Why Its OK If GM Fails
This is a reprise of a much older post, but since I have limited time for blogging, I thought it might be timely to reprise it:
I had a conversation the other day with a person I can best describe
as a well-meaning technocrat. Though I am not sure he would put it
this baldly, he tends to support a government by smart people imposing
superior solutions on the sub-optimizing masses. He was lamenting that
allowing a company like GM to die is dumb, and that a little bit of
intelligent management would save all those GM jobs and assets. Though
we did not discuss specifics, I presume in his model the government
would have some role in this new intelligent design (I guess like it
had in Amtrak?)
There are lots of sophisticated academic models for the corporation. I have even studied a few. Here is my simple one:
A corporation has physical plant (like factories) and workers of
various skill levels who have productive potential. These physical and
human assets are overlaid with what we generally shortcut as
"management" but which includes not just the actual humans currently
managing the company but the organization approach, the culture, the
management processes, its systems, the traditions, its contracts, its
unions, the intellectual property, etc. etc. In fact, by calling all
this summed together "management", we falsely create the impression
that it can easily be changed out, by firing the overpaid bums and
getting new smarter guys. This is not the case - Just ask Ross Perot.
You could fire the top 20 guys at GM and replace them all with the
consensus all-brilliant team and I still am not sure they could fix
it.
All these management factors, from the managers themselves to
process to history to culture could better be called the corporate
DNA*. And DNA is very hard to change. Walmart may be freaking
brilliant at what they do, but demand that they change tomorrow to an
upscale retailer marketing fashion products to teenage girls, and I
don't think they would ever get there. Its just too much change in the
DNA. Yeah, you could hire some ex Merry-go-round** executives, but you
still have a culture aimed at big box low prices, a logistics system
and infrastructure aimed at doing same, absolutely no history or
knowledge of fashion, etc. etc. I would bet you any amount of money I
could get to the GAP faster starting from scratch than starting from
Walmart. For example, many folks (like me) greatly prefer Target over
Walmart because Target is a slightly nicer, more relaxing place to
shop. And even this small difference may ultimately confound Walmart.
Even this very incremental need to add some aesthetics to their
experience may overtax their DNA.
Corporate DNA acts as a value multiplier. The best corporate DNA
has a multiplier greater than one, meaning that it increases the value
of the people and physical assets in the corporation. When I was at a
company called Emerson Electric (an industrial conglomerate, not the
consumer electronics guys) they were famous in the business world for
having a corporate DNA that added value to certain types of industrial
companies through cost reduction and intelligent investment. Emerson's
management, though, was always aware of the limits of their DNA, and
paid careful attention to where their DNA would have a multiplier
effect and where it would not. Every company that has ever grown
rapidly has had a DNA that provided a multiplier greater than one...
for a while.
But things change. Sometimes that change is slow, like a creeping
climate change, or sometimes it is rapid, like the dinosaur-killing
comet. DNA that was robust no longer matches what the market needs, or
some other entity with better DNA comes along and out-competes you.
When this happens, when a corporation becomes senescent, when its DNA
is out of date, then its multiplier slips below one. The corporation
is killing the value of its assets. Smart people are made stupid by a
bad organization and systems and culture. In the case of GM, hordes of
brilliant engineers teamed with highly-skilled production workers and
modern robotic manufacturing plants are turning out cars no one wants,
at prices no one wants to pay.
Changing your DNA is tough. It is sometimes possible, with the
right managers and a crisis mentality, to evolve DNA over a period of
20-30 years. One could argue that GE did this, avoiding becoming an
old-industry dinosaur. GM has had a 30 year window (dating from the
mid-seventies oil price rise and influx of imported cars) to make a
change, and it has not been enough. GM's DNA was programmed to make
big, ugly (IMO) cars, and that is what it has continued to do. If its
leaders were not able or willing to change its DNA over the last 30
years, no one, no matter how brilliant, is going to do it in the next
2-3.
So what if GM dies? Letting the GM's of the world die is one of the
best possible things we can do for our economy and the wealth of our
nation. Assuming GM's DNA has a less than one multiplier, then
releasing GM's assets from GM's control actually increases value.
Talented engineers, after some admittedly painful personal dislocation,
find jobs designing things people want and value. Their output has
more value, which in the long run helps everyone, including themselves.
