Trust but Verify; Verify before Trusting

Trust is a delicate flower. As I told my sons some years ago, if is hard to achieve and easy to ruin. The article below summarizes neatly while I have long believed that the best approach was, to use President Reagan's phrase, "trust but verify".

The diagram above shows some of variables which have to be managed in a trusting business relationship. It illustrates just how delicate are trust and commitment building and maintenance.

We can apply this model to current political behavior and the electorate's reactions. We'll see how this works out a week from now.

My past work in the automotive industry, particularly that involving automaker-supplier relationships validates this thought process. Little wonder that suppliers are more trusting of Toyota and Honda than any of the Big 3. Toyota and Honda behave in a trust-worthy way. Over the past fifteen years, the Big 3 have not. The purchasing heads of the Big 3 say that they want to improve relationships with their key suppliers. Little wonder that supplier executives are sceptical, given their experience. They would be foolish not to "Verify before Trusting".



The Decline Of Trust

By Sebastian Mallaby
Monday, October 30, 2006; A17

In 1995 Francis Fukuyama came out with a book called "Trust," in which he argued that a society's capacity for cooperation underpins its prosperity. The same year, Robert Putnam's famous article, "Bowling Alone," lamented that the United States was depleting its stock of precious social capital. The question of trust -- in government and also in communities -- preoccupied politicians too. "It Takes a Village," Hillary Rodham Clinton urged in the title of her 1996 book, which became a best seller.

You don't hear much about trust these days. Instead, we want accountability.

You see this most viciously in politics. In the mid-term campaigns, nobody has time for trust. The name of the game is to hold opponents accountable by attacking their records -- for failings real or imagined. If the Democrats capture one or both chambers, it will be largely because they promise to hold the president accountable.

This reflects a shift somewhere around 2003 or 2004. In the 1990s, after academics and pundits began talking about trust, the nation did actually become more trusting. The share of Americans saying they trust government "most of the time" or "just about always" rose from 21 percent in 1994 to 56 percent in 2002. Equally, elections became less abrasively focused on accountability. In 2000, according to John Geer of Vanderbilt University, a relatively low 40 percent of the messages in presidential TV spots were negative, down from 47 percent four years earlier.

But some time after the Iraq invasion, these trends reversed. In 2004 the share of Americans saying they trusted government fell to 47 percent, and this month a CBS News-New York Times poll put it at a rock-bottom 28 percent. Meanwhile Geer's measures show that in the 2004 election negative messages jumped to 50 percent of the total, and he guesses that this year's congressional races are the most negative in history.

There's been a similar change in corporate America. In the late 1990s, the new thing for corporate managers was to trust ordinary employees. Company hierarchies were flattened so that people in the middle could demonstrate initiative rather than suffocating under bureaucratic controls. In 1999, the Harvard Business Review reported that 30,000 articles on trusting and empowering middle managers had appeared in the business press over the previous four years.

That paradigm ended in 2002 with Enron, WorldCom and dozens of lesser corporate scandals. Suddenly nobody wanted to trust managers; they wanted to audit them. Instead of the era of management empowerment, we entered the era of mandatory online ethics training. Meanwhile private-equity firms are raising record sums to take over companies on the premise that incumbent managers need to be kicked rather than trusted.

What to make of this shift? Holding people accountable is a good thing:

This season's negative campaigning

can be seen (admittedly, with many despicable exceptions) as a healthy reaction to poor congressional performance. Equally, the 2002 scandals justified the Sarbanes-Oxley reforms of corporate governance. There are reasons we hold teachers accountable for failing

schools and put travelers through metal detectors.

But trust, when not abused, is nonetheless an asset. Accountants, lawyers and online training sessions impose costs on businesses; it would be cheaper to trust people if that were possible. Likewise, as Marc Hetherington of Vanderbilt University has demonstrated, government is constrained if nobody trusts it. The Great Society programs were possible because Americans trusted government in the 1960s; the creation of the Medicare prescription drug program arguably reflected the peaking of trust in government in 2003. But Bill Clinton's health care reform was thwarted in the low-trust early 1990s, and nobody now trusts government to modernize entitlements. Meanwhile President Bush had enormous foreign policy momentum in 2002-03 because Americans trusted him. Thanks to the Iraq mess, Americans are now focused on holding Bush accountable, and his options are limited.

There are powerful reasons trust tends to decline and accountability advances. Mobile societies tend to have weak bonds; the Internet makes it easier to hold people accountable and encourages acerbic negativity. And the absence of trust can feed on itself. Leaders function under stifling oversight; this causes them to perform sluggishly, so trust continues to stagnate. But occasionally there is a chance to escape this trap: A shock causes trust to rise, leaders have a chance to lead and there's an opportunity to boost trust still further.

We've recently had a double opportunity. The boom of the 1990s boosted trust in business; the 2001 terrorist attacks boosted trust in government. But CEOs and politicians abused these gifts with scandals and incompetence. Such is the cost of corporate malfeasance and the Iraq war: Precious social capital is destroyed by leaders' avarice and hubris.

mallabys@washpost.com

For Carlos Ghosn,, Fast Lane Gets Bumpy

Carlos Ghosn is one of my favorite business leaders. He is not afraid of oversized challenges and certainly faces them at present at both of his jobs as CEO of both Renault and Nissan. I'm glad (and maybe he is too) that the discussions with GM aborted. He has plenty to do without another distraction at present. (He may be right that eventually his alliance needs a North American partner, but this, as he readily admits, is hardly the ideal time.


One of Ghosn's strength is to meld "threat" with "promise". He is a big believer that constant new product introduction is essential for a successful automaker. He understands that a robust cash flow is a necessary, but not sufficient, condition for timely new product introductions. He sells continuous and sometimes radical cost reduction as a necessary element for assuring healthy cash flow, hence new product possibilities. This marriage of "carrot" and "stick" has been essential in the past for both Renault and Nissan, particularly effective at the latter.


Hopefully, approaches like this will continue to allow Ghosn to lead both companies to new heights, despite the "bumpy road" described below.

Inside the auto chief's hyperefficient world
of hands-on managing. Can it really save the industry?

Cuing up Fatboy Slim

By MONICA LANGLEY
October 28, 2006; Page A1

MAUBEUGE, France -- Stalking the factory floor of Renault SA's plant here last month, Chief Executive Officer Carlos Ghosn reminded managers of the car maker's commitment to boost its profit margin by 50% by 2009.

"Commitment is a strong word," one manager piped up, "and circumstances have changed" since the marching orders were delivered earlier this year.

"It's not a target," snapped Mr. Ghosn, who considers the profit-margin increase mandatory. "Either management performs or it's out -- and that applies to me as well."

Mr. Ghosn's accept-no-excuses attitude, his tendency to insert himself into the smallest aspects of his business and his celebrated turnaround of Tokyo-based Nissan Motor Co. have made him the closest thing the auto industry has to a rock star. Earlier this week, he was even knighted by Queen Elizabeth for Nissan's contributions to the British economy.

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Carlos Ghosn

In recent months, his name has been floated as a potential savior to the beleaguered U.S. auto industry -- sparking some high-level maneuvering in Detroit. But on the factory floors of France, Mr. Ghosn is under pressure now to show he is more than a one-hit wonder.

Boosting results at Renault, which he took over last year, is proving tough. Although the French company turns a profit, its model lineup is aging and profit has been sliding. In Japan, Nissan, which Mr. Ghosn continues to run, said Wednesday that second-quarter vehicle sales dropped 7.6%. In addition, several weeks ago, Mr. Ghosn's bid to form an alliance with General Motors Corp. fizzled.

"People are wondering if the magic is gone," Mr. Ghosn concedes in an interview.

The hard-charging, 52-year-old executive shot to fame a few years ago by rescuing Nissan from near collapse and giving it one of the highest profit margins among global car makers. Last year he added a second job seven time zones away: chief executive of Paris-based Renault, which has an alliance with Nissan. Each company holds a stake in the other.

Mr. Ghosn's name still looms large in Detroit despite the failed GM talks. Some believe he will eventually play a central role in the U.S. industry's efforts to figure out a way to compete with the Toyota Motor Corp. juggernaut. Mr. Ghosn (rhymes with phone) contends that the only way to compete effectively with Toyota is through an alliance that spans the globe, and that U.S. car makers cannot wait for a miracle or an earthquake to stop the world's strongest auto company. DaimlerChrysler AG and Ford Motor Co. have put out feelers to him about potentially working with him in the future.

