Ford: From Mexico to China

Ever since Donald Trump declared his intention to seek the Presidency of the United States, he has heavily criticized American firms that manufacture products in Mexico. One of those firms, for instance, has been the Ford Motor Company.

His criticism began in earnest more than a year ago, when Ford announced its intention to shift production of the subcompact Focus automobile from Wayne, Michigan to a new plant in San Luis Potosi, Mexico. But shortly after the Presidential election, Ford announced that it would reinvest in the Wayne production facility.

That produced celebrations in the American workforce, but astute observers noted that Ford didn’t actually announce that Focus automobile production would revert to Wayne. Instead, the firm declared that it would produce the subcompact at Hermosillio, a different location in Mexico, and would shift other vehicle production to Wayne.

And last week, less than six months later, Ford changed its plans again. Now it plans to shift the production of the Focus to China.

China? Whoa! The United States economy would undoubtedly be much better off with production of the Focus in Mexico, and not in China. After all, a Mexican final assembly factory would be sufficiently near the United States to purchase components from American suppliers.

And Mexican consumers, working in Mexican factories, are usually far more likely than Chinese consumers to purchase products that are manufactured in the United States. They’re also far more likely to use the online services of firms that are based in the U.S., considering that internet titans like Facebook and Google are banned from the Chinese mainland.

And what was President Trump’s response to Ford’s latest decision? Although he greeted Ford’s earlier decision by tweeting “Thank you to Ford for scrapping a new plant in Mexico …,” he hasn’t yet replied to the announcement of the shift to China.

Of course, it’s entirely possible that he might still comment on it. And it’s also quite possible that Ford will change its plans yet again.

But for the moment, it appears that Mexico’s loss is not the United States’ gain. It’s China’s gain, and thus the United States’ loss as well.

Morality and the Auto Industry

Do you recall the great Volkswagen emissions scandal of 2015? American officials discovered that the automobile company was hacking the computers of its own diesel engine products by installing secret software that tricked emissions testing equipment into ignoring hazardous levels of pollution.

Volkswagen then compounded this crime by marketing those very vehicles as green products to environmentally sensitive customers. Thus, citizens who cared the most about clean energy were duped into purchasing the dirtiest products imaginable.

At the time, it seemed that the scandal was an extreme aberration that was unlikely to recur in the future. But guess what happened last week? Two different national governments, in different regions of the world, announced similar investigations into the products of a pair of additional automobile companies.

According to Bloomberg, “Paris prosecutors, who raided Renault a year ago in an initial emissions investigation, opened a probe into the automaker on Thursday. About the same time, the U.S. Environmental Protection Agency accused Fiat Chrysler of installing software in 104,000 Jeep Grand Cherokees and Ram 1500 pickups that allowed them to exceed pollution limits on the road.”

What is going on here? Why are the internal environments of these automobile companies permitting employees to behave so badly? Considering that the firms all maintain extensive codes of conduct with clearly stated ethical guidelines?

One reason may be that these ethical codes are not firmly rooted in foundations of morality. Thus, although they attempt to regulate behavior, they do not help employees make appropriate moral judgments about right and wrong.

Consider, for instance, the Fiat Group’s current Business Ethics and Anti-Corruption Guidelines. They simply state that “payments … to any political parties … are permitted only if in compliance with applicable law.” In any corrupt nation of the world, of course, a ruling party could simply declare such payments to be legal, thereby negating Fiat’s prohibitive guideline.

In other words, an ostensibly immoral bribe might be classified as a perfectly ethical payment under Fiat’s Business Ethics guidelines. By failing to define its own moral principles in terms of what is right and what is wrong, the firm allows its ethics officers to (either intentionally or unintentionally) draft behavioral guidelines that permit immoral behavior.

Now let’s contrast this Fiat bribery guideline to one that is listed in Coca Cola’s current Code of Business Conduct. The beverage company states that, when dealing with governments, its employees should “ … not offer anything to a government official—directly or indirectly—in return for favorable treatment … Bribes Are Prohibited. A bribe is giving or offering to give anything of value to a government official to influence a discretionary decision.”

Can you see the difference? Whereas Fiat simply instructs its employees to make ethical decisions that are consistent with local laws, Coca Cola defines such ethical decisions by implicitly describing a moral distinction between right and wrong. For Coca Cola, a wrong decision is one that attempts to solicit “favorable treatment,” even if such a solicitation isn’t necessarily defined as illegal by a host nation.

