In the previous chapter we reviewed the evolution of the auto industry and noted how key innovations in approaches to management and organization have seen the industry grow from a craft operation – making single cars for wealthy customers – to the mass production of a wide variety of cars, affordable to an increasingly large proportion of the global population. Each of these innovations, or paradigms, has been the subject of intense analyses elsewhere and we will not reproduce these in detail. We point more specialist readers to some of the classic studies in the area.

Our aim in this chapter is to provide an overview of four broad approaches to management and organization in the auto industry, each represented by a particular car company which represents the pinnacle of what was possible in the auto industry at a particular point in time, within a set of parameters bounded by standards of cost, quality, product variety and so forth. The four companies are Ford, General Motors, Toyota and Volkswagen.

FORD: THE BIRTH OF MASS PRODUCTION

‘Any colour you like so long as it's black’

The first major innovation in management and organization in the auto industry was Henry Ford's mass production approach, which represented a step change in production efficiency. By reducing the cost of producing motor vehicles, Ford created an entire new market of car buyers. In his autobiography, Ford wrote:

Over time, Ford made many improvements to his production processes, which allowed him to reduce the price further over time. Ford's famous Model T originally cost $850 in 1908, but by 1920 the cost of a T had fallen to just $260. Falling prices meant a growing market and Ford produced over 15 million Model Ts between 1908 and 1927.

In this chapter we describe the evolution, decline and ultimate collapse of the Rover Car company, a UK auto firm that collapsed in 2005. Although the collapse occurred in 2005, Rover remains a very interesting example of crisis and resilience in the auto industry. The company, in various guises, had been around for a long time when it collapsed – over 100 years. At its peak it was large (producing around a million vehicles a year and employing approximately 200,000 people) and its decline occurred over a very long period – at least 40 years. Although there are many features of the story that are unique to Rover and the UK auto industry, there also many lessons from Rover's failure for other car companies.

Although the title of this chapter is ‘Rover’, ‘Rover’ or, strictly speaking, ‘MG Rover’ was in fact the brand name that was used on the company's vehicles only in the final years of its life, and before that was one of several brands offered by the company. The company was formed through a succession of acquisitions and mergers between smaller, independent producers, the last and most significant of which occurred in 1968 when the ‘British Leyland Motor Corporation’ (BLMC) was formed. BLMC was re-named a number of times over the years, with names that included British Leyland, BL, the Rover Group and eventually MG Rover. In the interests of simplicity we shall generally refer to the company as ‘Rover’, apart from when we are discussing specific events or periods in the company's history when we will use the name that applied at the time.

There have been several very comprehensive accounts of the history of Rover and the UK auto industry more generally. It is not our intention to replicate these here, but interested readers may wish to consult Williams et al. (1987), Church (1994) and Pilkington (1996).

We shall refer to various sources as we recount the Rover story, but we will draw most heavily on around 45 interviews that the authors personally conducted, along with Mike Carver, with key participants in the Rover story, a number of whom were CEOs of the company at various points in its history.

In Chapters 5 and 6 we examined the failures of Rover and Saab, the two most significant car companies to fail within the last decade or so. However, equally significant to any understanding of resilience in the auto industry are the cases of those companies that experienced crisis but managed to survive. Indeed, in more or less every decade since the Second World War there are examples of car companies that experienced a significant crisis and that managed to survive. In this chapter we examine two examples of ‘near death’ experiences, Japan's Nissan (in 1999) and Chrysler in the USA (in 1979 and again in 2009).

Many car firms that are currently regarded as strong, industry leading enterprises have – at least once in their lifetimes – come close to collapse. Crises are a perennial feature of the motor industry and have afflicted auto companies across all regions of the globe. Toyota, for example, nearly failed in 1950. In the early 1950s the young Toyota Motor Company faced a serious drop in demand as credit from the Reconstruction Finance Bank was restricted and a recession hit the Japanese market at the same time. Toyota vowed to honour its life-time employment contracts, but in the end had to lay off 2,146 workers through voluntary redundancy. The crisis forced company founder Kiichiro Toyoda to resign as president, after issuing a profuse apology to its workforce, and led to the division of Toyota's manufacturing and sales arms into two companies, a division which remained until 1982. Toyota's President Akio Toyoda summed up the nature of the industry, stating that ‘Toyota has been hit by a crisis about once every ten years.’ This picture replicates itself at most major car firms: VW, for example, one of the largest car makers in the world at the time of writing, experienced existential crises in 1973–4, 1982–3 and 1992–4, made a €1bn loss in the US market in 2004, and announced a $5bn cost reduction programme in 2014.