In Detroit, discussions about Mr. Ghosn lead invariably to two questions: Is this the man that U.S. auto makers need to pull them out of their tailspins? And would his style fly in America?

A series of interviews with Mr. Ghosn in France and Japan reveal a controlling, hands-on manager who noses into the details of everything from car designs and advertising campaigns to the wording of management brochures and the cleanliness of factory floors. He surveys hundreds of thousands of employees anonymously to evaluate the quality of his managers.

He even selects the music for his public appearances. His current choice: "Right Here, Right Now," by Fatboy Slim. At some auto shows, the tune blares as he walks down a runway and mounts a small circular stage in a dark pinstriped suit. He likes to address his audience in the round.

"I've never seen an executive whose presence is felt at every level up and down the ranks" like Mr. Ghosn's is, says John Casesa of Casesa Strategic Advisors, a New York auto consulting firm. "He's got the best track record of any CEO in the auto business. But the jury is still out if he can create a great global company."

Kirk Kerkorian, GM's largest individual shareholder, and his adviser Jerome York are fans and were the catalyst for the recent talks about a global alliance. They admire Mr. Ghosn for his straight-talking, results-oriented management style, particularly his willingness to reveal profit and sales targets to the markets -- then to deliver on them. They contend this is precisely the tonic Detroit needs.

Skeptics question whether he pushes to meet his goals at the expense of other long-term objectives such as quality and steady product stream. Although the quality of new Nissan models, as measured by J.D. Power & Associates, climbed above the industry average last year, their long-term reliability was below average, lagging behind GM brands such as Buick and Cadillac.

And in a September report, Bernstein Research said that Renault's stock had been "sustained by expectation," but that "near-term fundamentals are bleak." Mr. Ghosn's sales targets, it said, "look increasingly unrealistic."

For U.S. auto makers looking to expand abroad, Mr. Ghosn's global background is appealing. A Brazilian-born Frenchman of Lebanese parents, Mr. Ghosn is fluent in four languages -- English, French, Portuguese and Arabic. He oversees companies operating in more than 100 countries. If measured together, Renault and Nissan would constitute the world's fourth-largest car maker.

As a boy growing up in Porto Velho, Brazil, and in Beirut, Mr. Ghosn recalls, he developed a passion for cars and could distinguish between makes by the sounds of their horns. After earning an engineering degree in Paris, he took a job at Michelin SA, the French tire maker, and rapidly climbed the ranks. In 1996, he was recruited to serve as the No. 2 executive at Renault. His subsequent decision to close a factory provoked widespread protests. The French press dubbed him "le cost killer."

In 1999, Renault invested in near-bankrupt Nissan and dispatched Mr. Ghosn to Tokyo to take charge. He began studying Japanese and, in what he describes as an effort to show respect to his elders, retained Nissan's top Japanese executives to work with his team of Renault veterans.

But he broke from tradition by prescribing tough medicine. He sold off Nissan's ownership stakes in many top suppliers, raising much needed capital, and shut down a factory in Japan. He set an aggressive target to boost world-wide sales by one million vehicles by 2005, and rushed jazzy new designs through the development pipeline. His turnaround plan succeeded, and he became a celebrity in Japan. He was even the hero of a comic book.

In April 2005, Mr. Ghosn also took the helm at Renault. He moved his family back to their Paris home, keeping an apartment in Tokyo. The French company was healthier than some European rivals and was turning a profit. But except for its Megane and Clio models, its vehicle lineup wasn't selling well. Sales were zigzagging and profit margins were sliding. Renault's managers were shooting for a 4% margin, far below the nearly 10% margin at Nissan.

"I want specific objectives -- they can't be too short- or long-term -- that are fundamental, understandable and a stretch to achieve," Mr. Ghosn explains.

Earlier this year, he formally raised the bar. His plan, called Commitment 2009, calls for a 6% profit margin and for expanding world-wide vehicle production by nearly one-third, or 800,000 a year, by 2009. He ordered each department and factory to come up with a plan to meet the objectives. He personally fiddled with the wording of internal brochures and posters promoting the plan, he says, to make his intentions "clear and with no ambiguity." He even helped design the logo for the campaign.

During a visit last month to this French factory, which makes the Kangoo compact van, Mr. Ghosn pressed each department head about how they would contribute to the plan. He roamed the factory floor, surrounded by the factory's top managers, eyeing how tools and parts were arranged, even stopping one worker loading parts into a bin. "You're putting that part in the wrong slot," he said.

At a meeting with union representatives, he pressed them on worker absences. During lunch, he slammed the factory's top managers for the high absentee rate. "We have a 4% rate....Peugot and Toyota factories nearby have 2%," he said. "Does your action plan include getting rid of those not playing by the rules?"

The managers exchanged nervous glances and said they were studying the problem. Mr. Ghosn persisted: "An absent employee penalizes his team. With 14% unemployment in this area, I want those who really want to work....The unions I spoke to today have agreed to help."

On the company's Gulfstream jet back to Paris, Mr. Ghosn worked with a speechwriter on an address he planned to deliver to senior Nissan and Renault executives. Mr. Ghosn slashed adverbs and adjectives, reducing sentences to match his blunt style: subject, verb, object. "I don't want one word that's artificial," he said. He ordered up supporting numbers for the text, noting that numbers are a universal language.

The following day, Mr. Ghosn raced through a series of back-to-back meetings at the company's headquarters overlooking the Seine River. Some executives were allotted just 10 minutes. "With Mr. Ghosn, you don't chitchat," says Dominique Thormann, an executive who has worked at both Renault and Nissan. "When you walk into his office, you're there for a purpose that you've cleared ahead of time. He's in a hurry. He's almost obsessed with time."

Mr. Ghosn had to step up his pace when he agreed to run both auto makers. He receives two paychecks -- $2.1 million at Renault and an undisclosed sum estimated to be at least that much at Nissan. He carries two black briefcases, one for each company, and keeps his diaries and papers separate. His long hours in Japan earned him the nickname 7-Eleven, after the 24-hour convenience-store chain popular there.

In his sparsely decorated Paris office, his nearly spotless desk contains just a few papers and reports. It faces three clocks showing times in Paris, Tokyo and Nashville, Tenn., where he recently relocated Nissan's North American headquarters.

An air of formality permeates the offices of both companies. Everyone from senior executives to his driver calls him Mr. Ghosn -- never Carlos. His top advisers have never been to his home. "I've never been invited," says Patrick Pelata, a top Renault executive. Mr. Ghosn considers it vital to keep his professional and private lives separate.

Nearly every Saturday, he has a standing reservation for lunch with his wife, with whom he plays tournament bridge, and the three of his four children who still live at home. Shopping with his kids, he says, helps him "keep connected in music, fashion, youth." He uses them as a sounding board for whether his cars are hip. He was upset for a long time "because my kids never mentioned a Nissan car," he says. They do now, he adds. Image is important to him. Over the past few years, he has lost 20 pounds and had laser eye surgery to shed his glasses.

Although he remains a habitual micromanager, Mr. Ghosn no longer has time to delve into as many decisions at each company. When Michel Gornet, Renault's manufacturing chief, sought his advice on whether to shut down a plant for an extra couple of days, Mr. Ghosn told him: "This is your problem. I have no time for that." Carlos Tavares, Nissan's strategic-planning head, says he gets only an hour a month alone with Mr. Ghosn, and he sometimes has to cover 15 or more topics.

Nevertheless, Mr. Ghosn still seizes on small matters he deems important. With Renault preparing to introduce a new version of the Scenic, he reviewed storyboards for commercials featuring a baby elephant in the minivan. He groused that the ads didn't highlight an important feature for families. "Show the big trunk," he said. (The commercials now do.)

Improvements have been slow to come at Renault. World-wide vehicle sales are down 3.6% this year through September, and the company's European market share is off by one percentage point to 9.4%. Some industry analysts say it will be difficult for Mr. Ghosn to boost productivity at the company, which is partially owned by the French government, without cutting Renault's work force and closing plants -- a politically risky step in France.

Mr. Ghosn says that he expected the slow start, and that planned new models like a sport-utility vehicle developed with Nissan will boost sales. He predicts that both Renault and Nissan will take off in coming months, with the introduction of new models. Nissan plans to roll out an Altima midsize sedan, a Sentra compact and an Infiniti G-35 luxury sedan.

Mr. Ghosn is deep into the details of his pet project: Nissan's GT-R, a high-performance sports car boasting more than 450 horsepower and all-wheel drive. Mr. Ghosn has directed the company not to play up the vehicle's 180-mile-per-hour top speed. "Speed at the moment isn't very positive," he explained at a recent meeting. He directed the campaign to focus on the car's "unique driving experience."