The alternative to not letting GM die is, well, Europe (and Japan).
A LOT of Europe's productive assets are locked up in a few very large
corporations with close ties to the state which are not allowed to
fail, which are subsidized, protected from competition, etc. In
conjunction with European laws that limit labor mobility, protecting
corporate dinosaurs has locked all of Europe's most productive human
and physical assets into organizations with DNA multipliers less than
one.
I don't know if GM will fail (but a lot of other people have opinions) but if it does, I am confident that the end result will be positive for America.
* Those who accuse me of being more influenced by Neal Stephenson's Snow Crash than Harvard Business School may be correct.
**
Gratuitous reference aimed at forty-somethings who used to hang out at
the mall. In my town, Merry-go-round was the place teenage girls went
if they wanted to dress like, uh, teenage girls. I am pretty sure the
store went bust a while back.
HTRN:
GM's problems don't need a genius to figure out - obscenely high pay to union workers(on the order of $130K for a lineworker), legacy costs($1300 of each new car sold goes to paying medical costs for retired GM workerss), and quality issues(hey, when you can't fire the employees, where's the motivation?)
There's a reason why Toyota and Honda are opening up factories in America, but not going anywhere near UAW controlled Michigan..
July 25, 2008, 1:10 amlinearthinker:
A couple of years ago Wal*Mart did embark on a "Merry-go-round" marketing strategy. The fresh young lady brought in to oversee it now works elsewhere. After she left, my Wal*Mart stock is up something like 20% as I recall, not that the two facts are linked too closely.
Regarding GM, I'm reminded of Chrysler. The Carter era bailout as described in 1983: The Chrysler version of industrial policy, therefore, fleeced the company's creditors, resulted in a 50 percent reduction in Chrysler's workforce, rewarded the least deserving of Chrysler's stockholders, and let the U.S. taxpayer risk his money in a bankrupt company. This we are told, is the shining example for America's new industrial policy.
That was written before the Daimler-Benz acquisition. Now I understand the Germans are ready to shed their Chrysler holdings. I reckon we'll be bailing them out again before too long.
Neal Stephenson should be required reading starting in junior high school.
Incidentally, I have a cousin who was part of that corporate DNA at Emerson. Probably a little before your time. Jack White.
July 25, 2008, 1:35 amJeff:
Does the well-meaning technocrat that want to use Other People's Money to save GM drive a BMW?
Jeff
July 25, 2008, 5:57 amPhil:
Coyote,
What about Apple? In the mid-90s, Apple Computers was a joke. They had just discontinued their most popular computer, the Apple II line, and their main product, the Macintosh, had horrible marketshare, and Windows 95 seemed to have ended any advantage the Macintosh had. Then Steve Jobs came back. Now, the Macbooks are the most popular laptops on college campuses, and the iPod, a consumer electronics device, is the most popular player, and the iPhone seems to have enormous potential. That is a lot of change in only ten years (really the change began 6 or 7 years ago). So, with the right people, businesses can change very rapidly.
July 25, 2008, 7:46 ambbartlog:
GM's debt and obligations are too enormous for it to recover without something like bankruptcy (that would let it discharge some of its debt). I think they have on the order of $250 billion in debt, and it's not cheap debt either.
July 25, 2008, 7:53 amA well-managed bankruptcy would probably allow the company to survive, but it's not clear how that would happen. One of the interesting aspects of the GM situation is that the bondholders have both a bigger vested interest and possibly more power than the actual shareholders of the company. In a normal situation, this hardly matters since both parties just want the company to do as well as possible. Here, though, the future earnings of the company even under optimistic assumptions are not enough to make both bondholders and shareholders whole (let alone UAW retirees). So you basically have three or more factions fighting over the last piece of pie, and any one of them also has the power to destroy what remains if they're not happy with the proposed result.
At any rate, while I think GM should be allowed to fail I expect some sort of bailout will actually happen. The company is far more iconic than Chrysler ever was, and the bondholders surely have enough connections in government to get themselves paid off by txpayers under the guise of saving an American industry.
Highway:
linearthinker: Daimler has already dumped Chrysler like the albatross they are, although they can be partially blamed for the current status. Chrysler LLC is now a subsidiary of Cerberus, a chinese corporation (privately held). And it basically has no future. They don't even have a good prospect for a bailout.
