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Thursday, April 2, 2009

Crony capitalism: the anatomy of a failure

The churlish section of the wingnut chorus has sung its song of the peevish and petulant because of Barack Obama's immense popularity. They charge that Obama is regarded as a messiah, as a fuehrer, and every thing else they can squeeze out of those malignant little tumors that pass for minds. Their latest plaint is that in firing GM CEO Rick Wagoner the government is taking a giant step toward nationalizing the automobile industry. While it seems to register that something might be wrong with the corporations that have knocked the economy to its knees, they cannot relinquish the notion that corporations are their benefactors and CEOs should be treated like royalty. The attitude is one that has never been comfortable with democracy and the notion, as Jefferson put it, that the American aristocracy is those who actually accomplish and perform, not those who claim privilege out of some hierarchical scheme.

The corporation is their feudal Camelot, and Wagoner is being unfairly crucified. The labor unions, on the other hand, want the firings extended into the big banks and the financial industry.

As a business editor, I have long been skeptical about the status accorded CEOs. I have met some CEOs who deserve acknowledgment and reward for their acumen, their creative pr
oblem solving, and their contributions to society. But I have met many who were charlatans whose only talents were the manipulation into power among the suck-buddies we call executives. They were thoroughly anti-democratic schemers who regarded their employees as serfs and their customers as dupes. At times their attitudes led them to the the kind of greedy and power-hungry schemes that have been exposed in corporate life during our times, and I was pleased to report prison sentences for some, when their real accomplishments came to light.

But my knowledge of corporate life also comes as an insider. Within days after I was released from active
duty with the Army, I went to work for International Harvester Company, which at the time was in fact international, a global corporation headquartered on Michigan Avenue in Chicago. I got the job because I had worked at its East Moline plant a number of summers when I was an undergraduate.

At the time, two of International's main plants were in the Quad-Cities of Iowa and Illinois. The Farmall plant , which made tractors was on the Moline-Rock Island border, and its East Moline Works, which made harvester-threshers, corn pickers, and mowers, was on the Moline-East Moline border. They were both huge plants that were located on the opposite ends of a street on which the Deere & Company headquarters were situated, along with a number of Deere plants. J. I. Case, Caterpillar, Minneapolis-Moline, and a number of short-line manufacturers were in the community, and it was, indeed, the farm equipment capitol of the world. Many of my relatives worked in the industry, particularly for International Harvester. One brother was a price analyst for Deere.

Within a week, I went from guided missiles to a correspondence desk at the East Moline Works. I held a number of positions in the plant before I took a leave of absence to finish my college degree. Among them was a member of a consumer service team that was charged with investigating complaints about IH products we manufactured. When the team was created, executives assumed that we would find that most complaints resulted from careless and abusive treatme
nt of the machines that failed. The team consisted of a district sales manager, an engineer from test engineering, a representative from the service parts division, and me, from the materials control and order division of the plant. I wrote and edited the reports from our findings.

We actually found that most complaints were the result of engineering or manufacturing problems. When our reports indicated that there were company problems that needed addressing, the team was taken out of the field and disbanded. We made good products for the time that were sold world wide, but management took umbrage at any suggestion that the machines might need some improvements. The upper echelons liked to bask in the global stature of the company.

At this time, the industry was moving toward making bigger, technologically sophisticated farm equipment. Our team in the field became aware of the intensity of the competition. International had some "structural" problems that we saw as great disadvantages for the company. Those problems became apparent as we worked in the field with farmers and dealers. We became aware that other companies, particularly John Deere, were making inroads into IHC's market share.

A major problem with International was that its management was almost totally top-down, with all decisions being made on Michigan Avenue. When a plant such as ours wanted to make a change in product design or production scheduling, a request had to make its way to the Chicago headquarters. If the request was answered at all it might take months. My boss said it was like kicking a dinosaur in the tail. It took months for the kick to make its way along the nerve path to the brain, and if it registered at all, it was too late to react to the problem.

