The Reckoning

The Reckoning



The Pequod Review:

Written from the perspective of the mid-1980s — by which time GM, Ford and Chrysler had found their business models upended by foreign competition — David Halberstam's The Reckoning unfolds like a slow-motion horror film, as he captures the insularity and aversion to change that led to a disastrous outcome for the Big Three automakers. At its core, the companies' failures were largely result of an oligopolistic market structure whose participants had experienced decades of unchallenged success:

[I]n those days of the fifties and sixties no one complained very much, because everyone seemed to be benefiting. The weaknesses of the system, the inherent dangers of being a part of a domestic monopoly in an industry open to other countries, had not yet revealed themselves. So, while other areas of the American economy remained competitive, no one challenged the auto industry until the full-scale assault of the Japanese in the seventies. When it finally came, the extent of American vulnerability surprised even those who had been critical. Years later, Hal Sperlich, possibly the most talented product man of his generation in Detroit, said that the earlier era was marked by what was virtually an illusion of competition and hard work but in truth was a competition within a protected zone, finally more about the changing of hemlines than anything else. He compared the old days to being the best tennis players in a pleasant suburban country club, aware that everyone else in the club watched their fast, smooth Sunday game. “And then one day,” he said, speaking of the arrival of the Japanese, “Bjorn Borg and John McEnroe walked on the court.”

Soon it became clear that a basic theorem held true: The larger the American industry (steel, auto), the less prepared it was for economic rivalry. American workers had not realized that as the highest-paid workers in the world, they might be at a disadvantage in competing with workers in other nations who were hungrier, more grateful for their jobs, more willing to accept authority and to work longer hours for much lower pay. To American labor, Japanese unions often seemed to be extensions of management. What Japanese working people expected and considered themselves entitled to as a life-style — a term that had only recently entered the American vocabulary — was strikingly limited, resembling more closely the expectations of American workers in the thirties than those of present-day Americans. Of the simplicity of the Japanese worker’s life, of his willingness to work hard and save much of what he made, Paul McCracken, the University of Michigan economist, had said, “If John Calvin came back to earth, the nation he would feel most comfortable in would be Japan, that is where his real children would be.”

That was what was most ominous about the Japanese challenge in autos. To some it was more than just a growing imbalance in auto sales and a mounting trade deficit. They feared it might reflect an imbalance of values between the two societies, one poor but careful with its resources, the other rich and blessed and increasingly careless with its vast resources — the conflict, in sum, between the culture of adversity and the culture of affluence.

Thus the bad news on the Goodyear sign in Detroit, which continued to proclaim disastrous auto production figures for 1982, might be even worse than it seemed. It might mean not only that the Japanese made better autos, that they had newer plants, that the relationship between workers and managers was better, but that Japanese society, with its greater harmony, its greater belief and discipline in basic education, its more limited personal freedoms, was better prepared for the coming century. That was the real crisis, the grimmer one that hung over America.

By 1982 the sheer magnitude of this crisis had become evident to many. This was not some minor cyclical downturn but in fact might mark the beginning of the end of a historical era. Since the war, any difficulties in Detroit had been mercifully short-lived. A company might have brought out the wrong car in the wrong year and seen sales dive. Or the American consumer for a variety of economic and political reasons might have held back awhile on buying cars. People still talked about how terrible a year 1958 had been, because of Sputnik; Ford sales had dropped from 1.88 million units to 1.21. Just a bad year, everyone agreed, the first truly bad one in the postwar era. A hot car the next year, it was always said, would bring you right back. Sure enough, in 1959 sales had climbed all the way up again. But this crisis was different. There was a permanence about what was happening. It reflected basic changes in the nature of work and in the nature of the world economy. The time when the Big Three had something close to a global monopoly was over. No longer could Ford and Chrysler simply wait for GM to set the price so that they could set theirs, all under the attentive eye of a benign Justice Department that wanted no one to go out of business. In the new world economy the Americans were pursued by the Japanese who were pursued by the Koreans who were pursued by Hong Kong and Singapore.

But behind the institutions are people, and Halberstam profiles the key individuals involved — Henry Ford II, Philip Caldwell, Lee Iacocca and Walter Reuther — to show the entrenched mentality that pervaded senior leadership teams across the auto sector:

They were a product of a singularly successful era. They looked down not only on the government and on foreign companies but on other American businesses as well. They believed that if other businessmen were as true to their calling as the auto men were to theirs, then they would be just as prosperous. They had the special confidence of men who had been successful for so long, whose success was measured in such large sums, and whose product was so important that beside them all else paled. In the years after World War II, as America became the world’s first great middle-class society, the auto became the litmus test of middle-class status. These men saw this success not as something larger than themselves, something societal of which they had been among the principal beneficiaries, but rather as something they themselves had wrought. Once, in the early Eisenhower years, C. D. Jackson, the former publisher of Fortune then on loan to the Eisenhower circle, had returned to New York to lunch with his former colleagues. One editor asked him about Charles Wilson —  “Engine Charley” — the General Motors president who had become the administration’s Defense Secretary and who was thought to have said that what was good for GM was good for the country. What he really said was that what was good for the country was good for GM, and vice versa. C. D. Jackson replied, “There is a certain special stupidity and narrowness that exists in many of the more successful businessmen in this country, more so in the Midwest than other places, and nowhere else so much as in Detroit, and Charley Wilson is a perfect example. He knows one thing, and that one thing has worked quite well for him, and because it has worked he thinks he knows everything else, and then you meet him and he knows so little about anything else that you begin to wonder whether in fact he knows anything at all about the one subject he’s supposed to know so much about.” That arrogance and confidence was long gone from Detroit. The city, now on hard times, felt betrayed, as if fellow Americans, instead of appreciating its labors and sympathizing with it for the overnight failure of its truths, were now blaming it for everything that had gone wrong in the economy. Detroit dinner parties at the highest level were no longer what they used to be. Before, when the very powerful had congregated, these parties had been performances where rich, egocentric men, enjoying their might, had regally patronized those around them. In those days men like GM’s Ed Cole would hold forth for an entire evening on their favorite topic—in Cole’s case an invention called the flying wing, an airplane he was designing, which would move an entire combat division to a battle station. Who, at the end of one of Ed Cole’s loving descriptions of his coming military breakthrough, would dare disagree and say that it would never see battle?


That was it, Davis thought later — the Detroit line, the symbol of the protected industry. Don’t let GM do it first, let the other guy make the early, expensive mistakes. Right then, he was sure, at Ford and Chrysler there were people who were also deciding not to do it first because somehow someone else should do it first. It was, he thought, management by default. He knew there were businesses in America, typically smaller ones in various fields of technology and medical science, that were authentically competitive. There, companies lived on the edge, their survival depending on innovation and technological advantage. But in the auto industry, as in most big industries, it was not like that. It was a protected world, the shares of the market already apportioned, GM big, Ford moderate, Chrysler small, with the government watching to see that GM did not put either of the others out of business. It was not a vibrant industry anymore, he thought, because the top people were no longer doing things simply because they were the right thing. Those who had the most power had the least passion.

Halberstam's book is a bit too adulatory toward the Japanese OEMs (especially Nissan), and his attribution of their success to broader Japanese cultural factors (rather than just a superior business strategy) is often unsupported. But this is a very good and very detailed work of business history, and a vivid real world example of disruptive innovation.