Hopefully they'll die, with their horrible product as well.
http://www.ericpetersautos.com/home/index.php?option=com_content&task=view&id=556&Itemid=10894
July 25, 2008, 8:12 amFlash Gordon:
AT&T had been deregulated for 10 years when it acquired the cable giant TCI. The merger proved to be a disaster. The "phone people" at AT&T still had a regulated monopoly mentality trying to run a company that was built by entrepreneurial cable jockeys and depended upon that culture for its success. The cable people who were held over in the new company quickly became disoriented in the phone culture and either left or became malcontents. The only good to come out of the merger was the opportunity it created for Comcast to acquire some pretty good assets at a fire sale price.
I don't know if the AT&T now providing the cell connection for the iPhone is the same or a different company. I hope it's a different company because the phone people at the old AT&T are suitable only for government jobs. If it's a different company I wonder why they would even use the name given its negative connotation.
July 25, 2008, 8:34 amBruce Hall:
I'm not a big fan of GM although I live near Detroit.
Nevertheless, GM and Chrysler and Ford have contributed far more to the U.S. economy than some high paying assembly line workers [whose quoted high pay is often the result of working a second overtime shift].
Historically, Toyota, Honda, and now the Korean car companies have enjoyed the security of protected home markets and significant government support in the form of low taxes, export incentives, and minimal regulation. This has enabled them to remain profitable while focusing on expansion. That expansion included illegal "dumping" of vehicles and parts into the U.S. That expansion included setting up U.S. sales subsidiaries that bought vehicles from the home markets at inflated prices and sold them in the U.S. at paper losses to avoid U.S. taxes.
In the U.S., there has been an historically antagonistic relationship between the government and domestic automobile manufacturers which I attribute more to politicians needing election issues than anything else. For example, if there is a real [not artificially created] domestic oil shortage and consumers want small cars, why is it necessary for certain politicians to condemn domestic manufacturers for supplying what the market wanted 4 years ago or 2 years ago and create ridiculous and expensive mandates? Didn't Toyota create the Tundra and Highlander in response to the marketplace. Isn't Ford revamping its offerings in response to the marketplace?
That is not to say that large U.S. corporations are correct or "nimble" in their decision process. But there is more to the story than commonly portrayed.
How would the recreation industry react to an "environmental" tax of, say, $500 per camper... payable as an annual license? Look what is happening in Europe when you try to buy a larger than shoebox vehicle... environmental taxes. Or how about a mandate for all private campgrounds to reduce by 75% CO2 emissions from heating and campfires? I seem to have read that somewhere in the NW campfires are being banned because of CO2 "pollution."
It's easy for the government to point a finger at corporations and forget how many fingers are pointing back to government.
July 25, 2008, 9:33 amLeonard Huff III:
Goverments, 500 Fortune companies, states, county goverments, cities, local school districts, and alot of individuals go bankrupt every day or are going bankrupt soon. Used to be, there was a thing called a DEBTOR PRISON!, were people were locked up for this when it happened to them and/or entities.
Maybe, just maybe "WE THE PEOPLE" need to bring this back and try it for a little bit! Maybe it would get people to THINK TWICE before they load up 12 or 20 VISA credit cards to the MAX. and buy a house that they cannot afford or buy two new $40,000 cars on credit when it easy to get. It would get my attention for sure.
I experienced BANKRUTCY (NOT INDIVIDUAL), but as a hired gun. Dad, Brother, Business(Farming) had to take CHAPTER 12 (Farmer Bankruptcy) back in March 2001. In Midland , Texas I was a hired gun for ex-mother in law for the same thing. In Midland durning 1986, the price of six brand new drilling rigs value at $20,000,000 in 1981, fell to a value of $500,000. Banks wanted the difference NOW! No government bailout then. $1,000,000 in legal fees later (lawyers always get paid FIRST!) (WONDER WHY? -THEY MAKE THE LAWS! NO TERM LIMITATIONS IN CONGRESS & SENATE!) and 13 yrs later, ex mother in law in Midlad cleared up mess. February 28, 2008 took last payment with Mom to last Bank involved in mess for $65,678.98 and went home and had a few beers that night. Next morning , felt like ? , don't ask. ( I think I watch the Sun come up. Mind was litter fuzzing then)
Simple Answer to Problem! Make (people, corporation, Governments, Countries, World, responsible for the mess that they create out of stupid actions! be responsible for their actions and quit crying like a baby to me about your DAM little problem that you created and BE responsible for it. Period! Move to AFRICA and start over! Better take lots of FOOD, GUNS, AMMUNO, ECT.............
