Here is something that may surprise you. We are now gaining manufacturing jobs in the U.S. Manufacturing employment has fallen every year since 1998, until 2010. Since the beginning of 2010, there has been a 1.6% gain in manufacturing jobs. That’s twice the pace of the growth in other private sector jobs. The unemployment rate for the manufacturing has improved from 13% in December of 2009 to 9.5% in August of 2010. That’s a better performance than that of the overall labor force.
These gains have come primarily in four industries: automobiles, fabricated metals, primary metals and machinery. These industries have all been losing jobs for several years. What is behind the change? Here is a significant indicator. Recently, the United Autoworkers Union has crafted an agreement with General Motors to encourage GM to invest money to assemble a low-priced sub-compact car in the U.S., with unionized labor.
This will be a first. All other domestic and foreign manufacturers have produced their sub-compact cars offshore. GM’s sub-compact, the Aveo, came from South Korea. Ford’s Fiesta came from Mexico. Chrysler and Fiat are planning to manufacture the Fiat 500 in Mexico. The Honda Fit and the Toyota Yaris are imported from outside the United States.
This new agreement is truly ground-breaking. Under the terms of the agreement, GM will pay 60% of the sub-compact plant’s 1550 workers a wage of $28 an hour. The other 40% of the plant’s employees will make $14 an hour. By GM’s calculations, this would enable the company to build a sub-compact at a profit in the U.S.
This new agreement may, in fact, reduce the average wage rate to competitive levels. Before GM’s bankruptcy, the average GM worker earned over $70 an hour in wages and benefits. After bankruptcy, that rate of cost fell to about $57 an hour…good, but not good enough to compete profitably. (See “Audio Tip #163: Introduction to Step 25 of the Basic Strategy Guide” on StrategyStreet.com.) Toyota has average labor costs of about $50 an hour. The Toyota workers are not unionized. This new UAW agreement with GM should make the new sub-compact plant competitive with the cost that Toyota incurs in the U.S.
A change in attitude at the UAW is behind this job-creating agreement. A senior UAW official explained that this agreement was the result of some very difficult decisions the union had to make in order to safeguard jobs. He further explained that the UAW developed a new understanding of the realities of the 21st century global auto industry while living through the GM and Chrysler bankruptcies. (See the Symptom & Implication, “The industry is reducing costs aggressively” on StrategyStreet.com.)
Three cheers for the UAW/GM agreement. Let’s hope that it creates jobs and profits.
Showing posts with label General Motors. Show all posts
Showing posts with label General Motors. Show all posts
Monday, November 15, 2010
Thursday, July 15, 2010
Here We Go Again
The leader of the United Auto Workers is retiring. He is leaving a union under siege. By 2009, UAW membership was about half of the level of 1995. The union has hemorrhaged members as the big three domestic automobile producers have shrunk in market share, lost billions of dollars, and closed plants.
The departing leader of the UAW claims that the industry’s difficulties never rested with the union and its rich contracts. In his view, the crisis that led to the bankruptcies of GM and Chrysler and the near bankruptcy of Ford was strictly the result of an unexpected spike in gas prices and a recession that resulted from the mortgage crisis. He believes that the fault lay not with the union and not with the industry. Following this belief, he is encouraging his successor to begin clawing back the cost-cutting concessions that the union has granted the Detroit big three domestic automobile manufacturers now that these companies are moving toward profitable operations.
The problem is that these concessions did not do enough, at least from the results they seem to have produced. The concessions really got underway in 2003, as the union reduced its wages and benefits and transferred retiree healthcare costs from the automakers to an independent trust. Despite these concessions, union membership fell parabolically from 2003 to 2009, right along with the profits in the big three. In the meantime, German and Asian manufacturers continued to be profitable. These profits included profits in U.S. domestic manufacturing facilities as well. (See the Symptom & Implication, “Some industry leaders have lower returns than the smaller competitors” on StrategyStreet.com.)
The union is heading back to trouble and will take its unionized facilities with them. In an earlier blog (See Blog HERE), we described the hourly cost differences in wage rates between a unionized and non-unionized domestic facility. These cost differences are unsustainable in the longer term. No one can expect that an automobile plant with $73 dollar an hour labor will be profitable enough to compete with another domestic plant producing similar automobiles at $48 an hour. Despite recent troubles, the Asian manufacturers still command a premium price over their big three competitors for their products. So, Toyota and Honda get a higher price and produce with a lower costs. (See “Video #1: The Two Best Consultants in the World” on StrategyStreet.com.) Tell me how GM, Chrysler and Ford can produce an equivalent or better car with these economic conditions. The claw-backs will only make things worse.