In this chapter we describe two companies that have faced crises that led them to near-bankruptcy, but which survived: Chrysler, which has experienced a number of crises, but which was bailed out by the US Government in 1979 and 2009; and Nissan, which came close to bankruptcy in 1999 and was saved by entering an alliance with France's Renault.

Car companies are huge organizations, which design, make, sell and support complex products in high volumes, all over the world. In order to understand survival and failure amongst auto firms we shall focus on three areas: (1) the relationships between auto firms and their stakeholders (2) the ability of auto firms to run their operations effectively – essentially, designing, making, selling cars to competitive standards – and (3) key features of the context in which auto firms operate. Many analyses of competitiveness in the auto industry have tended to concentrate on the second of these, to the neglect of context and stakeholder relations. Our argument is that to understand survival and failure in the auto industry, consideration all three areas – operations, stakeholder relations and context – is necessary.

Manufacturers operating in competitive market conditions need to be capable of conceiving, designing, making, distributing and selling products to competitive standards, at appropriate prices and in economic quantities. They need to do this while maintaining sufficient margins between revenues and costs so that they can make provision for the development and renewal of products and infrastructure. This is a typical ‘operations’ perspective on success and failure. It is this perspective which dominates much commentary on the auto industry – and, indeed, much of the general strategy and operations management teaching in business schools around the world. From this perspective, efficient companies who make products that are comparable to, or better than those of their competitors in terms of price, quality, style and reliability are successful and grow; those that do not go out of business. To this, one could also add the need for sufficient financial flexibility to ride out perturbations such as economic downturns or other events (e.g. natural disasters, product recalls) to which the auto industry is vulnerable, and which can precipitate crises. The operations perspective represents a powerful, Darwinian logic of survival-of-the-fittest.

This perspective is compelling and persuasive, but it only provides a partial explanation of why some auto companies thrive and survive and others do not. As the woes of some of the Japanese automakers showed in the late 1990s, and the 2008–9 global financial crisis demonstrated more graphically still, auto companies that are capable of designing, making and selling reasonably competitive products, efficiently, can still get into trouble.

As this book goes to press in 2015, Saab Automobile is not producing cars and has not done so in significant volume for four years. The company declared bankruptcy in December 2011. Its main assets were acquired by a Chinese consortium, National Electric Vehicles Sweden (NEVS) in June 2012 and for a few months in the latter part of 2013 and early 2014 a small number of vehicles were actually produced, before NEVS filed for bankruptcy in August 2014. In late 2014, Indian Auto Group Mahindra & Mahindra was rumoured to be considering buying the remnants of the company.

In this chapter we trace the history of Saab Automobile from its establishment in the 1940s to the present day. We analyse the underlying reasons for Saab's failure, and set these in the context of the contemporary global automotive industry and in terms of the conceptual framework that we introduced in Chapter 4.

Saab (Svenska Aeroplan Aktie Bolag) was started in 1937 to produce military aircraft. Its formation was a government initiative, a response to the increasing likelihood of war in Europe. The company was started with private capital and built a new factory to the north of Trollhättan, which built Saab cars until 2014.

The company initially built a version of the German Junkers Ju-86 medium bomber under licence, adding a light fighter-bomber (the American Northrop B5) soon afterwards. Production of various other aircraft followed. However, as the Second World War drew to a close, it was clear that demand for military production would fall and that other activities would be needed to keep the Saab workforce employed. A number of alternative avenues were explored, including spinning reels and prefabricated sheet steel warehouses. Two were selected for further development – civil aviation and car manufacture.