Have a nice day!
Peace & Love!
ps: Telephone call. Got the first rig "TURNING TO RIGHT" sooner than I thought that they would today. Great Drilling Contractor. They Drill Worldwide. (NOT EVIL VICE-PRESIDENT CHEENY HALLIBURTON, BUT PARKER DRILLING COMPANY) I never, never, never, gave up on the EVIL OIL & GAS BUSINESS. I knew it WOULD come roaring back like a pack of lions! Go short on OIL because prices are going to come down. WHEN? If I knew, I would play the FUTURE MARKETS - PUT & CALLS. I don't like to gamble! Go Figure. I have never been in a Casino in my life! ODDS ARE TERRIBLE! GREAT FOR THE HOUSE!
July 25, 2008, 10:12 amBrandybuck:
Actually, I think "Snow Crash" has a more realistic view of the economic world than does the Harvard Business School.
July 27, 2008, 10:56 amJosh S:
GM has more potential than the current downturn in the truck market may suggest, and they have enough cash on hand to last far longer than many give them credit for. Given the phenomenal success of their Tijuana plant (non-unionized, highest-quality output of any GM plant) and their increasing numbers of Mexican engineers in their employ (Aveo was designed by Mexicans), I woudln't be surprised if they gradually move so much stuff south that we start thinking of them as a Mexican company. If the US government and unions don't want them around, they've got the resources to go elsewhere.
August 1, 2008, 11:36 amJB:
It's fine and dandy for people to say let GM fail if it isn't your toes that are being stepped on. My husband has been retired since 1974 and he did not make the big bucks you all are throwing around in your comments. If they go under then they take alot of people with them that lose their pensions plus health care. It's always easy to blame the people working for them but that is not the reason GM is in financial straits. Look at the upper management and how they handled things. Especially the ceo
October 1, 2008, 12:28 pmJB:
It's fine and dandy for people to say let GM fail if it isn't your toes that are being stepped on. My husband has been retired since 1974 and he did not make the big bucks you all are throwing around in your comments. If they go under then they take alot of people with them that lose their pensions plus health care. It's always easy to blame the people working for them but that is not the reason GM is in financial straits. Look at the upper management and how they handled things. Especially the ceo
October 1, 2008, 12:30 pmTom L.:
Miss JB, It is of course never a good thing for someone to lose their jobs, and upper management is to blame, but the cold hard truth of the matter is that nothing in this world is permanent, especially not a company. GM made plenty of mistakes because they "knew" in the end they would not have to lose a thing because they can lobby washington into believing that GM going away is bad for our nation and bad for it's employees. While this is true to an extent, if we continue down this path there will be nothing left. Money has to come from somewhere, it cannot just simply be printed and given away to failing companies, banks, or institutions as the appearant need arises. After GM receives a bailout and becomes owned in part by society as a whole, then so too will other companies follow suite. Gone will be the last rotting and festering shrivel of honesty left in corporate America. Why do the right thing when you (as a corporation) can use the government's (i.e. the people's) money to bail yourself out? All you have to do is make the case that a lost job is hard on people and families. These things happen, which is why it is important for as many of us citizens to live debt free as possible, and to expect the same of our bosses and our government leaders. The more people who are living their lives free from the burden of debt, the smaller the government's influence on our lives. As the people of any nation get further and further into debt they tend to grant more powers to the government than the government is deserving of.
In the end, this will be one of the ways the lobbyists and the corrupt government officials will rob the people of this nation of their freedoms without firing a single shot. We must stop this insane notion that "the people who are "smarter" than us" will help us get out of this mess. That kind of thinking is fed to us by those who would have us lose our control of our own destinies, We can no longer afford to pass the buck to Washington, we must take up the burdon ourselves.
November 7, 2008, 5:35 pm