Deere on the other hand maintained a very close and attentive relationship with its dealers and its product representatives. When there was a problem, there was an active line of communication between those working with the problem in the field or the plant and the executives in the headquarters. In fact, when problems with our machines occurred, the Deere people knew about it and were using the information in their own product design and service plans. They were always ready to listen to and help disgruntled customers. Managers in our plant were concerned about the issues we raised in our reports, but Chicago seemed to dismiss them because they were coming from low-level workers in the field.

At one point, the sales manager, who led our team, wrote to his boss in Chicago that some executives needed to meet us in the field and see first hand what we were finding. A vice president flew by charter aircraft to meet us in Wisconsin. He had the dealer call a group of farmers and invited them to dinner at an upscale supper club. He gave them a sales pitch on IHC machines, then flew back to Chicago first thing in the morning. The subject of problems was never dealt with. Shortly after, we were pulled in from the field.

IHC had a strange engineering arrangement. Some of its design and engineering was outsourced on contract. Two of the major engineers in our plant were hired by the company because they had invented and held patents on components that the company used in its machines. They received a royalty for every machine containing their components. Engineering for some products was contracted out to outside engineers, often engineers who worked at universities. The problem was that when company engineers recommended a design change, there was much negotiating and wrangling with the patent holders. Often in-plant engineers were left out of the loop in decisions made about the machines we made.

One case involved the main drive axles that were used in IH tractors and combines. These axles went through an expensive heat-treating process that hardened and toughened the steel, but did not make it brittle. It was a process used on generations of machines and the axles were durable and reliable. Someone in the upper echelons heard about a process that was much cheaper and would produce the same results, so after a little investigation the order came down that all drive axles were to be treated by this process. It would save hundreds of dollars on each machine and increase the company profits. The idea was pushed hard by central office cost accountants.

The test engineer on the consumer service team I was assigned to was dubious. He said that the process needed to be tested extensively before such a change in specifications was made, and, as a test engineer who knew metallurgy, he did not think the cheaper treatment would produce good results.

He was right. Both the Farmall and East Moline Plants had to shut down for six weeks to recoup the cost of recalling machines and replacing their drive axles with ones manufactured to the old specifications. The company lost millions in revenue and much more in customer confidence.

It was the engineering that eventually brought the company to failure and dissolution. That episode with the drive axles seemed to signal the beginning of two decades of decline. Although the company did well, it was losing ground to its competitors.

In contrast, Deere had an aggressive program to build a strong cadre of engineers. It hired engineering students as summer interns, and then hired the best of those when they graduated. It put many of them to work at research and development.

During the 1980s farm crisis, the equipment manufacturers had to cut back severely. In 1976, International Harvester was sued by Deere for some patent infringements, presumably because desperate engineers copied designs to try to stay competitive. Headed toward bankruptcy in the 80s, IHC sold its farm equipment division to J. I. Case and reformed its truck division to become Navistar. In 1982, Deere was awarded $28 million for the patent infringement and placed a number of IH properties under lien to collect the damages.

Management, of course, blamed the labor unions for the company's demise. But those of us who dealt directly with the customers and machines saw it coming 20 years before the company closed down. Fridays were payday, and some local bars cashed paychecks on those Friday nights. We often met after work those Fridays and recapped the events of the week. Those sessions included some of the bosses, and we talked about the problems we saw developing and the frustration that we could not get upper management to pay attention to them.

There is a book about the ending of IHC called "A Corporate Tragedy" which theorizes that the company tried to do too much with its many product lines of heavy equipment and trucks.

The real problem was that it had an executive corps that ruled by cost accounting and MBA schemes. The harsh fact is that IHC was losing customers to competitors who were building better machines and providing better service.
The end of the company came under CEO Archie McCardell. He came on board in 1977. I had left the company in 1962, but covered it as a newspaper farm and business editor during the sixties and later as a stringer for some business publications. I was interested in IH because of my time with the company, but also because I had many friends and relatives in the farm equipment industry, many of whom worked for IH. McCardell was obsessed with breaking down the unions. One of his first acts was to fire 11,000 company executives because he thought their relationship with the unions was too amiable.