Rob Schwartz of TBWA\Chiat\Day, who runs Nissan campaigns, recently presented five possible ads, featuring music ranging from John Lennon's "Power to the People" to Richard Wagner, the German composer. Mr. Ghosn singled out a new composition by a little-known band. "I like the bells with the metallic guitar -- precise, strong and unique," he says. Remarks Mr. Schwartz: "I've never talked to a CEO about instrumentation."

When news broke in June that Mr. Ghosn was talking to GM executives about a potential alliance, some industry observers wondered how much more he could take on. "I'd question how many companies even Carlos Ghosn can run," says Amir Anvarzadeh, director of Japan equity sales at KBC Financial Products in London, a Nissan bull. "His big ego helped when it gave him the confidence to do the impossible at Nissan, but at this stage, his ego could be a detriment if he tries to do too much."

The talks were the idea of Mr. Kerkorian and his adviser Mr. York, who was then serving on GM's board. From the start, Mr. Ghosn sensed that GM's chief executive, Rick Wagoner, had no interest in combining forces and that Mr. Wagoner resented Mr. Ghosn's car-czar status. GM executives let it be known that Mr. Wagoner preferred to hunker down to get results rather than work on his public image. After the news broke, some GM executives were taken aback that Mr. Ghosn invited auto reporters to one-on-one meetings in a corner suite at New York's St. Regis Hotel to share his thoughts about the possible tie-up.

Despite the tension, Mr. Ghosn pushed ahead, telling his team they had "nothing to lose." The way Mr. Ghosn saw it, an alliance would allow Renault, Nissan and GM to share costs on purchasing, design and manufacturing, potentially saving his two companies several billion dollars over five years.

Last month, over a dinner of quail eggs, grilled vegetables and steak at his favorite yakitori restaurant, Mr. Ghosn told Simon Sproule, a Nissan vice president: "Now we know the value of a North American partner." He reeled off the advantages of sharing vehicle platforms and combining purchasing. He spoke with admiration of GM's strong position in China.

"I'm in this for the long play," he told Mr. Sproule. He speculated that if talks with GM didn't pan out, Nissan-Renault would join with another Detroit auto maker, because the American companies would continue slipping.

Mr. Ghosn and Mr. Wagoner met last month at the auto show in Paris. Over lunch at Renault headquarters, Mr. Wagoner raised impediments. He argued that a deal would benefit Mr. Ghosn's companies more than GM and would give Nissan-Renault de facto control that would warrant a multibillion dollar payment to GM.

Within a week, Messrs. Wagoner and Ghosn called off the talks, and Mr. York resigned from GM's board. GM's stock dropped and Nissan's shares rose. Nissan investors had worried that an alliance with GM would distract Mr. Ghosn from Nissan's problems. Some Nissan dealers in North America also were concerned that associating with GM would dilute the value of their dealerships. "Ghosn is our rock star," one dealer said. "We don't want to share him."

The failed talks, Mr. Ghosn says, "convinced me of the absolute value" of a three-way alliance with a U.S. auto maker. "Who? When? How? I don't know. But I owe it to my stakeholders to pursue" such a deal after Nissan and Renault "get back their tail winds."

If Mr. Wagoner's turnaround plan for GM falters, Mr. Kerkorian, a fan of Mr. Ghosn, could push forcefully for a revival of the idea. Mr. Ghosn also could steer Nissan-Renault into talks with either Ford or DaimlerChrysler.

Ford Chairman Bill Ford has chatted with Mr. Ghosn as recently as this summer about working together. But talk of an alliance anytime soon is unlikely following the appointment last month of Alan Mulally as Ford's new CEO. Ford announced earlier this week a preliminary third-quarter loss of $5.8 billion.

A few months ago, Dieter Zetsche, DaimlerChrysler's chairman, discussed briefly with Mr. Ghosn the potential for working together, but there have been no further talks, according to people familiar with the situation.

Mr. Ghosn says he isn't actively seeking an alliance with a North American partner -- for now, that is. He says he is focusing on making improvements at Renault and regaining momentum at Nissan. In North America, dealer inventory on Nissan's new Versa compact has shrunken to just seven days -- a good sign -- forcing the company to boost production. It expects to post a double-digit gain in U.S. sales in October, compared with a year ago.

"People will be surprised at the positive news ahead," says Mr. Ghosn. "I'm not spreading myself too thin."

--Joseph B. White contributed to this article.

Write to Monica Langley at monica.langley@wsj.com

Peterhof - The Russian Versailles?

Yesterday I showed you a few photos of Versailles, outside of Paris. Outside of St Petersburg, Russia, there stand several palaces which are said to have been inspited by Peter the Great's visit to Versailles. My pick is Peterhof, on the Baltic coast (Gulf of Finland) about 45 minutes from St Petersburg. Unlike Versailles, where the fountains operate relatively rarely, at Peterhof they are on whenever visitors are present. A magnificent sight.

Michelle Maynard's articles are almost always worth reading. Here she challenges the historical conventional wisdom in Detroit and calls for focusing on a niche definition of a broad range producer. Her European examples are most interesting. It remains to see whether this approach applies to the North American market. After all, Toyota operates differently in North America than it does in Europe, or in Japan for that matter.

Still, very interesting food for thought.

---

October 29, 2006

Now Playing in Europe: The Future of Detroit

By MICHELINE MAYNARD

VALENCIENNES, France

WALK inside Toyota’s five-year-old factory here, an hour’s drive from the Belgian border, and step into a world stuck on fast-forward. Yellow forklifts speed down aisles bearing fresh supplies of parts, forcing visitors to flatten themselves against the concrete walls as the deliveries go by.

Huge stamping presses beat out an ear-splitting rhythm of “ca-chunks” as they bang out metal sides and roofs for the small Yaris cars built here. Deep inside the plant, injection-molding machines spit out brightly colored front and rear bumpers, looking like so many Lego pieces, which are loaded onto racks to be towed to the assembly line.

By contrast, the atmosphere at BMW’s plant in Leipzig, Germany, is decidedly more refined. Its soaring gray and silver factory, designed two years ago by the architect Zaha Hadid, is the equivalent of automaking by Armani.

Unpainted car bodies, their sheet metal the hue of brushed pewter, ride silently through the plant lobby, lighted from beneath in blue, providing a perfect accent to the colors of the building.

Outsiders are not allowed near these 3-Series models; instead, they must observe production from a catwalk above the assembly line. Below, in what seems more like a very expensive kitchen than a factory floor, workers clad in neat coveralls stroll along an assembly line that spreads into a series of fingers, the places where the real work goes on.

These two plants, one high-volume, the other high-end, may seem to have little in common with each other, let alone with the United States car market. But together, these plants — and the niches they serve — may offer some idea of what lies ahead for American automakers on their home turf.

During the past, awful year for Detroit, industry executives and experts have been puzzling through what will become of General Motors, Ford Motor and the Chrysler Group. One potential future consists of total disaster, with the Detroit automakers vanquished by their Asian and European rivals. This is an option that only those with a doomsday complex really believe, given the Detroit companies’ billions in cash and broad infrastructure. Another potential outcome is that the Big Three vanquish the competition to again rule American roads, a prospect that has faded in 30 years of fighting the imports and is even more improbable now that foreign companies hold nearly half of the market.

A third option, much more likely than the others, is for G.M., Ford and Chrysler to adapt to a new American market that in many ways resembles Europe’s: a fragmented bazaar that has little in common with the mass-production ethos of Detroit’s first century. In this new American market, it is very hard to profitably support enough different brands and models to guarantee “a car for every purse and purpose,” which Alfred P. Sloan, as G.M.’s president, declared to be the company’s mission in the 1920s.

RATHER than trying to be all things to all people, Toyota, BMW and other successful carmakers on both continents are concentrating on a different strategy: find a niche, hone it and own it. In Europe, for example, the market is not dominated by any single player or small group of players with market shares that dwarf smaller competitors the way G.M., Ford and Chrysler once did in the United States. Instead, Europe’s car sales are splintered such that 5 percent is enough to make a difference, and 20 percent is more than anyone can expect.

“There’s no case anywhere in the world of any previously dominant manufacturer retaining much more than 20 percent once the market is opened to full global competition,” G.M.’s vice chairman, Robert A. Lutz, said in a recent interview.

