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Are Family Businesses Better Poised to Survive the Current Economic Crisis? Some Hopeful Signs from the Auto Industry


Are Family Businesses Better Poised to Survive the Current Economic Crisis?
Some Hopeful Signs from the Auto Industry

The current economic crisis has impacted most businesses. The automotive sector has been particularly hard hit with a perfect storm of problems both old and new, which could bring down industry giants as well as countless smaller businesses that supply these companies. The stresses that North American auto manufacturers are experiencing due to the current credit crunch are coming on the heels of major sales declines in light trucks and SUVs due to a spike in fuel costs, along with a manufacturing cost structure that has long put pressure on the U.S. “Big Three.” The decline in auto sales also extends well beyond the U.S. market—companies around the globe are being impacted. While all this is largely discouraging, it may be of interest to note that among the larger players in the automotive industry, those that retain a meaningful affiliation with their founding families may be better positioned to weather this storm.
 
The best-known example of this is the Ford Motor Company, a publicly traded firm still largely controlled by the founding family’s descendents through super-voting shares. Though the family owns less than 3% of the outstanding stock, they control 40% of the voting rights—giving them tremendous authority on key decisions. Many institutional holders of Ford shares have taken issue with this arrangement—yet to date the family has held firm. In addition, many employees still value and respect the family legacy, providing the business with a powerful ally, which may be particularly critical to the company’s long-term survival in these turbulent times. In fact, during a recent visit by Bill Ford Jr. to a plant in Michigan, UAW Vice President Bob King was quoted as telling his people: “I hope everybody to the core of their being really appreciates Bill Ford and the Ford family, because as many other manufacturers were running away from existing facilities—running away from legacy employees, running away from urban areas, going to the South, and in many cases going overseas—Bill Ford and the Ford leadership team under his leadership decided to keep jobs in Dearborn, Mich.”
 
Despite this powerful endorsement, Ford remains plagued by many of the same issues as its two domestic rivals. However, it is widely acknowledged that of the three, Ford is in the “best” financial health. In fact, though it supported the government’s financial bailout, it has still elected not to take any federal money. Allan Mullaly, the current chairman, expressed confidence that the company had the financial stability to avoid bankruptcy certainly through 2010. That is not a glowing assessment, but it is certainly more than can be claimed by either Chrysler or GM.
 
In fact, Chrysler may soon cede 35% of its ownership to enter into a strategic alliance with a foreign auto manufacturer with important family ties in a position of relative health in this crisis. While American car companies have been fighting for survival for the past several years, Fiat Group automobiles turned a profit in 2007 for the first time since 2000, putting Fiat in a stronger position at the outset of the current downturn. Much of the credit for the turnaround of this family-owned Italian icon, producer of Fiat, Lancia, and Alfa Romeo automobiles, has gone to nonfamily CEO Sergio Marchionne and a strong team of nonfamily executives. Marchionne may seem an unlikely pick to turn around Fiat, as he grew up outside of Italy and was not involved in the industry prior to working at Fiat. Yet, Marchionne’s outsider perspective is one of the reasons cited for Fiat’s success.
 
When Marchionne joined the company in 2003, the business was in turmoil. Gianni Agnelli, the industrialist credited with building the company, died in 2003. When his brother Umberto died a year later, Gianni’s 28-year-old grandson John Elkann became leader of the family. Marchionne joined the Fiat board and became CEO under Elkann, following four failed CEOs in three years. With the support of the board, Marchionne shook up the Fiat culture quickly, firing 10% of the white-collar staff. Following the management changes, Marchionne focused on revamping the product line—which has helped to keep Fiat in a position of relative strength, even in these trying times. In fact, some of the new technology innovations developed under his watch are a large component of what may be driving the alliance with Chrysler.
 
A third example comes from a supplier to the industry. Magna International, Inc., the largest auto-parts manufacturer in Canada, still largely influenced by its legendary founder Frank Stronach, is posting major losses and anticipating a dismal 2009. However, this company is in a far better position than almost any of its rivals, in part because it has built up large cash reserves and has mostly avoided debt since the company nearly went under in the late 1980s due to excessive expansion. As with many family businesses, once burned, lesson learned—a lesson that may enable the business to emerge from this current downturn stronger than ever.
 
While certainly these three examples are very large companies and their size alone may offer protection, the reality is that large and small businesses are at risk today. Though some of the specific family-business advantages these companies have cultivated may differ—from strong employee loyalty to a willingness to make changes and innovate to a healthy balance sheet—the common theme to all these begins with the presence of a steady and long-term view that starts from the family. The lesson we can all learn from the struggling auto industry is that the ability to manage for the long term, a characteristic we often find in family businesses, may provide the right balance of stability and flexibility that is particularly critical for survival in these difficult times.
 

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