile has an important effect on the natural environment. Just a bit of thought will identify other important systems in which they are critical participants, such as the government supply system and the land use system. Each of these views of the industry's boundaries suggests different questions about how to shape the future of the players in question.

Consider the supply chain, which accounts for 70% of the cost of a car. In the past, each U.S. automaker has tried to cut costs with suppliers by squeezing their margins, as if the suppliers were outside of its boundaries. But this method doesn't produce good cars. It doesn't even produce cheap cars, since the price per piece of the component is only a small part of its true cost. For instance, it does not include the costs of installing that part, of fixing problems that arise during production, or of repairing finished cars should the part fail while under warranty.

How to Be Prepared In contrast, Honda (HMC) and Toyota (TM) have implemented a highly efficient supply chain system, one that benefits all parties, including consumers. Suppliers' knowledge is a key part of the system's design, not an afterthought. For each step of the product development and manufacturing processes, the firms jointly ask: Is this step necessary? Could it be done more cheaply? This method surfaces information that typically yields far greater savings than do multiple rounds of competitive bidding. Of course, Asian automakers are not immune to the effects of the downturn; they are also suffering. But they have designed a flexible innovation system that will position them well when the economy rebounds.

For its part, GM spent only two pages discussing suppliers in the plan it submitted to the White House in February. Extensive public financing of the auto industry should not simply go toward rebuilding a broken system. Instead, government should invest with the recognition that its actions will have an impact that stretches well beyond the auto industry's conventional boundaries. That impact is likely to be more desirable if it is factored into its plans from the beginning.

Think of the potential, for example, if the government considered the auto companies as part of a program to reduce pollution. It would make sense not only to press for a supply of fuel-efficient cars but to ensure that there is demand for them. This could be done through policies that make drivers bear more of the true costs of driving. Similarly, when the costs of offshoring are properly accounted for (including extra inventory and delayed problem-solving), less offshoring would be in the interest of the public or of for-profit automakers.

Challenging conventional boundaries can also stimulate a return to first principles. Returning to a fundamental question—"what are we trying to do?"—might see us consider whether individuals need to own cars (Zipcar), whether individual transit and public transit could be combined (smart highways)—and who knows what else.

The point of such exercises is not that the government should redesign the auto industry. It is to reframe the discussion in order to generate a wider range of alternatives. The decision attitude commonly applied to such large problems assumes that a good set of alternatives already exists. A design attitude challenges us to do better. It invites us to imagine new alternatives, to engage in conversations that bring unlikely partners to the table, and to revel in surprise.

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