The departing leader of the UAW claims that the industry’s difficulties never rested with the union and its rich contracts. In his view, the crisis that led to the bankruptcies of GM and Chrysler and the near bankruptcy of Ford was strictly the result of an unexpected spike in gas prices and a recession that resulted from the mortgage crisis. He believes that the fault lay not with the union and not with the industry. Following this belief, he is encouraging his successor to begin clawing back the cost-cutting concessions that the union has granted the Detroit big three domestic automobile manufacturers now that these companies are moving toward profitable operations.
The problem is that these concessions did not do enough, at least from the results they seem to have produced. The concessions really got underway in 2003, as the union reduced its wages and benefits and transferred retiree healthcare costs from the automakers to an independent trust. Despite these concessions, union membership fell parabolically from 2003 to 2009, right along with the profits in the big three. In the meantime, German and Asian manufacturers continued to be profitable. These profits included profits in U.S. domestic manufacturing facilities as well. (See the Symptom & Implication, “Some industry leaders have lower returns than the smaller competitors” on StrategyStreet.com.)
The union is heading back to trouble and will take its unionized facilities with them. In an earlier blog (See Blog HERE), we described the hourly cost differences in wage rates between a unionized and non-unionized domestic facility. These cost differences are unsustainable in the longer term. No one can expect that an automobile plant with $73 dollar an hour labor will be profitable enough to compete with another domestic plant producing similar automobiles at $48 an hour. Despite recent troubles, the Asian manufacturers still command a premium price over their big three competitors for their products. So, Toyota and Honda get a higher price and produce with a lower costs. (See “Video #1: The Two Best Consultants in the World” on StrategyStreet.com.) Tell me how GM, Chrysler and Ford can produce an equivalent or better car with these economic conditions. The claw-backs will only make things worse.
Tuesday, July 6, 2010
How to Fail in a Market You Dominate
The cable T.V. companies are the big dogs in the television industry. So far, no one has been able to unseat them, though they seem to be trying to unseat themselves. The cable industry is losing customers to satellite T.V. and phone companies entering the video market. The rate of these customer losses is significant.
In 2006, the cable T.V. companies controlled nearly 69 million video customers. By 2009, that number had fallen to 63 million. (See the Symptom & Implication, “The industry leaders are losing share” on StrategyStreet.com.) The problem is both price and service. Many consumers see these cable T.V. companies failing on both Price and Reliability. (See “Video #14: Definition of Reliability” on StrategyStreet.com.)
The cable T.V. companies have responded to the incursions of satellite and phone companies with discounts. Most of these discounts come in the form of bundles of products, including two or three choices among T.V., internet and telephone. Some of the discounts came in the form of free services during a promotional period. Still, the prices for cable T.V. have gone up every year faster than inflation. The discounts slowed, but did not stop, customer defections. Customers felt gouged.
A more troubling failure has come with customer service. We have all heard that power corrupts. Well, the cable T.V. companies had great market power for a long period of time. That power didn’t corrupt them in the moral sense, but certainly caused them to ignore the common tenets of good customer service. They offered service on their terms. Customers could take it or lump it. And customers became resentful.
Of the two failures, one of high prices and the other of Reliability failures with poor customer service, the most troubling is the Reliability failure. People tend not to forget and forgive Reliability failures for a long period of time. General Motors will be living down its reputation for less than stellar automobile quality for a long time. The same fate awaits the cable T.V. companies. (See “Audio Tip #35: How Does a Company "Fail" in a Market?” on StrategyStreet.com.)
In 2006, the cable T.V. companies controlled nearly 69 million video customers. By 2009, that number had fallen to 63 million. (See the Symptom & Implication, “The industry leaders are losing share” on StrategyStreet.com.) The problem is both price and service. Many consumers see these cable T.V. companies failing on both Price and Reliability. (See “Video #14: Definition of Reliability” on StrategyStreet.com.)
The cable T.V. companies have responded to the incursions of satellite and phone companies with discounts. Most of these discounts come in the form of bundles of products, including two or three choices among T.V., internet and telephone. Some of the discounts came in the form of free services during a promotional period. Still, the prices for cable T.V. have gone up every year faster than inflation. The discounts slowed, but did not stop, customer defections. Customers felt gouged.
A more troubling failure has come with customer service. We have all heard that power corrupts. Well, the cable T.V. companies had great market power for a long period of time. That power didn’t corrupt them in the moral sense, but certainly caused them to ignore the common tenets of good customer service. They offered service on their terms. Customers could take it or lump it. And customers became resentful.
