Let Bankruptcy Save the Big Three

“If you want to shrink something, you must first allow it to expand.

If you want to get rid of something, you must first allow it to flourish.

If you want to take something, you must first allow it to be given.

This is called the subtle perception of the way things are.”

—Lao Tzu, Tao Te Ching

All great innovations emerge out of crisis. They are born when someone recognizes that the system—the company, the industry, the country—is stuck and can no longer react to a new reality. This is rooted in a fundamental principle of nature: people are only open to change when they understand that the current path is no longer acceptable.

Sun Tzu spoke of this strategy more than 2,500 years ago when he advised his generals to march their soldiers deep into enemy territory. When we feel the threat of being far away from home and away from safety, and when we cannot see a path out, we become unified in our conviction to do something great.

This is why addicts cannot move toward sobriety until they reach bottom. For things to rise, they must first fall.

This is what the big three automakers face. This ancient principle shows us that for the big three automakers to survive, they must first hit the bottom.

Sure, the CEOs of GM, Ford, and Chrysler returned to Washington last week driving hybrid cars, carrying dense detailed business plans. Sure, the United Autoworkers have made some meaningful concessions. But they have only faced part of the problem. Auto dealers nationwide employ 1.1 million people, more than the big three combined, and it is this facet of the auto industry that isn’t adapting.

Through protective franchise laws, auto dealers have been allowed do business in the same way for years. This has caused them to become complacent and has slowed their ability to adapt to competitive and market changes. They know that a healthy U.S. automobile market will depend on U.S. dealer networks shrinking in line with those of foreign manufacturers. This trimming of dealer networks is part of all three U.S. automakers’ business plans.

So dealers have mostly stayed out of the way and in the fray, hoping to protect themselves. It is only with the recent mention of “bankruptcy” that dealers have entered this national dialogue. Dealers fear that people will not want to buy cars from a bankrupt carmaker. They know this will hurt their sales and their bottom lines, and so only now do they care enough to change.

The threat of bankruptcy is waking dealers up to the fact that they must be part of the solution. Any solution that does not grow from urgency risks prolonging the inevitable.

To see the possible consequences, consider the situations Puma and Reebok faced in the early 1990s. Both global footwear brands were in deep financial trouble.

Puma had not produced a profitable quarter since it went public in 1986. Traditionally strong in the lower-end athletic shoe market, Puma was seeing its customers trade up for more expensive shoes offered by Nike and Adidas. At the same time, even lower-priced brands were attacking Puma’s customer base, forcing the company to lower prices.

Reebok was facing a similar situation in the U.S. In the 1980s, Reebok had been the shoe of choice for the millions of people who trekked to gyms for aerobic and dance classes. But that craze faded, and as exercisers traded the dance floor for the free-weight area and outdoors activities, Reebok’s sales stagnated.

Both of these companies were executing losing strategies. Both held on to outdated business practices. Both had reason to change.

But Reebok had enough cash to linger on while Puma faced near bankruptcy.

It was the risk of bankruptcy that allowed Puma to take meaningful action. It reinvented itself as a fashion company rather than a shoe company and emerged as the fastest growing, most profitable company in its industry for more than a decade. Meanwhile, Reebok mostly languished.

Which path do we want the U.S. automobile industry to take? Should we drug them with a numbing dose of bailout cash, allowing them to linger a bit longer? Or should we arm them with the tool of bankruptcy with which they can craft a new, exciting, innovative future?

 

 

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