The Toyota-Nissan Recalls: Noblesse Oblige

The recent massive recall of Toyota and Nissan is a stark reminder of the costs of strategic dominance.

Although external suppliers account for most (around 75%) of the cost of making a car, automobile manufacturers have long for been legally responsible for the entire product. This principle, enshrined in US law by a famous decision of the New York Court of Appeals in 1916 (MacPherson vs. Buick), means that the automobile manufacturers, for better and for worse, have to stand by the car's faults, whether they are the result of themselves or their suppliers.



Now, being legally liable for something might appear to be a headache, and many in the automobile industry certainly treat it as such. Yet my recent research, with Wharton's John Paul MacDuffie, suggests that this short-term headache is also a long-term strategic weapon, which automobile manufacturers have used to ensure they keep a high, and steady proportion of the total value-add in the sector.

Despite the extensive outsourcing that took place in cars, from the 1980's onwards, automobile manufacturers have been able to retain value. Unlike the computer sector, where vertical dis-integration led to value migration from computer makers such as IBM to chipmakers such as Intel and software and OS writers such as Microsoft, in cars the automobile OEMs still are able to keep the lion's share of the sector's total market capitalization.

This achievement is in no small measure due to the fact that they are ultimately legally responsible for a car. This liability has allowed them to shape standards and demand compliance (with backing from regulators) from their suppliers. As a result the "master and servant" relations between those who outsource and those who produce have not reversed in the car industry, unlike in the computer industry.



That being so, it is quite reasonable to expect automobile manufacturers to graciously accept responsibility for the faults of their cars, and take the short-term financial hit that recalls, small and large, impose.

The same goes for Tesco's and other retailers in Europe, who were found to have horsemeat in their burgers. They were wise not to use the cheap defense that "we didn't know, and it was the fault of our (obscure) suppliers who told us all is good". They recognized that with their acceptance of responsibility was the price of being seen by customers to be their products' guarantors of quality, a key driver of strategic control and profits.

As they used to say in medieval France, "Noblesse Oblige." Much as the nobles of yesteryear understood that they had to accept some responsibilities to stave off revolutions, today's industrial leaders must be willing to take the hit if they are to keep their role at the top of the supply chain pecking order. History is full of examples of what happens to those who become too greedy, choosing short-term gains over long term positioning.

via HBR.org http://blogs.hbr.org/cs/2013/04/the_toyota-nissan_recalls_nobl.html