Of the two failures, one of high prices and the other of Reliability failures with poor customer service, the most troubling is the Reliability failure. People tend not to forget and forgive Reliability failures for a long period of time. General Motors will be living down its reputation for less than stellar automobile quality for a long time. The same fate awaits the cable T.V. companies. (See “Audio Tip #35: How Does a Company "Fail" in a Market?” on StrategyStreet.com.)
Monday, April 26, 2010
Using Finance to Reduce a Price
Dell is struggling to keep up with HP in the personal computer market. There is one part of the market, though, where Dell remains the clear leader, the small business market. Part of the reason for the company’s success in this market is its financing package. It is more generous with financial support than its competition. It may offer interest-free financing when companies purchase $25,000 or more of new computers. The company offers other creative financing deals. In one of these deals, a customer bought $30,000 of computers on a three-year lease plan that allows the customer to keep the equipment when the lease expires. Overall, Dell says that 22% of its small and medium-size business customers use Dell to finance their purchases. This 22% is up from 17% just two years ago. The company is gaining share by using its financing muscle, despite the chancy economic environment.
Offering financing, whether subsidized or not, is a way of extending the time a customer has to make its cash payment to the supplier. This is a form of discount. In our analysis of several thousand price reductions over the last twenty-five years, we have identified fifteen distinct forms of discount. The offering of financing is one of those forms. Many industries have relied on financing to build their businesses, even in difficult times. The automobile industry has used financing to offer attractive lease rates and payment plans to its customers using captive finance vehicles, like GMAC. GE has used its captive finance arm to finance customers in many of its product categories. In fact, GE has seen its captive finance arm grow into a lender in many markets where GE does not even compete as a supplier.
The home building industry has also used financing creatively. For example, last year Lennar offered special financing with no money down and a 3.625% mortgage rate for the life of its loans on purchases of Lennar’s newly built homes. Subsidized financing helped Lennar win new customers in an abysmal market. (See the Symptom & Implication, “Demand in the industry is falling” on StrategyStreet.com.)
Even small businesses use the extension of financing to build their businesses. Faryl Robin is a New York company that sells high-end women’s shoes. In the expectation that it would build its business with long-time customers in a tough economy, the company offered additional financing. In 2009, it offered retail customers with whom it had a long-term relationship an additional sixty days over its normal thirty day payment period for the customer to make its full payment for shoes she had purchased.
Offering financing, whether subsidized or not, is a way of extending the time a customer has to make its cash payment to the supplier. This is a form of discount. In our analysis of several thousand price reductions over the last twenty-five years, we have identified fifteen distinct forms of discount. The offering of financing is one of those forms. Many industries have relied on financing to build their businesses, even in difficult times. The automobile industry has used financing to offer attractive lease rates and payment plans to its customers using captive finance vehicles, like GMAC. GE has used its captive finance arm to finance customers in many of its product categories. In fact, GE has seen its captive finance arm grow into a lender in many markets where GE does not even compete as a supplier.
The home building industry has also used financing creatively. For example, last year Lennar offered special financing with no money down and a 3.625% mortgage rate for the life of its loans on purchases of Lennar’s newly built homes. Subsidized financing helped Lennar win new customers in an abysmal market. (See the Symptom & Implication, “Demand in the industry is falling” on StrategyStreet.com.)
Even small businesses use the extension of financing to build their businesses. Faryl Robin is a New York company that sells high-end women’s shoes. In the expectation that it would build its business with long-time customers in a tough economy, the company offered additional financing. In 2009, it offered retail customers with whom it had a long-term relationship an additional sixty days over its normal thirty day payment period for the customer to make its full payment for shoes she had purchased.
Thursday, April 15, 2010
Recycling of Capacity in a Tough Market
Sweden is a small country with a proud tradition of producing tough, high-end, automobiles. We call these high-end products Performance Leaders. In a hostile market, a Performance Leader usually suffers from scale disadvantages compared to the much larger industry leaders, whom we call Standard Leaders. Often, these Performance Leaders become acquisitions for the industry’s Standard Leaders. (See the Symptom & Implication, “The industry is consolidating through mergers and acquisitions” on StrategyStreet.com.) That was the case when GM bought Saab and Ford bought Volvo.
Both of these automobile industry Standard Leaders operated their Swedish acquisitions as separate companies. However, as GM and Ford themselves faltered in the market, they both decided to jettison their foreign high-end products. Spyker Cars NV, a Dutch company, has purchased Saab from General Motors. China’s Geely Automobile Holdings Ltd. has purchased Volvo from Ford. Both the Saab and the Volvo brands, then, will continue into the future.
