General Mediocrity - The Ticket to Failure

"Competition is always a good thing.  It forces us to do our best.  A monopoly renders people complacent and satisifed with mediocrity." - Nancy Pearcey

 After reading about General Motors' 30th recall of the year I began to wonder why it was that this company was worth saving with tax payer money?  Considering that the government's investment lost $10.5 billion of taxpayer (that is your and my money) I think it worth looking at the company in more detail.

Since saving it the company has recalled millions of cars, killed 13 people due to faulty ignition switches and continues to pour out mediocre cars and trucks.  I understand that the idea was to save jobs but if the company was of some strategic importance or was producing a technological break through that would be one thing but to save a company that was doomed to failure because of its own ineptness rather than market problems is intervention of the Japanese kind.

Sure there are those that remember the famed American heyday of the automobile but to compete in the car market today you either need to differentiate yourself through either building excellent cars like the Japanese and the German's or innovating like Tesla or you need to be the cheap alternative like the Koreans.  Sitting in between differentiation or low cost is prone to failure and that is exactly what GM had done.  In his famous book on Competitive Advantage, Porter explains in detail how companies fail unless they achieve one or the other and GM had at the time of being rescued neither going for it.

Fast forward to today and it is clear that regardless of the support they have gone back to business as usual. They were given an opportunity to develop into a world class company but this has been squandered.  Sure, sales have grown but the net income margin has shrunk from around 6% in 2011 to just over 3% in 2013 and it looks like it will fall further.  Worse still, if you add back the original cost of debt that the company had pre-rescue, net income would be zero.

Now I am not opposed to saving jobs but would the loss of GM really have had that big of an impact.  Consider the brands that GM holds and some of the makes and models of cars I firmly believe that many of these brands would still be operating today but under new management with better efficiencies than GM.  I would be highly surprised if the brands of Chevrolet or Cadillac were not still around and I would also be highly surprised if they were not profitable.  These companies would be independent of one another and would rely on innovation and excellence rather than just brand loyalty.  The problem with brand loyalty is that after a while it wanes particularly when people are dying due to the company's mediocrity.

If I am right it undermines the argument that the company was so big that if it failed it would drag down the supply chain and hurt millions of individuals ans companies.  Now while this may have been the case temporarily the idea behind capitalism is to let things die that are inefficient so that the new company or companies can prosper and provide opportunity for the people that work there. 

The $10.5 billion is gone and I am not crying over spilt milk what I am bringing to everyone's attention is that we need to let capitalism work and stop the manipulation of the markets and companies.  The too big to fail mantra needs to be dropped as it breeds inefficiency and complacency and stands in the way of innovation and development.  Japan is still struggling to get their economy started after 30 years of trying and one of the reasons is their mantra of work is provided for life.  This is akin to too big to fail and unless we learn from this lesson we too will be stuck muddling along for a long time to come.