Saturday, September 30, 2017

The Vega - Engineering Solutions to Management Problems

Trying to leapfrog competition with innovation in place of good management is almost always bound to fail.

One of the problems that has plagued American companies for the last few decades has been weak management.  Managers of American companies are unwilling or unable to address underlying cost issues in manufacturing, which makes them uncompetitive with foreign manufacturers.  In particular, they are unwilling to confront the unions and cut excessive wages and benefits as well as eliminate restrictive work rules and lavishly gold-plated pensions and health plans.

Since they are unwilling or unable to deal with the unions, they look for technological solutions to management problems.  The Chevrolet Vega is a case point.  In 1972, General Motors was coming out of a brutal strike with the United Auto Workers. The company was losing a lot of money because they weren't making any cars. When I was at General Motors Institute, our professors told us at every five minutes another Chevrolet Caprice came off the assembly line and that was another $5,400 worth of car to sell.

So, if the union went on strike, we'd be losing $1,000 a minute at each assembly line.  The underlying message was to do anything and everything to appease the union and union members, which we pretty much did.  When I worked at New Departure, we had a list of requests by union members as to what changes they wanted made to the contract.  Some of them were patently ludicrous. One worker submitted the idea that the company should provide at least two free beers a day to each employee.  This is the sort of mentality we are dealing with, when it comes to unions.

In the 1950s and 1960s, small foreign cars became very popular in America. General Motors initially attempted to confront this threat by building the Corvair, which was a very complicated vehicle and was expensive to build.  It had a cast aluminum air-cooled engine much like the Volkswagen.

Of course Volkswagen could make such a complex car inexpensively due to currency exchange rates as well as their lower labor rates at the time.  Today, their labor rates are higher and exchange rates are not as favorable, which is why they opened a factory again in the United States, and why most European cars have moved upmarket into luxury territory.

Ford took an easier route, building the Falcon, which was basically a scaled-down version of their full size car.  It was cheap and simple and easy to build and Americans flocked to it because it had a lower price. General Motors followed suit with the Chevy II, and Chrysler did the same thing with the Plymouth Valiant and Dodge Dart.

But, by the late sixties a new generation of inexpensive imported cars were coming from Japan, and the big three automakers knew they had to do something, as the muscle car era was being choked off by both emissions and insurance. The gas crisis of 1973 had yet to materialize.

GM realized they couldn't make a small car like a Toyota Corolla or Corona and compete on price, based on their labor infrastructure.  They felt they needed to do a "Hail Mary" pass in technology order to produce a car far more cheaply than the Japanese could.  Or that was the thought, anyway.

GM tried all sorts of esoteric things to nip away at costs.  The Vega would be shipped vertically in special rail cars so that an additional five or six cars could be put on each rail car to reduce shipping cost. In order to do this, the battery had to be mounted at an angle so it wouldn't spill acid all over the inside of the engine compartment.

Of course the biggest technological leap of faith was the engine - which used a high tectate silica die-cast engine block.  It was a long stroke engine that rocked back and forth in the engine bay like a hay baler, and never idled very smoothly.  Unfortunately, they couldn't get it to work quite right, and resorted to using a cast iron head with the aluminum block, which had two different coefficients of thermal expansion. Once overheated, the Vega engine would warp the head, and it would seize the engine, usually it about the 70,000 mile mark.

Oddly enough, BMW had better luck with this technology decades later, although BMWs have been known to blow up on occasion, particularly when they are overheated.  If you have a BMW and it starts to overheat, my strong suggestion is to pull over right away before you spend an awful lot of money on a brand-new motor.  Jackie O. blew up a motor just that way on the Long Island Expressway in her Bavaria.

But of course, these technological "Hail Mary" passes were not enough to cut costs on the Vega to make it competitive with the Japanese.  So they resorted to traditional cross-cutting methods.  For example the cheapest possible narrow 13" tires were put on the car, which made it handle like hell, and ride like shit.  The inner fender liners were removed from the front, which ensured they would rust out within three years, as my mother's car did.

The interiors were cheapened, and lesser-quality materials were used throughout, making them less competitive with the Japanese, who provided more value for the money at the time.

