How not to run a company

By Paul Walker 20/09/2014 4

At the Offsetting Behaviour blog Eric Crampton reminds us of one of the great stories about the inefficiency of the old Eastern Block. Eric writes,

Remember the story of the West German auto exec who, after touring the Trabant plant, wept because the value of the steel and other inputs going in exceeded the value of the car coming out? The Trabant plant was destroying value.

For those who don’t know it, the story comes from a World Bank publication, Transition: a newsletter of the World Bank, Number 5-6, May-June 1996, page 15:

With a view to corporate takeover Volkswagen AG sent a Herr Heuss to Zwickau to find out how the Trabant (relatively cheap, East German cars) were made there. He emerged shocked from the huge plant, babbling “My God!” The Trabant operation was value-subtracting: valuable material, labor, and capital inputs went in at one end; shabby Trabies came out at the other, their bodies made from compacted trash. The final output was worth less than the sum of the inputs. What was not fully understood at the time was that East Germany’s whole economy was value-subtracting and cost-unconscious.

I still can’t get my head round the idea that “production” is value decreasing! But its something to keep in mind when there are those who would have the government take a much greater role in running the economy and owning firms. It doesn’t doesn’t always end well.

4 Responses to “How not to run a company”

  • We had local examples of negative value-add back in the days of import licensing. We imported kits of parts to make eg hi-fi systems; the kits were more expensive than the assembled product, had we been able to import them from the same source.
    Also, it was reported that when Ford bought Jaguar, the executive they sent to look over the factory was so shocked he had a heart attack.

  • That is a key point in the adding value to NZ primary produce debate. The danger is that a New Zealand company takes an ingredient that is valuable to an offshore company (a log, say) and for a variety of reasons, including not having brand presence, sales channels or critical processing scale, spends money on turning it into a product that is expensive to ship and doesn’t recover the value of the ingredient exported as is.