You might also notice that Coca Cola’s discussion of bribery appears in a section of its Code of Business Conduct entitled “Integrity in Dealing with Others.” Furthermore, the phrase “Acting With Integrity Around The Globe” appears on its Code’s cover page. In contrast, Fiat’s Business Ethics and Anti-Corruption Guidelines only mention the word “integrity” in passing in a brief introductory paragraph.

This is not to imply, of course, that Fiat’s ethical guidelines are unimportant. Nor is this to imply that the recent investigatory announcements of the American and French governments are unnecessary.

But if we hope to prevent such ethical lapses by automobile companies in the future, it may not be sufficient to simply rely on these controls. After all, they do not seem to be up to the task of compelling appropriate employee behavior.

Instead, we may need to require the corporate leaders of these firms to create cultures of morality within their own organizations. Once their employees are able to differentiate between right and wrong, they may be more likely to engage in honest behavior.

Take Us For A Ride

Poor John Stumpf. For the past two weeks, members of Congress have been bashing him mercilessly in his role as the Chairman and Chief Executive Officer of Wells Fargo. He’s been threatened with dismissals, massive fines, and even criminal prosecution.

But why? Did his bank really do anything more odious than the other global banks? Given the multitude of complex schemes that these banks have perpetrated recently, what did John Stumpf and Wells Fargo do to deserve such repudiations?

Their scheme was actually a simple one, but it involved thousands of bank employees acting illicitly for many years. When new customers applied to open new accounts, the employees opened those accounts for them. But then the employees opened secret secondary accounts, and never told the new customers about the duplicate ones.

The customers used their primary accounts, and remained unaware that the secret secondary accounts even existed. Although the secondary accounts began with zero balances, they inevitably accrued maintenance fees and became overdrawn. In some instances, the overdrawn accounts were reported to credit agencies, which then downgraded the credit reports, ratings, and scores of the unwitting customers.

Why did thousands of employees engage in this behavior? Because Chairman and CEO John Stumpf was heavily promoting the principle of “cross selling.” In other words, the employees were presented with sales quotas and financial incentives to sell as many products and services to customers as possible.

Without, apparently, implementing the internal controls that might have guarded against the opening of fraudulent accounts.

The ire of the members of Congress was further stoked by the finding that Stumpf was warned about the illegality of the practice by internal staff, and yet allowed it to continue unabated. And he recently permitted Carrie Tolstedt, a senior executive with direct responsibility for the fraudulent activity, to retire with a nest egg that may be worth as much as $125 million.

So what is poor John Stumpf to do? What example can he emulate while dealing with government officials who are furious that Wells Fargo accepted a huge federal bailout during the financial crisis, and is now repaying that generosity with such illegal behavior?

Perhaps he should look outside the banking industry and consider how the leaders of the American automobile industry handled their own inauspicious moment before the United States Congress. In late 2008, they were briefly excoriated when they traveled to Washington DC in their private corporate jets to ask for federal bailout funds.

That’s like driving up to a soup kitchen in a luxury sports car and then asking for a free bowl, isn’t it? The American people and their Congressional representatives were incensed by the action.

But the automobile executives quickly learned from their mistake. The next time they traveled to Washington to testify before Congress, they made strikingly different travel arrangements.

What did they do? They took a road trip! They drove fuel efficient American made vehicles and touted their plans to build affordable and environmentally friendly cars.

The result? The automobile bailout was approved, in a bipartisan manner, without rancor. Although the automobile industry has continued to generate controversies, it has escaped the intense criticism that has stalked the global banking industry since its crisis-era bailout.

And thus there is a lesson that John Stumpf might learn from the automobile industry. Namely, if you’re accused of taking American citizens for a ride in a pejorative sense, why not take ‘em for a ride in a more positive sense? Why not identify a product or service that all Americans could support with enthusiasm? Then invest some of the Bank’s sizable financial assets in it, and find an engaging way to tout its public benefits.

Market analysts may complain that such a strategy may hurt the market valuation of Wells Fargo if the investments don’t yield sufficient financial returns. But considering the billions of dollars that other global banks have paid to settle charges of misbehavior, aren’t such socially beneficial investments worth the risk?

The Auto Industry’s Ethics Problem

Automobile sales have been surging in the United States lately, driving up consumer spending and boosting the national economy. If you are one of the Americans who need a new car, which model will you choose?

A European model? Perhaps not. Volkswagen, the German manufacturer that is now the largest auto maker in the world, recently admitted to a mind boggling fraud. While promoting millions of vehicles as environmentally Clean Diesel devices, VW intentionally built the cars with technology that tricked pollution testing equipment into giving the engines passing grades.

