Thursday, December 11, 2008

Too Big to Fail?

Today, Republicans in the Senate seem poised to kill the auto industry bailout bill. Without more changes, I'm in agreement with them that the bill shouldn't pass.

What does it mean when a business is "too big to fail"? It seems to me that once you've decided a company is too big to fail, you've lost any chance that that company will ever innovate and be successful again.

Creating and running a successful business is tough and it's getting tougher. The fear of failure - that adrenaline-induced sense that you've got to do everything in your power to help your company succeed - is one of the things that leads to success.

For years, I've watched as the US auto companies have done everything in their power to fight against rules for higher fuel efficiency. What strikes me is that that any one of them could have seen the new standards as an opportunity for innovation yet none of them stepped up.

If the rules had been applied equally across all cars and vehicles sold in the U.S., it would have been the equivalent of a platform shift. In technology, platform shifts always create opportunities for new winners and losers. That's what had the big automakers scared. Why should they subject themselves to competition when by hiring more lobbyists they could protect the status quo?

We're also past the point where a combative relationship between workers (the unions) and management makes any sense. Successful companies today need to find ways to get everyone committed to the same goal of building an innovative, profitable business that can compete in the global economy. I don't understand how you do that when workers are guaranteed a wage and benefits that would put the company at a competitive disadvantage.

There are ways to incent workers so that they share in the success of a company. Stock options or profit sharing are two ways that companies have enlisted employees in feeling an ownership stake. As a investor, I want the people who are making the day-to-day decisions on behalf of a business to share in the company's success. Likewise, if the company is facing tough times, I want the employees to feel that pain too so that they'll work harder to curb expenses and to contribute ideas that can turn a flailing company around.

In the case of the UAW, for way too long, members have worked against the interests of the company by fighting for rules that make no economic sense. It's crazy to think that people should get paid when they're not contributing to the economic well-being of the company. The autoworkers have been so focused on "winning" whatever concessions/benefits they can from the company, and in so doing lost sight of the fact that their companies were losing the war.

The new winners in the automotive industry are going to be the innovators who work to create change. The losers are going to be the ones who are constantly looking backwards, fighting to keep things as they are.

Ultimately, I'm highly doubtful that there's anything anyone in Washington can do to change the underlying culture of businesses that believe they are too big to fail.

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