Vantage point

Wednesday, November 19, 2008

Detroit, Romney and IBM

Where was this Mitt Romney all of last year? That's real "straight talk". Perhaps wary of the fact that his father George Romney's failed 1968 Presidential nomination bid was marked by a shooting-from-the-hip style and actual "maverickiness" (he came out and opposed the Vietnam War), Mitt decided to go the opposite direction and came across as being too rehearsed, too cautious, and even fake. Good to see him say something right - let the big 3 automakers go bankrupt. After all "bankruptcy", at least Chapter 11, does not mean the companies shut down, sell of their plants and die. It just means they go into a mode of restructuring with a hope to survive. Many airlines in America are under Chapter 11, but we still fly on their planes and their employees still get paid.

To understand why Detroit must not be bailed out, it might be useful to look at the example of my former employer - IBM. In 1993, IBM was in as pathetic a shape as Detroit was, and for similar reasons - bad strategic decisions. Much like the big 3, IBM also posted historic losses.... in fact their loss of 8 billion was then the largest ever yearly loss in history. They never filed for Chapter 11, but came very close to doing so. If the government had simply stepped in and thrown some cash IBM's way "in the interests of protecting the American workers" and "saving a national symbol", it would have lived to see another day. But it would have continued on a doomed path paved by past blunders. And who knows, might have folded up within a decade.

What happened instead was how capitalism should play out, and often does if left alone by the government. The CEO had to go, and several top executives were fired. In came Lou Gerstner, and fundamentally changed the way IBM does business - moved it from a product focus to a services focus. Although everyone and their uncle, and especially the government, already involved in anti-trust cases against IBM, wanted the company to break up into smaller firms, Gerstner bucked the trend. He had the vision to see that despite the success of smaller and leaner young firms in Silicon Valley, blindly following their lead was not the answer. IBM's massive size and even massive-er scope was something that could serve as a source of competitive advantage if used rightly. So Gerstner came in, armed with hatchets, scalpels, scotch-tape and clay-dough and remade IBM set it on the right path, where it has stayed since, barring a few hiccups. It still employs hundreds of thousands of people and still makes money for its shareholders more often than not.

If there had been a government bailout for IBM in 1993, they would have had to dance to the government's tunes. And I doubt if any politicians or political appointees would have been able to engineer the turn-around that Gerstner, assisted by able lieutenants like Palmisano (his eventual successor), was able to. IBM's resurgence would have made Schumpeter happy. That is what Detroit needs to do.