As is the case in Europe, no auto company in America can automatically count on selling hundreds of thousands of one particular model annually as they could even five years ago, meaning that they must find ways to profitably stay on top of market trends — or be left in the dust. In Europe and increasingly in America, consumers are demanding the latest in environmental technology, both to save gasoline, as with hybrids, or to avoid using it altogether, as with diesel-powered cars.

While some national loyalty lingers in Europe, as it does in the United States, no company can rely on such loyalty to sell cars. Carmakers are forced to continually update their brand images in order to stand out in a crowded market. At the same time, like their European counterparts, America’s unionized autoworkers must also adjust. They cannot count much longer on the cushy contracts that typified their jobs in the past, because new deals at new factories have chipped away at pay and benefits while emphasizing more-productive work methods.

European companies have long competed this way, but it is a new reality for American carmakers who were so dominant for much of the last century. As recently as 1990, G.M., Ford and Chrysler together sold more than 70 percent of the cars bought in the United States; G.M. alone accounted for more than one-third of auto sales.

Now those companies’ American market share has dropped to around 50 percent, while the influence of Toyota and other foreign manufacturers is growing. Though G.M. remains on top, its share has slipped below one-quarter, and the battleground has become the section between 10 percent and 20 percent of the market. That is the area where Ford and Chrysler have slipped and where Toyota and Honda have grown.

In many ways, the changes in the United States have European parallels. Toyota is also rising in Europe, where its market share has more than doubled over the last 10 years, to about 5.7 percent. It has forged the gains by focusing on one segment, well-made small cars, and pursuing it with single-minded determination. Its factory here in Valenciennes is evidence of that focus.

Inside the factory offices, the plant manager, Didier Leroy, sits in front of an electronic tally board that shows the plant’s production goals for the day and the number of vehicles it has actually built. This board, along with others inside the plant, gave a disappointing picture on a recent afternoon, showing that workers had fallen behind their target.

But Mr. Leroy, who resembles a red-haired version of the actor Marcello Mastroianni, confides with a smile that managers intentionally set the targets a little too high, to keep workers focused on their tasks. If employees believe that they are falling behind, he says, pointing to the board, they will work more vigorously than if they think the day’s objective is easy to achieve.

The workers in Valenciennes need little reminder of what happens to people who cannot compete. Only about 75 miles up the Paris-Brussels highway are the remnants of a factory in Vilvoorde, Belgium, that Renault shuttered in the late 1990s because it could not operate it at a profit.

There is little chance of the Valenciennes factory meeting a similar fate. It is among Toyota’s most important plants worldwide — ranked even above its American operations, to hear some inside Toyota put it. An important reason lies inside the body shop, where major structural parts of the car are welded together.

Valenciennes was the first Toyota plant outside Japan to receive what the company calls its Global Body Line: a configuration of robots that can be programmed to build a number of different styles of vehicles without having to modify the entire factory. Today, that same body line is in Toyota’s plants in Kentucky and Indiana, and has been installed in the pickup factory that Toyota will open next month in San Antonio.

While the Valenciennes plant builds only one model, the Yaris, it produces it in four configurations — left-hand and right-hand drive, and equipped with gasoline and diesel engines. Each configuration requires different parts and production steps. That flexibility, which can also be harnessed to produce wholly different models on the same assembly line at the same time, is a hallmark of Toyota’s factories around the world, and an example that other companies, both in Europe and the United States, are striving to emulate.

Just last week, for instance, Alan R. Mulally, the former Boeing executive who has been Ford’s chief executive for less than a month, stressed that Ford’s plants must become more flexible if the automaker is to pull out of its sales tailspin. The company said last week that it lost $5.8 billion in the third quarter amid plummeting sales.

David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., said that American carmakers must change, and fast, or risk disaster. “For an automobile manufacturer, big and slow doesn’t work anymore,” he said. “Big and fast gives you a chance.”

In Valenciennes, the word “big” is not in the vocabulary. Even a few years back, Toyota might have allowed more room on the assembly line to accommodate differences among the various kinds of Yaris cars it makes. But the crowded floors suggest that it decided otherwise, and Toyota is deliberately keeping things that way.

As the company builds more plants around the world — including another in the United States that could be announced soon — they are more likely to be compact facilities like the one here in Valenciennes; it would fit into a corner of Toyota’s sprawling factory in Georgetown, Ky., which produces hundreds of thousands of Camrys and other models each year.

EVEN more important, as Toyota considers how it will operate its factories in the United States and elsewhere, it is monitoring how managers and workers in France handle a 24-hour operation.

Toyota’s sales in Europe are growing much faster than expected — it is on a pace to meet its 2010 target of selling 1.2 million cars a year by 2008 — and it needs to wring every possible vehicle out of its factories here to meet that demand. The same is becoming true in the United States, where Toyota passed DaimlerChrysler this year for the No. 3 spot in sales, and now seems likely to pass Ford as No. 2, behind G.M.

Still, the constant production here is a risk for Toyota, which has had a long practice of sharing ideas among its factories around the world. As the company’s only 24-hour-a-day production site, Valenciennes now has no such sister plant and must act as an independent player, Mr. Leroy said.

By contrast, BMW’s sparkling factory in Leipzig has a distinct New World relative: BMW’s plant near Spartanburg, S.C., the inspiration for the factory’s layout. The German facility, which is fast rivaling Bach’s grave as Leipzig’s favorite tourist attraction, has a legion of similarities to the South Carolina factory. That is no surprise, because the Leipzig plant manager, Peter Claussen, was in charge of developing the American plant.

The Spartanburg facility, which began production in 1994, was BMW’s first venture outside Germany, and it initially prompted a debate over whether Americans could produce real BMWs. Likewise, the decision by BMW to build a factory in Leipzig, in the former East Germany, instead of in a cheaper location in central Europe, raised eyebrows for the same reason. But just as BMW scored valuable political points by setting up shop in the America’s rural South, it won hearts in Germany by building its showplace in a region where the unemployment rate is 20 percent, twice as high as it is in the rest of the country. “It’s unbelievable,” said James Oehlschager, 31, who works in the plant’s body shop. “I can’t describe the meaning for East Germany that BMW decided to come here.”

One reason BMW went to Leipzig was labor costs. While the factory is unionized, its pay rates average 20 percent less than what BMW pays its workers at its home base in Bavaria. The company also has the flexibility in Leipzig to vary the working hours, a perennial sticking point at other European auto factories.

Despite that, Mr. Oehlschager said workers did not feel like second-class citizens. “Compared to other salaries in the region, it’s a top level,” he said.

Like Spartanburg’s factory, the Leipzig plant is divided into three main sections: body shop, paint shop and assembly area. Each can work independently, so a bottleneck at one need not stop the whole plant.

Visitors who gaze down at the section of the assembly line available to public view are missing the part of the plant where the real work occurs, a series of mini-lines that shoot off from the trunk like branches. Forklifts do not race down the assembly line the way they do at the frenzied Toyota factory in Valenciennes. Instead, they deliver parts to the end of each branch, and then components are sent down the line to the spots where workers need them. If BMW needs to increase production here, it will not rip up the main line; it will just extend the length of each limb.

Even with that capability, BMW is not itching to expand. Nor is Toyota. The companies have similar shares of the European market, each just under 6 percent, and are leery of the hazards of growing too quickly.

“We do not believe in this incurable bigness,” Michael Ganal, a member of the BMW board, said last month in an interview at the Paris Motor Show. “Yes, you can create economies of scale if you grow, but it is better to run a fast and successful manufacturer.”

In a separate interview at the Paris show, Dieter Zetsche, the chief executive of DaimlerChrysler, agreed that reflexive pursuit of market share is not necessarily the right strategy. “If you have strong brands and satisfied former customers, you already have a brilliant strategy,” he said.

Such caution has historically been rare in the United States, and John Casesa, managing partner of the Casesa Shapiro Group, an investment advisory firm, said American auto executives must come to grips with it.

“The concentrated oligopoly structure is gone,” Mr. Casesa said. “Plant by plant, Detroit has had to adjust its thinking. Detroit doesn’t have any products that can fill a single plant any more” except for a handful of high-volume vehicles like Ford’s F-Series pickups or the new trucks that G.M. is about to introduce.

THERE are signs, however, that American executives are getting the message. Ford shocked the automotive world this summer by announcing that it would cut its production by one-fifth during the final three months of the year, its single-biggest reduction in more than two decades. Nearly all of the cuts are at plants that built only sport utility vehicles or pickups, whose sales plummeted as gas prices spiked. In an interview last week, Mr. Mulally said it was incumbent on Ford to end its dependence on big vehicles and to turn to the more-nimble production model provided by Toyota.