The real death knell came in 1979. (The year I moved to South Dakota.) IH was at the time the fourth largest corporation in the U.S. and it was bringing in record revenues. McCardell complained about the legacies of employee benefits and wanted to reduce labor costs, but he also promoted the payment of large dividends to shareholders rather than invest money into research and development.

The farm equipment industry labor contracts were up for renegotiation in 1979. McCardell put out a list of company demands from which he said he would not vary. The wage and benefits issues were settled quickly in line with settlements that took place with Deere and Caterpillar. However, McCardell wanted some changes in work rules. For one, he wanted mandatory overtime. The operating provision in the contract that had been in effect since 1950 was that employees could turn down overtime. (In my time with the company the workers would nearly always work overtime unless it conflicted with some planned family event. They liked the money. My overtime went into a tuition fund that I used to finish college.)

The real problem was McCardell's intransigence and his total incompetence at collective bargaining. He kept sending out statements on negotiations to the press that were forcing the workers to lock down on their positions. This led to a strike in November of 1979 that lasted until April 1980, Deere and Caterpillar had brief strikes, but settled them quickly. McCardell refused to negotiate the issues in question and, during the strike, orders built up that the company could not fill once the strike was settled. IH took a huge loss. Both company and union negotiators and executives with other companies blamed the prolonged strike on McCardell and his blustering incompetence. He was eventually fired, but by then he had devastated the company beyond rescue.

After the strike ended, the farm crises of the 80s made its sweep across the land. Farmers could not afford to buy machines. The entire industry had to retrench. IH was still reeling under its loses and debt. At the same time it was besieged with lawsuits---a fact seldom acknowledged in accounts of the company's demise. Deere was by no means the only company with a claim against IH.

McCardell asked the unions to make wage concessions. They, in fact, negotiated concessions and sent them to the bargaining unit for a vote. Then the news broke that McCardell had authorized $16 million in bonuses to his executives. As a result, the workers voted overwhelmingly against the concessions.

Within a few years, McCardell had taken the fourth largest corporation in the U.S. to a point where it had to dissolve, sell off a major product line, and reform a new company around its truck division. At the time, the vast majority of trucks that plied the interstates were IH. That, too, has changed.

McCardell came to IH at a time when it needed reforming and upgrading. But he was a CEO who neglected product development, insulted and abused his workforce, and showed the nation how to destroy a vital and successful company.

In our current crisis, all we can note is that the business world did not learn much from International Harvester.

1 comment:

Douglas said...

Very interesting post. When IH was in a bind, I had an idea which might have greatly helped their marketing. All I could get back from them was standard "not invented here" BS which indicated even if my idea was any good and made them millions, saved the company, etc. I would be guaranteed nothing.

John Deere may be better, but I have talked to mechanics working on JD equipment who said suggestions for needed changes were about like spitting in the wind even if they were welding up the same breaks on nearly every machine of that type sold.

Large corporations have inherent problems related to their very size and a bunch of redundant executives mainly good at making sure good ideas never see the light of day because they seem to threaten their jobs.

The last thing I read about IH before it croaked, was that it intended to use no standard bearings in any equipment and manufacture all its own in a subsidiary. That idea died when they had to sell it so they weren't quite as able to gauge and ripoff their customers on parts. They also seemed to make dozens of part number changes to make it difficult for other suppliers to sell common stuff like belts and filters.

Some design decisions may save a manufacturer a few dollars and then make repair nearly prohibitively expensive. My son just got an older SAAB car. Got the repair manuals and found out the engine and transmission had to be removed in order to replace suspension bushings. Chrysler has vehicles in which a wheel has to be removed to change a battery. Years ago their Plymouth Satellite had a fan motor that had to be replaced and that required removing wheel and all the fender lining.

Some engineers and bean counters deserve torture for the misery they generate for customers.

Enough griping. A native of India who taught Pol Sci at USD thought that the idea of contracts and corporations was the major contribution of the western world to world societies.

Now and then it is hard to see continued support for the idea however

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Aberdeen, South Dakota, United States