The global auto industry and the world of technology seem to have only one overlap right now: self-driving cars. There is more to the comparison than meets the eye, however. Many of the features you associate with great technology companies today used to be true about the US auto industry as well.
Take as one example the “Whiz Kids” of World War II. A group of 10 young men, they started working together in the Army Air Force during the conflict. Their specialty: “Statistical Control”, which meant analyzing data to optimize scarce military resources with rigorous math rather than simple intuition. By all accounts, their efforts were wildly successful. They also got along so well they decided they wanted to keep the team together as they left the service.
After the war, they went as a group to the Ford Motor Company. Newly minted Chairman Henry Ford II wanted the best and brightest to help him run the company with the most modern management practices. Nowadays, of course, the Whiz Kids would be headed to Google or Facebook. But not in 1946. The auto industry was the place to be.
With that small cornerstone of an intellectual structure, here are some other automotive/technology industry comparisons and lessons.
#1. Private “Unicorns” are nothing new… With rafts of private capital available to them, large Technology companies stay private longer than before. Uber, Airbnb, Ant Financial, WeWork… It must be a fault of the current capital market system, or so many think.
But consider that the Ford Motor Company was in private hands from 1901 to 1956. It developed the Model T, Model A, and a host of other products with no public capital. Its founder, Henry Ford, didn’t want to answer to anyone. So the company stayed private until several years after his death. When it did come public, it was the hottest IPO of the decade.
#2. …And neither is insider control. Even when Ford finally went public, the family retained a controlling stake. This is still a feature of the company’s ownership structure.
Tech founders often feel the same way, much to the dismay of their investment bankers and eventual public market investors… There is nothing new under the sun on this point.
#3. Cutting edge technology is often weaponized. During World War II, the US automakers were part of the “Arsenal of Democracy”, as the country shifted industrial production to a wartime footing. GM and Ford made anything and everything the US government needed in the war effort.
Now, of course, there is broad public concern over foreign countries using social media to reduce Americans’ confidence in its democracy. Physical capital (production plants) has given way to intellectual capital (hacking and knowledge of social networks) in terms of how countries butt heads. But in both cases they represent scarce resources allocated to a geopolitical goal.
#4. Anything can be disrupted. In the 1960s, GM and Ford had a combined 75% share of the US light vehicle market. As a comparison, that is roughly Google’s share of the search engine market today. The US auto industry looked as invincible in the 60s as Google does today. Hard to believe, I know, but it is true.
Then two things happened to the US auto industry. First was the 1973 oil shock, when gasoline prices increased by +300%. Second, Japanese companies like Toyota and Honda started expanding their dealership networks to offer affordable and efficient small cars. At first, the US automakers happily ceded the low ground of cheap, low profit margin cars to the competition. Then the Japanese started offering family sedans. And the US makers let them also have that still less-profitable market. Then the Japanese offered luxury cars, SUVs, minivans and pickups. And you know the rest of the story.
Bottom line: nothing is forever. Innovative disruption is a perpetual cycle. Will Google have the same trajectory over the next 50 years as GM did over the last half century? History points in that direction.
#5. If you want to be global, you have to play by everyone else’s rules. Over the decades, both Ford and GM built large international operations. Ford started production in the UK in the 1910s. GM did the same, and bought Opel (continental European operations) and Vauxhall (UK) in the 1920s. In all cases, the companies had to follow local labor laws, local product regulations, and local customs with respect to business models and practices.
The global nature of the Internet may make it seem that one-worldwide-size-fits-all, but US tech companies are slowly learning this is not so. German labor laws always applied the same to Opel as VW or Mercedes factories when GM owned the asset. At least in that case, the Opel plant employed German labor. That is much less so the case with Google or Facebook, where headcount is still predominantly American. And that makes them easier targets.
#6. Watch your fixed costs as your business matures. You probably know the United Auto Workers union was, over the decades, able to negotiate excellent benefits from US automakers. Health care, pensions, the lot.
But the reason this was the case was not mismanagement. Rather, those benefits developed as a result of the car companies trying to hold wage growth to manageable levels. Pension costs weren’t onerous – male life expectancy 50 years ago was 67 years. Health care costs were low as well. Fast-forward 20/30 years, and the situation for each was dramatically different.
Now, the global tech industry might look at this example and say “Not I…” And to a certain extent, they have a point. At one point in its heyday General Motors directly employed over 500,000 people. Google has 88,000 now. Facebook has 25,000. And they are young, smart, and energetic. But companies, like people, mature and age.
Don’t get us wrong – we favor Technology stocks and think the industry has a long way to go. But we also know history eventually repeats. Tech is especially prone to disruption and in some ways any given “Big Tech” company’s competitive advantage is no more secure than GM or Ford’s position in the 1950s and 1960s.