That makes the flexibility of factories like Toyota’s in Valenciennes even more important as American companies stare at their European-influenced future.

Yet Mr. Leroy said the factory had been valuable in another sense. As with its American plants, Toyota’s French factory has helped convince Europeans it is acceptable to own a car built by a Japanese company. Customer surveys have shown that they think of the Yaris as a French car, he said.

If such blending of perception is possible in Europe, where national identities have long been strong, the American market cannot be far behind. But for their part, American executives need not fear that their industry’s influence will be forgotten.

On a recent weekend, Mr. Claussen of BMW went to his bookshelf to seek guidance on solving a problem in the Leipzig factory. He found a solution in “My Life and Work,” written by Henry Ford in the 1920s.

Back then, Mr. Ford offered advice that still sounds appropriate today, as American companies look to Leipzig, Valenciennes and elsewhere for hints of the future.

“If there is any great secret of success in life,” he wrote, “it lies in the ability to put yourself in the other person’s place and to see things from his point of view — as well as your own.”

Nick Bunkley contributed reporting from Detroit.

Versailles

Versailles, about 15 miles from Paris is a beautiful place to visit, but rather intimitating overall. It is huge and usually crowded. Generally, I prefer the gardens to the interior of the building. But earlier this year I made an extended visit to the interior to see a special exhibition on the splendors of the court of Saxony and the see the half-resored Gallerie des Glaces (see first photo). Both were excellent.

The Usual Suspects

I heard Daniel Howes speak on just this subject the other evening at the CAR "Supplier Challenges, Investor Opportunities" seminar mentioned earlier. He is just as good a speaker as a writer, not always the case for a print journalist. (Full disclosure: Dan and I come from the same home town and graduated from the same undergraduate school, the College of Wooster. But we don't really know each other.)

For almost three decades now, I have been arguing that Detroit's automotive management has led a cloistered, incestuous life in the "biggest village in the nation". As Dan points out, that severely narrows the thinking of the Big 3 management.

It is hard for these executives to believe that they are at the center of what befalls our industry. This is not to say that these are bad people. Hardly. They are hard working and often very smart. It is just that they look too much at outside influences to explain their unacceptable performance.

I really don't know how to change this, other than bringing in new blood. Perhaps Bill Ford and the Ford board of directors will find their recent decision to bring in an individual from outside of our industry useful in this respect. Of course, Alan Mulally will have to deal with an inbred organization which is prototypical of the issue posed herein. One can only wish him luck.

Unfortunately, since Dan wrote his column, the Tigers lost the World Series. Well, there is always next year.

Daniel Howes

Usual suspects may not be to blame for Detroit's auto ills

G ood thing this town has the Tigers to cheer, because the hometown auto industry really is broken.

General Motors Corp. pops its third quarter numbers this week and calls them a success, despite a $3.8 billion cash burn, lower year-over-year U.S. market share and continuing losses in its auto business. With success like that, failure must be what -- last year?

Chrysler, reputedly the first to emerge from the trough a few years back, is back in it. Yet another whopping loss -- nearly $1.5 billion -- presages more Sturm und Drang in Auburn Hills. And Ford Motor Co.'s numbers, its worst in 14 years, are too depressing to even contemplate.

Which gives rise to a favorite question 'round here: Whose fault is it?

The 'enemy' is us

In the pantheon of blame, there are the usual suspects -- Toyota, other Asian rivals, NAFTA, high gas prices, dumb product decisions, gas-guzzling SUVs, currency manipulation, rich union contracts, fat executive bonuses, the Bush administration and, my personal favorite, American consumers.

You'll notice none of the would-be enemies, to paraphrase Pogo, is us. But recognizing that it might be, that the expectations of comfortable middle-class culture forged by industrial America are blocking change, would be a major step toward retooling for the 21st-century global world.

A new study by the Brookings Institution proposing strategies for reviving the "Great Lakes region" describes our prevailing culture as "plainspoken, hardworking, egalitarian and problem-solving" at its best. At its worst, it's "anti-intellectual, nativist and insular."

Sound familiar?

"A culture of expectation and entitlement grew around the economic success of its companies and the prosperous middle-class life they afforded," the study says.

'Things as they were'

"Unfortunately, the sense that this relative prosperity would always endure stifled the entrepreneurialism and economic churn that built the region. What was once a dynamic economy is now change-averse, weighed down by sticky attitudes of entitlement and hopes that 'things would stay as they were.' "

Nothing's wrong with such nostalgia, except that it a) doubles as denial and b) fails to recognize the world is changing much faster than the comfortable culture.

The chronic inability of Detroit's automakers to honestly assess where they stand in their own country is as much about an ingrained culture of comfort-cum-arrogance as it is about building the right cars and trucks for the right times.

The American exceptionalism that defined Detroit's golden era, the notion that this town and its industry are special, is being abandoned by broad swaths of America -- coastal consumers, politicians, opinion makers, even neighboring states like Indiana, Ohio, Kentucky and West Virginia who've eagerly wooed foreign automotive investment.

The overpowering temptation is to blame all of them. But if those in the middle of all this -- management, unions, employees, politicians -- can't fix their own problems, why should anyone else?

Daniel Howes' column appears Mondays, Wednesdays and Fridays. He can be reached at (313) 222-2106, dchowes@detnews.com or his blog at http://info.detnews.com/danielhowesblog.

Is Private Equity the Answer for Auto Suppliers?

I just attended an excellent workshop sponsored by the Center for Automotive Studies (CAR), where I serve on the board, entitled "Supplier Challenges, Investor Opportunities". For an agenda of this seminar see: http://www.cargroup.org/investorsupplier/index.html There were many "takeaways" from the talks and discussion. For example: The core problem of the Big 3 is the inbred culture of those organizations and the environment in which they operate. The situation for the Big 3 (and their suppliers) will get worse before it gets better. By the end of this decade, the Big 3 will collectively have less than 50% market share in the United States. That will probably also be true shortly thereafter with respect to production share. The 2007 negotiations with the UAW will be fraught with danger, but might result in meaningful changes which will facilitate necessary changes in the industry. The North American automotive industry (the Big 3 plus its supply base) needs a major recapitalization with all that implies. Outside "Private Equity" investors can play a vital role in this recapitalization. The role of private equity as a necessary and beneficial actor to our industry's mutation is a debatable one (see, for example, the article which follows). My personal view is that the "right" kind of private equity recapitalization can play a useful role. What do I mean by "right"? I am not quite sure but here are a few minimum requirements: Long-term investment horizon. Quick buck artists stay away. Partners include at least some who are expert in the automotive industry. Exit strategies contemplate and facilitate the ongoing health of the resulting firm. What do you think about private equity in the automotive industry? October 26, 2006

