The More You Read…

While in Michigan last weekend I picked up the Sunday edition of the Detroit Free Press, hoping for some local insight on the GM and Ford fiascos. I wasn’t disappointed. Every article on the front of the editorial section, as well as almost half of the inside articles, had something to do with the crisis that those companies are supposedly confronting.

An article by bankruptcy attorney Alan Gover argues that there is nothing worthwhile in bankruptcy for either company. Basically eliminating $27 billion in equity directly or indirectly held mostly by small shareholders is obviously a concern, and it would allow the company to shed those incredible legacy healthcare and pension costs that were negotiated over the past couple decades by rather pathetic company managers. But Gover’s main point is that bankruptcy does not lead to true reform. As he puts it, “Chapter 11 is never a business plan in and of itself. All the lawyers, investment bankers, accountants, and consultants in the world cannot turn around a troubled company; only businesspeople can.” He goes on to cite several examples of where bankruptcy did not turnaround a company until higher caliber operational leaders were brought in. An interesting perspective from someone that makes a living from bankruptcies. 

Kevin Kearns and Alan Tonelson of the U.S. Business and Industry Council have an article that tries to blame the ills of GM and Ford on “one way free trade”, assailing NAFTA and the “tricks of foreign governments” along the way. According to those two buffoons, a flood of imported cars has created the problem and the solution is a tariff on imported vehicles and intervention by the U.S. government. Can they really be so naive as to be simply unaware that Toyota and Honda now make most of their U.S.-destined vehicles in the U.S., that the labor hours (not dollars!) to create a Toyota is 20% less than a Ford, and that the American consumer simply finds more value and quality in a Toyota or Honda? Sorry guys, the free market works, and subsidizing incompetence, low efficiency, and poor quality simply adds cost to the consumer and doesn’t lead to true internal reform.

A 30-year GM hourly employee, Stan Phillips, is excited by the addition of Kirk Kerkorian advisor Jerome York to the GM board of directors. He reminisces about the time many ears ago when Ross Perot was added to the board and pushed the value of employees, continuous improvement, and knowledge… to the point that GM let him go. Stan hopes that York may follow some of Perot’s doctrine. Although he is concerned about the impact on employee pensions, he likes York’s philosophy of “equality of sacrifice” that has executives also taking pay cuts, and recognizes that dramatic changes in benefits and methods must occur.

Howard Segal, a history professor at the University of Maine, compares the turnaround challenge faced by GM and Ford. He notes that Bill Ford has a personal interest that is based in his family history, and that his company puts his name on every vehicle while GM doesn’t have that personal connection. He then goes on to correctly describe the legacy of Henry Ford, from which lean manufacturing was originally created, and talks about how Taichi Ohno was initially a student of Ford’s methods. Segal believes that Ford’s turnaround plan, although still flawed by focusing on innovation rather than an internal focus on lean, has a better chance at success than GM’s due to the legacy of Henry Ford and the personal tie to Bill Ford.

A tax attorney, Eric Nemeth, argues for increased R&D tax credits to further stimulate innovation. The primary focus of those incentives would be to hire the best and brightest, with a focus on smaller companies that could provide faster growth. Although we’re always in favor of lower taxes, this sounds rather complicated, and it’s obvious that Eric doesn’t get the real bottom line when he closes with a remark about how due to Chinese labor rates it can deliver a family sedan for $10,000. Yes, labor rates have some impact, but as Toyota’s U.S.-based operations prove every day, you don’t need Chinese labor rates to be competitive.

Dana Johnson, a bank executive, provides an oft-unreported side of the "U.S. manufacturing disaster”. As he notes, similar to NAM data, manufacturing in the United States is expanding, not contracting. In fact, in terms of dollars of goods actually manufactured in the U.S. the industry has expanded in 18 of the last 20 years. However productivity has been increasing at a much greater rate, a rather phenomenal 55% since 1995, thereby leading to a 20% decrease in manufacturing payrolls in the same period. This is analogous to the change in the agricultural industry during the early part of the last century, leading to today’s situation where a 95% reduction in the number of farmers now produces 500% more product at a corresponding reduction in cost to the consumer. Is it any different overseas?  Nope… even in China manufacturing employment has fallen by 11%.  Of the top 28 manufacturing countries (90% of the world’s output), job growth has occured in only 5: Argentina, Brazil, Spain, Thailand, and Turkey.  Change and improvement can be painful.  And keep the numbers in perspective: the percentage of global manufacturing made in the U.S. is dropping, and the competitive pressure from overseas is increasing rapidly, therefore U.S. manufacturers must improve in order to survive.

Daniel Howes opines that GM should define how its cutbacks will add to its value. He notes that an old business adage holds that companies can’t cut their way to prosperity, but decries the culture at GM with cutbacks reign with little countervailing force. He asks where is the clearly articulated vision of how GM will be “different” when it emerges from this challenge… if it does. Bill Ford has created a vision that includes specific innovations, which some of us may believe is still somewhat askew, but GM has no such vision. GM’s ads say it will be “a different kind of car company”. Exactly how?

Sounds like so far our buddy Womack is the only one who has put forth a tried-and-true vision for turnaround success.  Too bad they don’t seem to have the guts to run with it.