EARLY CAR PRODUCTION

The German auto producer DKW provided an example for Saab to follow, building relatively inexpensive cars powered by two-stroke engines. Ironically perhaps, DKW was later assimilated into what became Audi, one of Saab's strongest competitors. After the war, Saab began work on a front-wheel drive vehicle, powered by a two-stroke engine. Saab applied its expertise in aerodynamics from its aircraft operations to the vehicle, the Saab 92, and in 1949 produced a car with an astonishingly low drag coefficient for the time of 0.30.

Few inventions have shaped our lives as much as the automobile. It not only allows us to freely move around in our personal lives, it also underpins and enables much of our economic activity by being able to efficiently move goods. As we write this book, the global automotive industry has produced a combined 3 billion vehicles since 1900. The annual growth rate of industry output since 1945 has been 6.3 per cent, and this growth – despite distinct troughs during economic crises – has accelerated in the most recent decade.

In 2013 a total of 87,354,003 vehicles were produced globally, of which 65,462,496 were passenger cars. These added to the 1.1 billion vehicles presently in operation on the planet (see Figures 2.1 and 2.2).

The global auto industry comprises around 40 companies (or groups of companies) who in 2014 each manufactured 100,000 cars a year or more. Most of these also produce light commercial vehicles and about half have divisions that produce heavy commercial vehicles. The largest of these are truly colossal – companies such as Toyota, GM and Volkswagen produce around 10 million vehicles a year, employ hundreds of thousands of people in 100s of assembly plants and other facilities around the world. Yet, despite this scale, giant car companies are not immune from failure, as the bankruptcies of both GM and Chrysler in 2009 show.

In this chapter we will describe the evolution of the auto industry, as well as the operation of car companies within it and look at their strategy and operations. Car companies represent an extreme in terms of scale and complexity, but we will argue that many of the processes at work in the auto industry are common to many other organizations – they are simply played out on a much greater scale. The auto industry also has six key idiosyncrasies that are key to understanding both the dynamics of the industry and the success and failure of particular auto firms. These are:

1. Persistent global production overcapacity – in aggregate, automakers around the world have the capacity to produce far more vehicles than there is demand for. This is not a transient problem – overcapacity has existed for many years.

2. Auto firms have national and corporate symbolic value – for developing economies, possession of a car industry symbolizes economic development and progress.

Corporate failure is an increasingly prevalent occurrence. Interest in resilience – the avoidance of failure and the recovery from it – is therefore unsurprisingly on the rise: The average lifespan of a company listed in the S&P 500 index has decreased by more than 50 years in the last century, to a mere 15 years by 2010. Company life expectancies are reducing, and so are CEO tenures. Many reasons for this trend have been put forward: technological innovation, low-cost competition, overcapacity, and an increasing focus on short-term financial returns in many business environments. From a free market perspective, occasional failure is not a bad thing, a sign of creative destruction. Firms that are unable to generate sufficient returns should go out of business, or be taken over by stronger, more efficient firms. Yet in cyclical, mature industries this short-termism may deprive companies of the opportunity to develop long-lasting capabilities that generate wealth in the long term.

The ‘industry of industries’, as Peter Drucker once called the automotive industry, is a perfect setting to explore these challenges. Yet many other sectors, such as aerospace, electronics and industrial equipment, face the same problem: firms are battered by cyclical markets that see demand drop drastically in a downturn, while they struggle to reduce the large structural cost embedded in their business. Recurring crises become the norm. Emerging markets have been both a bane and a boon in this respect – often providing the greatest opportunity for growth and a major threat due to new entrants at the same time. How can firms develop resilience to perennial problems such as global overcapacity and low-cost competition, to withstand the pressures that they face during a downswing in the business cycle? In short, what does it take to survive in a mature global industry? This is the question we seek to answer in this book.

MANAGEMENT OR CONTEXT?

Our analysis combines the perspectives of two, usually opposing, schools of thought on corporate success and failure. Within writings on general management (by which we broadly mean strategy, organizational behaviour and operations management) there are ample examples of ‘best-practice’ literature. This literature typically identifies the practices found in relatively successful companies and describes these, often in a highly stylized form, in a manner suitable for consumption and transfer to other environments.