DOW JONES REPRINTS This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit: www.djreprints.com. • See a sample reprint in PDF format. • Order a reprint of this article now. For Car Industry, Sum of the Parts May Be Lifeline Hedge Funds, Buyout Companies Line Up to Pour Billions of Dollars Into Slimmed-Down Suppliers By JEFFREY MCCRACKEN in Detroit and IANTHE JEANNE DUGANHENNY SENDER in New York and October 26, 2006; Page C1 With Detroit's auto industry struggling through its darkest days in decades, some big investors are betting billions of dollars that the auto-parts sector is poised for a comeback. A handful of hedge funds and private-equity firms that specialize in struggling or undervalued companies have concluded that they can create big returns as auto-parts makers close plants, shift operations to lower-cost countries and cut retiree benefits. For years, investors have tried to remake the business without success, so the risks are high. But this time the calculus is that the companies, unions and other participants are so desperate, they are willing to make sacrifices they would have scoffed at in the past. According to some estimates, at least $50 billion in auto-parts businesses in North America are currently for sale. Two moves are expected within the next week -- a play for control of Delphi Corp., the former General Motors Corp. parts unit, and a separate deal for Lear Corp.'s North American auto-interiors business. The big New York buyout fund Ripplewood Holdings LLC likely will make a formal offer to buy some or all of the assets of Delphi, which collapsed into Chapter 11 bankruptcy last year, burdened by costly labor agreements and unprofitable contracts. Delphi is North America's largest auto supplier, and the biggest supplier to GM. Delphi has also attracted attention from Appaloosa Management, a hedge fund that already owns more than 9% of Delphi stock. It has proposed pumping in several billion dollars in a deal that would give that firm more than a third of Delphi's stock after the auto-parts maker emerges from bankruptcy-court protection. Hedge funds are private investment funds catering to wealthy investors and institutions. Also jockeying for a significant stake is Cerberus Capital Management LP, a large private-equity firm. Cerberus put in an official proposal for a stake in the company in the past few days, people familiar with the process say. Private-equity funds often invest in struggling companies and attempt to turn them around in hopes of selling later for a profit. Right now, each fund is "vying to run the show alone," says a person familiar with the Delphi bidding. This bidding process gives the United Auto Workers a key role as the funds try to persuade union officials of the worthiness of their rival plans. Delphi, in court filings, has said it wants to close 21 of its 29 plants. The UAW is pressing for more plants to stay open and could be swayed to support one fund's bid over another based on the issue, said two union officials familiar with the talks. At Lear, billionaire investor Wilbur Ross says his deal to acquire its $3.5 billion North American interiors business "should be resolved in the next few days, no later than next week." Mr. Ross says he has signed confidentiality agreements with eight other suppliers. "It seems like the whole components business is for sale," he said. Mr. Ross, who played a central role in the restructuring of the U.S. steel industry, has stepped up his interest in Lear at the same time as financier Carl Icahn has negotiated a deal to become the largest shareholder of the $18-billion-a-year maker of seats, instrument panels and other parts. For $200 million, Mr. Icahn's stake in Lear would grow from 5% to 16% and he would get a seat on the board. Another hedge fund, Pardus Capital Management LP, has spent $109 million this year to acquire 14% of Visteon Corp.'s stock, making it that supplier's second-largest shareholder. Pardus has also requested a seat on the board of Visteon, which is the former parts operation for Ford Motor Co. The renewed interest from private-equity firms in auto suppliers could have a big impact on the overall restructuring of the traditional auto industry, which financial experts say is going through an upheaval akin to textiles in the 1980s, steel in the 1990s and airlines earlier this decade. The real change could be that these funds alter the longstanding, usually one-sided relationship between suppliers and auto makers -- where auto makers traditionally call the shots. That kind of change could have enormous ramifications: Detroit's auto makers have been able to avoid bankruptcy in part by wringing concessions out of their now-beleaguered suppliers. Hedge funds now control about $1.1 trillion in assets -- more than double what they had five years ago, according to Chicago-based Hedge Fund Research. An estimated $1 trillion more is committed to private-equity funds and venture-capital firms. It adds up to more than enough money to acquire huge chunks of the distressed North American auto-supply industry at current values. This isn't the first time Wall Street money thought there was gold in the Rust Belt. In the late 1990s, investors like former Reagan budget director David Stockman spent billions of dollars rolling up smaller companies to create megasuppliers. > "This is much different, because the funds getting in now are consolidating around the world, not just in North America," said Tom Stallkamp, an industrial partner at Ripplewood and a former vice chairman at DaimlerChrysler AG, in an interview yesterday. "Plus, this money is more diligent, more disciplined, more focused on profits and not just growing the business or adding sales at any cost." Speaking yesterday at an investors' conference in Dearborn, Mich., Mr. Stallkamp added that funds like his prefer to buy "just before [the companies] go into bankruptcy, when you don't have this thing play out in public," as they do once a company is in bankruptcy proceedings. Write to Jeffrey McCracken at jeff.mccracken@wsj.com1, Ianthe Jeanne Dugan at ianthe.dugan@wsj.com2 and Henny Sender at henny.sender@wsj.com3

Collegiate Sports Tax Breaks

Those that know me, understand that I have little or no interest in sports, unless one of my grandchildren is playing. Given my political bent, you might think that I wouldn't like George Will. That is far from the case. Whether I agree with Will or not, his arguments are well reasoned and expertly written. In fact, I often agree with him, at least in certain domains, as witness the following from today's Washington Post.



Tax Breaks for Football

By George F. Will
Wednesday, October 25, 2006; A17

Before Miami police quelled the recent riot involving more than 100 University of Miami and Florida International University football players in the Orange Bowl, fighting erupted among fans in the stands. In two masterpieces of misdirected anxiety, the commissioner of the Atlantic Coast Conference, to which Miami belongs, said the rioting "has no place in college football" and the commissioner of FIU's Sun Belt Conference said "there is no place in higher education for the type of conduct exhibited."

But the question really raised by the barbaric behavior, and by nonviolent but nonetheless lurid behavior by some universities, is: What is the place of high-stakes football in higher education?

Twelve days before the Orange Bowl brawl, Republican Rep. Bill Thomas wrote, as chairman of the tax-writing Ways and Means Committee, an eight-page letter to the president of the National Collegiate Athletic Association, asking awkward questions. Thomas wonders how, or whether, big-time college sports programs, which generate billions of tax-exempt dollars -- CBS pays the NCAA an annual average of $545 million, mainly for the rights to televise the March Madness basketball tournament -- further the purposes for which educational institutions are granted tax-exempt status. Other questions include:

How does the NCAA fulfill its proclaimed purpose of maintaining "the athlete as an integral part of the student body"? Only 55 percent of football players and 38 percent of basketball players at Division I-A schools graduate. The New York Times has reported that at Auburn, a perennial football power, many athletes have received "high grades from the same professor for sociology and criminology courses that required no attendance and little work." Eighteen members of the undefeated 2004 team took a combined 97 hours of those courses while at Auburn. Who believes such behavior is confined to Auburn?

In recent decades the NCAA has increased the number of games that football and men's basketball teams are allowed to play. Thomas wonders how these changes help athletes improve their academic performances. Perhaps these changes have pecuniary purposes?

The NCAA says it aims to "retain a clear line of demarcation between intercollegiate athletics and professional sports." But aside from not compensating the athletes in a way commensurate with the money they generate for the universities, how is that line clear?

Some say the tax-exempt status of college sports is justified by the fact -- and it is a fact -- that successful sports teams often trigger increased applications for admission, and largess from alumni and legislatures. But, Thomas notes, "federal taxpayers have no interest in increasing applicant pools at one school opposed to another." Furthermore, athletic success that causes a surge of giving to universities might decrease giving to worthy charities.

Also, tax exemption is financing an escalation of coaches' salaries. More than 35 college football coaches are paid more than $1 million annually. The University of Colorado athletic department has borrowed $8 million, much of which will be used to buy out the contract of a fired football coach. Noting that several universities pay their men's basketball coaches four to five times what they pay their women's basketball coaches, Thomas wonders: "What additional educational benefit do men's basketball coaches provide beyond that which is provided by women's basketball coaches?" If the disparity has a commercial rather than an educational rationale, why should the commerce be tax-free?

Tax exemption also is a federal subsidy for ever more lavish facilities: Oklahoma State University, which is receiving $165 million from T. Boone Pickens to improve its athletic facilities, was already planning a $102 million upgrade of its football stadium. OSU charges fans a $2,500 "annual donation" just to become eligible to buy tickets for the best seats. The University of Michigan, which has had 198 consecutive sellouts at its stadium -- it now seats 107,501 -- is spending $226 million to add 3,200 luxury seats and 83 suites. The University of Texas at Austin is spending $150 million to add 10,000 seats to its current 85,123 capacity. These may be sound commercial decisions, but why should this commerce be tax-exempt?

Thomas wants to know: How many NCAA members "generate a net profit on the operations of their athletic departments (excluding university subsidies such as student fees or general school funds and services)? Of the institutions that generate a net profit, how many use the profit for purposes unrelated to the athletic department?"

Thomas is retiring, but if Democrats capture control of the House, the new chairman of Ways and Means, Charles Rangel, may hold hearings into the NCAA's tax-free lifestyle. Such hearings will be embarrassing, if people who operate football and basketball factories are capable of embarrassment.

georgewill@washpost.com

When Congress Checks Out

I have not yet read Ornstein and Mann's article in Foreign Affairs (see summary below) but have read with interest their book on "The Broken Branch". It was well worth the effort. The authors' analysis of the history of Congress' operations and current disfunctionment is very interesting. Some of their prescriptions for improvements seem reasonable. Being the cynic I am, I fear that no one will really address the issues for a long time to come. Such a shame. But do read the book (and the article) if you are interested in better government.



When Congress Checks Out
Norman J. Ornstein and Thomas E. Mann

From Foreign Affairs, November/December 2006

Article preview: first 500 of 5,181 words total.

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Summary: Over the past six years, Congress' oversight of the executive branch on foreign and national security policy has virtually collapsed. Compounding the problem, the Bush administration has aggressively asserted executive prerogatives -- sometimes with dire consequences. The oversight problem must be fixed, ideally as part of a more fundamental effort to restore the balance between the two branches.

