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Hertz hit by the law of unintended consequences

  • Though companies and governments plan and strategize, they often suffer from tunnel vision and ignore lateral consequences of actions taken by them or by other agencies.

Once upon a time, Hertz Global Holdings Inc. was a market leader with a 55% share of the car rental business. Last week, the $8.9 billion company went into bankruptcy, unable to cope with the wipeout of its business following the covid-19 pandemic.

The last few years have been tough for Hertz as competition from ride-sharing companies like Uber took a toll, leading to an $18 billion debt burden. But still there was some hope it could stage a comeback by cutting costs aggressively. Just this March, the company laid-off 12000 people while embarking on an ambitious plan to sell-off thousands of its cars. Hoping for a strong fourth-quarter performance, the company was looking forward to an encouraging performance in 2020. It wasn’t to be. Unable to service its massive debt pile, Hertz finally filed for bankruptcy.

Among the contributory factors that pushed it over the edge were the falling prices of used cars. Since the bulk of its debt was secured against the value of the cars it owned, the thumbs down from potential buyers for used cars at auctions spelt doom for Hertz.

At the same time, as Hertz was coping with its sudden loss of business, shipping companies in another part of the world were making money hand over fist. As oil prices sank to unprecedented levels, the logical thing should have been for its primary transportation medium to also suffer the same fate. After all, 60% of oil and gas transportation across the world is sent through maritime routes. But a faceoff between Saudi Arabia and Russia, the world’s largest oil producers, led to a situation where despite a complete drying up of demand, oil production stayed steady. With consumption down, buyers needed to hold the oil somewhere, anywhere. The answer, berth it at sea. Suddenly, large shipping companies which own the supertankers and even smaller ones which have the second tier barges, found themselves in great demand as charter rates for these temporary floating storage facilities doubled over the last few months.

Indeed, corporate history is littered with examples of companies, which have faced the consequences of actions in which they were unwilling victims or unexpected winners.

It’s a variant of The Law of Unintended Consequences, often cited by many economists and social scientists before it was articulated conceptually and clearly by Robert Merton in his 1936 essay The Unintended Consequences of Purposive Social Action. Merton explains: “with the complex interaction which constitutes society, action ramifies, its consequences are not restricted to the specific area in which they were initially intended to centre, they occur in interrelated fields explicitly ignored at the time of action. Yet it is because these fields are in fact interrelated that the further consequences in adjacent areas tend to react upon the fundamental value system."

Not surprisingly, the law often relates to the actions of governments. Thus, the 22 March lockdown in India, aimed at stemming the spread of covid-19, inadvertently led to lakhs of migrants making a dash for their homes the moment there was an opportunity. In the melee, social distancing norms were thrown to the winds and it now emerges that thousands have been infected in the course of their desperate dash home.

It isn’t the first time a government has failed to think through all possible ramifications of its actions. Of the many instances that provide evidence of how the law of unintended consequences plays out, there’s none more bizarre than the one quoted by Rob Norton in a piece on the subject (bit.ly/3d7VjyH). Norton writes, “In 1968, for instance, Vermont outlawed roadside billboards and large signs in order to protect the state's pastoral vistas. One unintended consequence was the appearance of large, bizarre "sculptures" adjacent to businesses. An auto dealer commissioned a twelve-foot, sixteen-ton gorilla, clutching a real Volkswagen Beetle. A carpet store is marked by a nineteen-foot genie holding aloft a rolled carpet as he emerges from a smoking teapot. Other sculptures include a horse, a rooster, and a squirrel in red suspenders."

In India, another great example is what has happened in Mumbai thanks to the rent control legislation. The artificial cap has meant that many landlords have preferred to keep apartments empty rather than risk give them at such low rentals, also ensuring that tenants never move out. This has led to a further shortage in the housing available for renting. What was originally meant to help tenants has ended up hurting them even more.

Or take the many flyovers built by the Delhi government through the first decade of this century. Originally built to reduce congestion, these new flyovers ended up getting so much traffic that within a few years the bottlenecks just shifted to the points where they ended and were joined by other roads.

Though companies and governments plan and strategize, these examples serve as a reminder of how often they suffer from tunnel vision and ignore lateral consequences of actions taken by them or by other agencies. It is possible that activist investor Carl Icahn who owns 40% of the company may still find a way to restore Hertz’s fortunes. For now, Hertz is paying for its own sins and also those where it was an accidental victim.

The author is a former executive editor of Mint

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