In other words, they promoted the cars to environmentally conscious consumers as green vehicles. But the autos actually spewed illegal toxic fumes into the atmosphere, and were rigged to cheat on the engine tests that are periodically required in the United States.

Well, then, will you select an Asian model instead? Once again, perhaps not. Toyota, the largest of the Asian automobile manufacturers, was recently forced to recall millions of vehicles because of devastating car accidents involving unintentional acceleration. In a wide variety of situations, drivers found themselves behind the wheel, trying desperately to stop automobiles that were accelerating out of control.

What about other Asian models? Hyundai / Kia, the largest Korean manufacturer, wouldn’t offer you much of an alternative. Just last year, the American government fined them for brazenly lying about the fuel mileage of their automobile models. Unlike Volkswagen, the firm didn’t instruct their engineers to develop clever technologies to trick regulatory testing devices into certifying the performance claims of their vehicles. Instead, they simply lied about their performance.

Then how about selecting an American model? Yet again, perhaps not. General Motors, the largest manufacturer of America’s Big Three, is still managing the fall-out of its ignition switch scandal. For many years, its engineers knowingly allowed one hundred customers to die because of a mechanical defect that it illegally hid from the government and the public.

So what is going here? Why is the entire automobile industry led by manufacturers that behave in this way? Perhaps the root cause of the problem is the nature of the firms’ sales distribution networks. By relying on networks of independent dealers to sell their products, the firms are insulated from their own customers and thus fail to be influenced by their concerns.

Such insulation problems are not unique to the automobile industry. Steve Ballmer, the long time chief executive of Microsoft, has spoken about the company’s decision to design, produce, and sell Surface tablets directly to the public without contracting with its Original Equipment Manufacturers (OEMs) and distribution partners. According to an interviewer of Ballmer:

“As expected, Microsoft’s OEMs, some of whom said publicly they felt blind-sided by Microsoft’s decision to make its own devices, were none too happy about the move. But Ballmer insisted Microsoft had no choice.

‘I was concerned that we had areas of vulnerability in competing with Apple and without any (first-party) capability, that we were not transacting that well just through our OEM partners.”… our OEMs were having a hard time investing in competing with the higher end brand. The (Microsoft retail) stores … hadn’t taken off … that was also an issue … our OEMs do great work, but there are places their brands and investments don’t travel.’”

Nevertheless, Microsoft’s products don’t kill their customers, as do the products of automobile manufacturers. And Microsoft has not been accused of lying about the performance of its products to the government and the public. So what unique feature of the automobile industry’s sales distribution strategy is promoting such ethical lapses?

Although it’s impossible to pinpoint a single causal feature, one contributing factor might be the manner in which sales prices are established with individual buyers. After all, how many customers are truly prepared to engage in complex haggling with auto dealers — i.e. with professionally trained negotiators — to agree on prices?

Most customers know that they are not equipped to do so. And as a result, many feel uncomfortable about the process of purchasing an automobile.

Does this culture of “haggling vigorously with your own customers for every penny of every sale” itself promote unethical behavior? The only way for a manufacturer to know for sure would be to experiment with haggle-free policies, and to observe whether such practices align their cultures with the interests of their own customers.

Until a manufacturer decides to try that approach, good luck! And let’s be careful out there.

New Jersey Bans Tesla!

Less than three months have passed since the infamous George Washington Bridge – Port Authority traffic scandal exploded across the headlines. Despite Governor Chris Christie’s attempts to move beyond the controversy, political and criminal investigations are imperiling his political future.

Wouldn’t it be reasonable, then, to expect the Governor to steer clear of any controversial transportation industry decisions? Instead, Christie’s administration leaped into a national debate last week by banning electric automobile pioneer Tesla from maintaining company stores in the Garden State.

Apparently, New Jersey requires automobile manufacturers to sell their products through independent dealership networks. Tesla, as a relatively young firm with no such network in place, has opted to distribute its electric automobiles through “Apple style” company owned retail stores instead. Many of these outlets are actually located in luxurious shopping malls!

Tesla founder Elon Musk, outraged by New Jersey’s ban, charged that Governor Christie “cut a backroom deal (with) the auto dealer lobby.” Then, referring to the GWB / PA scandal, he added “If you believe (him), Gov. Christie has a bridge closure he wants to sell you!”

The dealership lobby claims that restrictive sales laws are needed to prevent unfair competition and ensure consumer protection. It is difficult to imagine, though, why a Tesla company store would be any more threatening to the economy or to consumers than an Apple company store.