Norman J. Ornstein is a Resident Scholar at the American Enterprise Institute. Thomas E. Mann holds the W. Averell Harriman Chair and is a Senior Fellow in Governance Studies at the Brookings Institution. They are the authors of The Broken Branch: How Congress Is Failing America and How to Get It Back on Track.

Failing Oversight

The making of sound U.S. foreign policy depends on a vigorous, deliberative, and often combative process that involves both the executive and the legislative branches. The country's Founding Fathers gave each branch both exclusive and overlapping powers in the realm of foreign policy, according to each one's comparative advantage -- inviting them, as the constitutional scholar Edwin Corwin has put it, "to struggle for the privilege of directing American foreign policy."

One of Congress' key roles is oversight: making sure that the laws it writes are faithfully executed and vetting the military and diplomatic activities of the executive. Congressional oversight is meant to keep mistakes from happening or from spiraling out of control; it helps draw out lessons from catastrophes in order to prevent them, or others like them, from recurring. Good oversight cuts waste, punishes fraud or scandal, and keeps policymakers on their toes. The task is not easy. Examining a department or agency, its personnel, and its implementation policies is time-consuming. Investigating possible scandals can easily lapse into a partisan exercise that ignores broad policy issues for the sake of cheap publicity.

The two of us began our immersion in Congress 37 years ago, participating in events such as the Senate Foreign Relations Committee's extended hearings on the Vietnam War. Throughout most of our time in Washington, tough oversight of the executive was common, whether or not different parties controlled the White House and Congress. It could be a messy and contentious process, and it often embarrassed the administration and its party. But it also helped prevent errors from turning into disasters and kept administrations more sensitive to the ramifications of their actions and inactions.

In the past six years, however, congressional oversight of the executive across a range of policies, but especially on foreign and national security policy, has virtually collapsed. The few exceptions, such as the tension-packed Senate hearings on the prison scandal at Abu Ghraib in 2004, only prove the rule. With little or no midcourse corrections in decision-making and implementation, policy has been largely adrift. Occasionally -- as during the aftermath of Hurricane Katrina last year -- the results have been disastrous.

WSJ: Bipartisan Redeployment

The attached editorial from the Wall Street Journal caught my attention this morning. I have mixed feelings about the Biden-Gelb proposal for the partition of Iraq. It is hard to find examples in history where similar partitions have worked out.

What I liked particularly in this editorial was the emphasis on seeking bipartisan solution to the Iraq mess. I agree that neither party can really gain from "going alone" in this area. Certainly, the nation as a while loses from partisanship in this (and many other) area(s). If the "Iraq Study Group" leads us to developing a bipartisan Iraq policy and implementation, bravo. (see: http://en.wikipedia.org/wiki/Iraq_Study_Group for more details on membership, etc.)

Note that not everyone likes the Iraq Study Group. See, for example: http://www.weeklystandard.com/Content/Public/Articles/000/000/012/850ulqxz.asp

Bipartisan Redeployment

By JOSEPH R. BIDEN JR. and LESLIE H. GELB
October 24, 2006; Page A18

Because the current course in Iraq is a losing course, we have to prepare ourselves to make the toughest decisions since the end of the Cold War. Neither Democrats nor Republicans alone will make them: No one wants to be blamed for what might happen next in Iraq. Thus, President Bush continues on autopilot with no end in sight, while some Democrats call for fixed withdrawal deadlines that no president would ever adopt.

The only way to carve out a new path is through bipartisanship. With a united voice we can speak with strength to Iraqis on the need to put their house in order, and find political protection here at home. Political leaders in our country must choose to hang together rather than hang separately. They have every incentive to do so. It is flatly against the security interests of the U.S. to stay the current course. It is also against the political interests of both parties. Republicans don't want to run for the presidency in 2008 with Iraq around their necks. Democrats do not want to assume the presidency in 2009 saddled with a losing war.

Serious members of both parties are prepared to seek a solution. It was in that spirit that Congress urged the creation of the "Iraq Study Group" to explore policy options, led by James A. Baker III, former secretary of state, and Lee Hamilton, former chairman of the House International Relations Committee -- a Republican and a Democrat both known for bipartisanship. The other eight members of their commission have stature in their parties to kickstart a bipartisan policy. They understand their responsibility to help our nation find a reasonable path out of Iraq's plunge toward civil war and the untenable situation for our troops.

The commission is expected to present its views publicly after the November elections. We believe that the group could cohere around three basic principles which we have advanced for some time and which are explained in detail at www.planforiraq.com:

• First, there can be no military success in Iraq without a political settlement -- a power-sharing arrangement that gives its major groups incentives to pursue their interests peacefully instead of falling into a cycle of sectarian revenge. Mr. Bush's drive to establish a central government of national unity hasn't worked and won't work. The major parties in Iraq don't have the common interests, the trust in each other, or the capacity at this point to make it viable.

What could work is a federalized Iraq, with three or more largely autonomous regional governments to suit the separate interests of Shiites, Sunnis and Kurds. A central government would administer common concerns, such as defending Iraq's borders and managing its energy infrastructure. The constitution already provides for this approach and Iraq's parliament last week passed a law to implement its articles on federalism. But for federalism to work, the constitution must be amended to guarantee Sunnis 20% of oil revenues to be administered by the central government. Only with such revenues could a Sunni region become economically and politically sustainable.

The final decisions will be up to the Iraqis. But without us helping them arrange the necessary compromises, as we have at every critical juncture, nothing will get done. With 140,000 Americans at risk, we have a right and a responsibility to make our views known.

• Second, we must have a plan prepared by our military for the redeployment and withdrawal of most U.S. troops over the next 18 months. Both Americans and Iraqis have to see that we are not blindly committing ourselves to civil war. And we have to recognize that keeping this level of forces in Iraq indefinitely is counterproductive for our mission and a growing challenge to the well-being of our volunteer military.

The redeployment plan has to prevent insurgent control of strategic areas; vet and train Iraqi forces; create strong incentives for Iraqis to assume battlefield and police responsibilities; and allow for a residual American force to keep Iraqis and their neighbors honest. There's no fixed or artificial timetable here to bind a president unreasonably. But we must unambiguously say to Iraqis, "Here is your last, best chance to escape a disastrous civil war with our help, and it is up to you, now."

• Third, we have to ignite the most vigorous regional diplomacy to back up the power-sharing deal among Iraqis and avoid neighbors warring over an Iraqi vacuum. Some of Iraq's neighbors have no desire to do us any favors -- but like us, they can see the abyss opening up before them, and like us, they all have powerful interests in preventing a full-blown civil war that becomes a regional war. We have to bring them together now to begin shaping and supporting a political settlement in Iraq -- or, if necessary, to contain the fallout from chaos inside Iraq.

Given the deterioration of the situation, no approach is an odds-on winner. But these three principles can unite our political parties. Nothing in them runs counter to the basic beliefs of either party. And unlike the present policy, they have a chance of working.

The Baker-Hamilton commission has a unique opportunity to generate a bipartisan way forward in Iraq. If it comes up with a better plan than the one we propose, we will embrace it. But whatever it does, it cannot kick the can down the road. It must come up with a strategy that allows us to leave Iraq without leaving chaos behind -- which is not being done in Washington now.

Mr. Biden is a Democratic senator from Delaware and ranking member of the Senate Foreign Relations Committee. Mr. Gelb is president emeritus of the Council on Foreign Relations.

From the Washington Post: A Nadir of US Power

A Nadir of U.S. Power

By Sebastian Mallaby

Monday, October 23, 2006; Page A21

It's not exactly morning in America.

In Iraq, things get ever uglier, and the old remedy of extra troops now seems tragically futile. The Bush team has recently tried putting thousands of additional soldiers into Baghdad, and the result after two months is that violence there has increased.

Iraq is often seen as a special Rumsfeldian screw-up. But in Afghanistan, the Bush team quickly handed off to a model pro-Western leader backed by a broad NATO coalition. And what are the results there? The government is wobbling, warlords run drugs and the pro-al-Qaeda Taliban have 4,000 to 5,000 active fighters in the country.

It's not just military efforts that are faltering. Five years ago, President Bush launched an experiment in tough-talk diplomacy, warning foreign leaders that they must be with us or against us in the war on terrorism. At first this yielded at least one achievement: Pakistan sent troops for the first time into its wild border regions to root out Taliban and al-Qaeda fighters. But that success has now gone into reverse. Pakistan recently withdrew its soldiers, in effect ceding the border territory to the radicals.