And finally, they resorted to the oldest trick in the book - to speed up the assembly line and crank out more cars per day.  The infamous Lordstown, Ohio assembly plant, where the Vega was produced, already had a lot of labor strife, and was mostly staffed by young men who are more prone to being hotheads. When the line was sped up, the quality went down and the workers got frustrated and called wildcat strikes.

The end result was more labor trouble, and poor assembly quality, which completed the shit car triumvirate of poor design, poor quality of materials, and poor assembly quality, which always ends up reducing a poor car.

It would take several decades and the bankruptcy of General Motors for management to finally be in the position to confront the unions.  Once the company was bankrupted, they had the leverage to force new union work rules, appropriate wages, and also offload the unfunded pension liabilities.  Although General Motors is doing better today, they are once again heavily reliant on pickup trucks and large SUVs for their profit center.  As we saw on the recession of 2008, once these products stop selling, the company goes into the red rather quickly.

Unfortunately, many other companies have tried this technological breakthrough technique to overcome basic management problems.  Rather than cut costs, cut overhead, and confront labor directly - and work with the unions to reduce costs and show them that outrageous salaries, restrictive work rules, and lavish pensions cannot be supported indefinitely, they try to leap frog the competition with some sort of new Gizmo or manufacturing technique which they think can reduce costs.

The end result, like the Vega, is usually a fiasco.  It just simply isn't possible to cut costs with half-assed engineering solutions. Engineering by its nature is a business of incremental savings here and there. You can't just cut the cost of a product without affecting its quality. And neglecting to address the real underlying issue - high overhead in American factories - is simply putting one's head in the sand.

And yet I have seen this same thing happen again and again at other companies I worked for. And I see it happening in the marketplace even today, as old line companies are desperately trying to find new techniques to save money and overcome what are fundamentally classic management problems.

The big problem with the technological "Hail Mary" approach is that even if it did work - which it usually doesn't - is that once you start using it, and it works, your competition will adopt the same exact technology and you'll be right back where you started - as their labor costs is already far less, and they will be able to produce a product for less than you can make it.

You can go back to the drawing board and try to find another "Hail Mary" technological breakthrough, but each successive breakthrough is harder to achieve, if indeed any of them achieve substantial savings at all. Eventually you have to confront the beast - your high overhead, your obsolete equipment, your overpaid union workers, your bloated pension plan, your gold-plated healthcare, restrictive work rules, your lack of productivity - and of course, bloated management.

These are all very hard things to do, though, and require incremental changes over and over and over again in a never-ending battle with overhead. Management likes sexy solutions like engineering breakthroughs which sound like so much more fun than going head-to-head with your local union rep.

So what's the point of all this? Well, several things.  First, if you work for a company that is proposing using some technological breakthrough to cut their costs and thus compete with companies who merely use the age-old technique of effective management, you might want to start thinking about finding a new job.  Granted, it took decades for General Motors to eventually go bankrupt, but in the interim, it could be a very uncomfortable place to work as an engineer, particularly if you were assigned to such projects as the Vega.

Second, if you are investing in a company that is trying to use this "Hail Mary pass" technological breakthrough technique to compete with lower-cost competition, you might want to think about selling your stock. These technological breakthroughs work sometimes, but usually in the minority. And as I noted, the competition can usually use the same technology as often it is hard to protect these types of things with patents and the like.

A third thing is, if you work for a company and are thinking of joining a union or you are in a union, and you think you're going on strike, think very hard about where this is going. Sure, your company might stay in business for 10, 20, 30 years or more even though their cost of overhead is twice that of their competitors.  But eventually something will have to give and that might give just the time that you want to retire. At that point the company goes bust and your pension plan may be taken over by the government, and you get $0.40 on the dollar.

The workers at the Nissan plant in Canton, Mississippi recently voted overwhelmingly to reject the United Auto Workers Union. It's not that the UAW didn't offer them a better package of benefits and wages, which no doubt they probably could have obtained if they'd gone out on strike.  However, the workers realized that a job with slightly lower pay is better than no job at all.  And they realized that if they choked off the lifeblood of their own factory, they were basically shooting themselves in the foot.  People in Mississippi are a lot smarter than we give them credit for.