Leadership That Attracts Investors - the auto industry does not have strong leadership - Brief Article

Automotive Industries, Nov, 2000 by David Andrea

Billionaire Warren Buffet's view of farming is: "It's not a good business. But it's a satisfying business." His quotation might also describe the auto industry. Why would anyone go into the auto business unless they truly were satisfied at the end of the day by contributing to another model year? Many institutional investors are coming to the industry not because the sky's the limit, but because the business cannot get any worse. And even with the gloss off the instant Silicon Valley, dot.com jackpot, the Valley still seems a much better way of earning a living than by, say, testifying in front of a U.S. Senate product safety hearing.

So, what's required of, or what's missing from, the auto industry to turn it from just a satisfying business to a good business? Perhaps it's leadership.

I continue to be haunted by Sun Microsystems CEO Scott McNealy's comments at last year's SAE Greenbrier meeting. McNealy perceives that "Detroit" (as he dubs the auto industry) doesn't offer the Bill Gates', the Larry Ellison's and the Steve Jobs' that Silicon Valley does. Perhaps Detroit lacks innovative leadership because it has collapsed into an oligopoly. Or perhaps it rightly fears the product liability risk. What ever the case, there is no one who stands out from the crowd defining the potential of the industry to meet consumers' and society's needs in a manner that attracts the required human and financial capital.

Maybe it is just the nature of a mature industry After all, Bill Ford, Jr.'s laudable efforts to "connect with society" were greeted with suspicion and warnings of setting off policymakers' expectations.

While I cannot make a definitive case for the following, I do believe the lack of leadership is resulting in one major industry deficiency: technology commercialization. If you buy the argument that Silicon Valley's OEMs and first-tier suppliers are better at setting future market expectations, their suppliers should be more willing to invest in innovation. Last year's patent grants prove that out. The computer makers (IBM, Sun, etc.) dominate the patent grants, but their first-tier suppliers (Motorola. Advanced Micro, TI Intel, etc.) are ranked right among the OEs for those grants. In automotive patent grants, the OEMs are all bunched at the top of the list and their suppliers are few and far behind.

Taking this a step further to commercialization (and valuation), The Patent & License Exchange (pl-x.com) has developed a patent valuation methodology. As the graphic shows, automotive parts as compared to one high-tech sector, information technology, lags far behind in terms of the valuation of intangible patent assets. From this single perspective, is it any wonder that auto stock valuations lag the market?

Certainly the auto industry produces advanced technology. But most of it is directed at meeting governmental regulations, not creating unique company-specific market opportunities (and thus company valuations).

Suppliers continue to question the OEMs' ability to handle intellectual property rights, pricing structures and design and engineering responsibility in a manner that promotes innovation. This takes leadership. And until a new style of leadership is ingrained into the "Detroit culture," the industry will continue to be satisfying -- but not good (in valuation).