It would be nice if this merely proved that tough talk can backfire. But traditional diplomacy is faring no better. In North Korea and Iran, the United States has tried every diplomatic trick to prevent nuclear proliferation, making common cause with Western Europe, Russia, China and Japan, and wielding both sticks and carrots. The result is failure: North Korea has tested a nuke and Iran still presses on with its enrichment program.

A few years ago, the collapse of Russia's currency triggered a furious debate in Washington over who lost Russia. Now Russia's pro-Western voices are being snuffed out, and Americans are so inured to the limits of their power that they don't even pose that question. A crusading journalist has been killed, and on Thursday Vladimir Putin silenced Human Rights, Amnesty International and more than 90 other foreign organizations. Everyone accepts that there's not much the West can do about this.

In Somalia, a Taliban-style group of Islamic militants has seized part of the country. One of its commanders is said to be sheltering terrorists who blew up the U.S. embassies in Kenya and Tanzania: A brand-new terrorist haven may be emerging. Again, it is assumed that the world's sole superpower can't do much but watch.

Three long years ago, the Bush administration described the killing in Darfur as genocide. You might think that an impoverished African state that can't control its own territory would be a pushover. But the Bush administration has tried sanctions, peace talks and United Nations resolutions. Sudan's tin-pot dictator thumbs his nose at Uncle Sam and dispatches more death squads.

When historians analyze the decline of empires, they tend to point to economic frailties that undercut military vigor. Well, the United States has several economic frailties and can't seem to address any of them.

Every honest politician knows that entitlement spending on retirees is going to bust the budget. But since the failure of Bush's proposed Social Security overhaul last year, nobody is doing anything about it.

Every honest politician knows that we need to quit gobbling carbon. But higher gas taxes are seen as a political non-starter on both sides of the political spectrum.

Every honest politician knows that support for globalization is fraying because of rising inequality at home. But how many of them stand up for policies that could reduce inequality without harming growth -- most obviously, tax reform? You don't hear anybody on the left or right denouncing the absurdity that more than half the tax breaks for homeownership flow to the richest 12 percent of households.

In fact, it's hard to name a single creative policy that has political legs in Washington. Is anyone serious about tackling the crazy tort system, which consumes more than a dollar in administrative and legal costs for every dollar it transfers to the victims of malpractice? Nope. Is there any prospect of allowing the millions of immigrants who come here to do so legally? To be honest, not much.

Instead, the right and left are pushing policies that are marginal to the country's problems. The right wants to make its tax cuts "permanent," even though the boomers' retirement ensures that taxes will have to go up. The left wants to raise the minimum wage, even though this can only help a minority of workers.

I'm not predicting the end of the American era, not by a long shot. The U.S. business culture is as pragmatic and effective as its political culture is dysfunctional. But has there been a worse moment for American power since Ronald Reagan celebrated morning in America almost a quarter of a century ago? I can't think of one.

Trinity St Sergius Monastery

About an hour outside of Moscow is the St Sergius Monastery, for almost 1000 years an important center of Russian Orthodoxy pilgrimage and education. I have never seen such piety as was expressed the day I visited there. The building are beautiful, there are many priests, monks, and nuns about (there is a seminary attached), but what was most interesting was the attitude of the many Russians who were visiting there. An extremely worth-while side trip and a good introduction to Russian Orthodoxy.

Musee d'Orsay

The Musee d'Orsay in Paris is a real delight in several respects. Its collection of 19th century French art is magnificent. Equally magnificent is the way this old train station was transformed (about twenty years ago) to this airy and well-lit museum. Recycling old buildings like this adds much to a city, retaining history which providing new functionality. Bravo

Raise the Gas Tax

The attached editorial, which appeared today in the Wall Street Journal, brought up a subject that I have meant to discuss. For many years now, I have been in favor of significantly higher fuel taxes in the United States. I am glad that Mr. Mankiw has opined in favor of this general approach. My own justification of this policy focuses on energy independence (in the medium-term) and environmental benefit (in the longer term).

However, I would make the following comments on his editorial:

1. He is too timid as to the rate of rise and the desired ultimate fuel tax rate to be targeted. One dollar per gallon more taxes, to be attained in $ 0.10 increments over ten years is simply not meaningful enough to structurally change consumer behavior. Although I have not studied the matter, this is an policy area which is susceptible to serious analytical work. My own guess would be that a total increase of $ 3 per gallon is more like it. This could be approached by increases of $ 0.25 per gallon per year for the first four years, followed by increases of $ 0.50 per gallon per year thereafter until the desired level of taxation is attained.
2. Since the United States is large and housing is increasingly far from work, public transport is spotty at best, and the poor would have to retain the current fuel in-efficient fleet the longest, such an aggressive increase in fuel taxes would hit some people extremely hard. This could be mitigated by something like the refundable earned income tax credit for those disproportionately adversely impacted.
3. In order to have the best effect, these taxes would have to be permanent. Consumer behavior will most likely change the fastest if consumers were convinced that the increased taxes are permanent. Likewise, automotive industry, fuel supply industry, alternative propulsion, and infrastructure investment will happen faster and more smoothly if decision-makers are convinced of a real shift in market desires. Let's not opt for an "on-again, off-again" set of taxes (like the R&D tax credit).

Is this politically feasible? Not in today's political climate, unfortunately. It will take more positive leadership and less partisan doctrine than either the Administration or the Congress seem able to muster.

Raise the Gas Tax

By N. GREGORY MANKIW
October 20, 2006; Page A12

With the midterm election around the corner, here's a wacky idea you won't often hear from our elected leaders: We should raise the tax on gasoline. Not quickly, but substantially. I would like to see Congress increase the gas tax by $1 per gallon, phased in gradually by 10 cents per year over the next decade. Campaign consultants aren't fond of this kind of proposal, but policy wonks keep pushing for it. Here's why:

The environment. The burning of gasoline emits several pollutants. These include carbon dioxide, a cause of global warming. Higher gasoline taxes, perhaps as part of a broader carbon tax, would be the most direct and least invasive policy to address environmental concerns.

Road congestion. Every time I am stuck in traffic, I wish my fellow motorists would drive less, perhaps by living closer to where they work or by taking public transport. A higher gas tax would give all of us the incentive to do just that, reducing congestion on streets and highways.

Regulatory relief. Congress has tried to reduce energy dependence with corporate average fuel economy standards. These CAFE rules are heavy-handed government regulations replete with unintended consequences: They are partly responsible for the growth of SUVs, because light trucks have laxer standards than cars. In addition, by making the car fleet more fuel-efficient, the regulations encourage people to drive more, offsetting some of the conservation benefits and exacerbating road congestion. A higher gas tax would accomplish everything CAFE standards do, but without the adverse side effects.

The budget. Everyone who has studied the numbers knows that the federal budget is on an unsustainable path. When baby-boomers retire and become eligible for Social Security and Medicare, either benefits for the elderly will have to be cut or taxes raised. The most likely political compromise will include some of each. A $1 per gallon hike in gas tax would bring in $100 billion a year in government revenue and make a dent in the looming fiscal gap.

Tax incidence. A basic principle of tax analysis -- taught in most freshman economics courses -- is that the burden of a tax is shared by consumer and producer. In this case, as a higher gas tax discouraged oil consumption, the price of oil would fall in world markets. As a result, the price of gas to consumers would rise by less than the increase in the tax. Some of the tax would in effect be paid by Saudi Arabia and Venezuela.

Economic growth. Public finance experts have long preached that consumption taxes are better than income taxes for long-run economic growth, because income taxes discourage saving and investment. Gas is a component of consumption. An increased reliance on gas taxes over income taxes would make the tax code more favorable to growth. It would also encourage firms to devote more R&D spending to the search for gasoline substitutes.

National security. Alan Greenspan called for higher gas taxes recently. "It's a national security issue," he said. It is hard to judge how much high oil consumption drives U.S. involvement in Middle Eastern politics. But Mr. Greenspan may well be right that the gas tax is an economic policy with positive spillovers to foreign affairs.

Is it conceivable that the policy wonks will ever win the battle with the campaign consultants? I think it is. Even after a $1 hike, the U.S. gas tax would still be less than half the level in, say, Great Britain, which last I checked is still a democracy. But don't expect those vying for office to come around until the American people recognize that while higher gas taxes are unattractive, the alternatives are even worse.

Mr. Mankiw, a professor at Harvard, was chairman of the Council of Economic Advisers from 2003 to 2005.