Interestingly, New Jersey has also banned self-service gasoline stations from its territory for the past 65 years. Claiming that such stations create safety hazards, the state requires that all filling stations offer full service gasoline pumps only.

So it appears that the Garden State has been promulgating unusual transportation policies for a very long time. But would the general public experience an economic and social benefit, or a commensurate risk, if the State continues to do so?

If you were Jessica Rich, the Director of the Bureau of Consumer Protection of the Federal Trade Commission, would you support New Jersey’s right to ban Tesla company stores? As well as all self-service gasoline stations?

Toyota’s Fall From The Top

It didn’t last very long, did it?

Just a few years ago, with the global economy falling fast and General Motors on its way to a government bailout and bankruptcy court, the Toyota Motor Company of Japan overtook GM and became the world’s largest automotive company. That event ended GM’s 77 year run as the king of the hill, a title that it originally wrestled from Ford shortly before the start of the Great Depression.

From the very beginning, Toyota’s grasp on the global crown appeared to be tenuous at best. Volkswagen, for instance, declared itself to be firmly on a trajectory to overtake Toyota within a decade. And over the longer term, nobody was counting out the growth potential of homegrown Chinese automotive companies like Chery and Geely.

But nobody anticipated that Toyota’s reign at the top might only last a few years. And, most certainly, nobody dreamed that the company that would overtake Toyota might be the firm that fell behind it so recently; namely, GM itself.

The Blink of an Eye

We’re only one-third of the way through the year 2011, of course, and so it may be premature to assume that GM will indeed best Toyota this year. Nevertheless, the firms have already locked in their production plans for the next several months; based on their manufacturing capacities and sales trends, it does indeed appear likely that the rivals will trade places at the top of the global industry heap for the second time in four years.

GM’s stock is actually performing in a lackluster manner, but it has managed to refresh its product line and to continue succeeding in high-growth markets like mainland China since emerging from bankruptcy proceedings. Toyota, on the other hand, has staggered from one crisis to another, most recently the great earthquake, tsunami, and nuclear catastrophes that have disrupted supply chains and imperiled energy sources.

The emergence of Asian economic power, of course, is a decades-long phenomenon that began in post-war Japan and later lifted the Asian tiger economies of Hong Kong, Singapore, South Korea, and Taiwan. Although most pundits believe that the Asian region will continue to drive the global economy for decades to come, the rapid shift of financial might from the Land of the Rising Sun to the People’s Republic of China appears to demonstrate that local fortunes can turn in the blink of an eye.

Global Oligopolies

There is a chance, of course, that General Motors, Toyota, and Volkswagen will simply become a trilateral oligopoly based respectively in America, Asia, and Europe, clustered at the top of the global automotive industry and trading places from time to time. This has occurred in other worldwide industries as well; the three major airline alliances Star, SkyTeam, and OneWorld, for instance, each serve every continent and collectively hold close to a 75% market share of the global flight network.

Nevertheless, Toyota’s rapid ascent and subsequently startling decline, when contrasted with the astonishing turnaround of a once-moribund General Motors, are indicators that the industry may be looking forward to a future of unexpected twists and turns. From the emergence of the electric powered car in the West, to the introduction of Tata’s tiny Nano in the East, we have witnessed trends and developments that would have seemed implausible a mere decade ago.

Furthermore, the renewed escalation of energy costs will inevitably encourage entrepreneurs to invent new means of transportation that may assign the gasoline engine to the scrap heap of history. Might not the entire automotive industry, as we now know it, fall into decline if firms like Better Place, Pure Mobility, and Tesla Motors actually succeed in making ecologically efficient transportation alternatives affordable and reliable?

The Arc of History

All of this uncertainty leads one to accept an unescapable conclusion: that, although the long arc of history might lead us in foreseeable directions, it may be impossible to predict the short term fortunes of specific entities. Various American, Asian, and European automotive companies have risen and fallen, and many have risen again. Entire nations, and their national economies, have indeed followed similar paths.

With the Chinese economy on a multi-generational growth tear, the Japanese economy in free fall, and the American economy wallowing in debt, it may be unwise to predict any short-term changes in these trends. And yet many predicted that the Japanese economy would overtake America’s in 1990 when the market capitalization of the Tokyo Stock Exchange overtook the venerable New York Stock Exchange, a condition that permanently reversed itself a year later.

Thus, while General Motors might allow itself to feel a brief glow of satisfaction about its re-emergence as the “top dog” of the global automotive industry, it would be well-advised not to spend too much time looking back over its shoulder. In the words of the immortal Satchel Paige, someone else may be gaining on them.