These purchases illustrate the sometimes difficult workings of a hostile marketplace. (See “Video #10: Industry Consolidation and Recycling of Capacity” on StrategyStreet.com.) Both Volvo and Saab were failing as stand-alone Performance Leader competitors. But they did not go out of business. Instead, larger industry Standard Leaders bought them and kept their capacity in operation. This is a first example of the recycling of brands, but more particularly, productive capacity in an industry that already had too much of it. Neither GM nor Ford was able to make a go of it with these Performance Leader brands. Rather than shut the brands and their productive capacity down, however, both the Standard Leaders found willing buyers for the brands and their industry capacity. This is the second example of recycling of the same capacity. In each case, the buyer got the company and its capacity for a cost below the book value of the original seller.
We have found this recycling of capacity to occur in virtually every industry that goes through over-capacity and hostile times. Capacity will not go away until it cannot produce cash for any owner. The recent closing of the San Francisco Bay Area Nummi plant, once co-owned by GM and Toyota, is a clear indication that the plant can no longer produce cash as an automobile plant. It may finally stop producing automobiles forever. It is worth noting, however, that this was a GM automobile plant before it became Nummi. It had already been recycled once in the mid-1980s.
Both of these automobile industry Standard Leaders operated their Swedish acquisitions as separate companies. However, as GM and Ford themselves faltered in the market, they both decided to jettison their foreign high-end products. Spyker Cars NV, a Dutch company, has purchased Saab from General Motors. China’s Geely Automobile Holdings Ltd. has purchased Volvo from Ford. Both the Saab and the Volvo brands, then, will continue into the future.
These purchases illustrate the sometimes difficult workings of a hostile marketplace. (See “Video #10: Industry Consolidation and Recycling of Capacity” on StrategyStreet.com.) Both Volvo and Saab were failing as stand-alone Performance Leader competitors. But they did not go out of business. Instead, larger industry Standard Leaders bought them and kept their capacity in operation. This is a first example of the recycling of brands, but more particularly, productive capacity in an industry that already had too much of it. Neither GM nor Ford was able to make a go of it with these Performance Leader brands. Rather than shut the brands and their productive capacity down, however, both the Standard Leaders found willing buyers for the brands and their industry capacity. This is the second example of recycling of the same capacity. In each case, the buyer got the company and its capacity for a cost below the book value of the original seller.
We have found this recycling of capacity to occur in virtually every industry that goes through over-capacity and hostile times. Capacity will not go away until it cannot produce cash for any owner. The recent closing of the San Francisco Bay Area Nummi plant, once co-owned by GM and Toyota, is a clear indication that the plant can no longer produce cash as an automobile plant. It may finally stop producing automobiles forever. It is worth noting, however, that this was a GM automobile plant before it became Nummi. It had already been recycled once in the mid-1980s.
Thursday, March 18, 2010
Reliability in Tough Markets
The stats for the light vehicle sales in the U.S. during the month of February are out. Of course, Toyota’s sales shrank by nearly 9%. The surprising big winner was Ford, whose sales increased 43%, far more than anyone else. Its nearest competitor, Nissan, had a sales increase of 29%. GM’s sales increased by 12%. What may be driving this superb performance from Ford?
We often use the Customer Buying Hierarchy to evaluate a company’s performance against its competitors. The Customer Buying Hierarchy argues that customers buy Function, Reliability, Convenience and Price, in that order. Customers continue to cycle through their alternatives until they have chosen one supplier who offers something important to the customer that no one else offers. As we have noted before, in tough marketplaces, high Reliability is a hallmark of the best industry performers. (See the Symptom & Implication, “Competitors are emphasizing reliability in product quality” on StrategyStreet.com.)
Ford’s reliability is impressive today. (See the Perspective, “Reliability: The Hard Road to Sustainable Advantage” on StrategyStreet.com.) The National Highway Traffic Safety Administration measures the complaints it receives about automakers and their products. Their measure is number of complaints per 100,000 vehicles sold. Honda is the leader here, with about 64 complaints. Ford follows at 81, then Toyota at 91 and GM at 104. So, Ford’s quality seems to be somewhat better than Toyota’s today. That is at least one reason why Ford is in the ascendant, and while Toyota is falling off the pace.
We often use the Customer Buying Hierarchy to evaluate a company’s performance against its competitors. The Customer Buying Hierarchy argues that customers buy Function, Reliability, Convenience and Price, in that order. Customers continue to cycle through their alternatives until they have chosen one supplier who offers something important to the customer that no one else offers. As we have noted before, in tough marketplaces, high Reliability is a hallmark of the best industry performers. (See the Symptom & Implication, “Competitors are emphasizing reliability in product quality” on StrategyStreet.com.)
Ford’s reliability is impressive today. (See the Perspective, “Reliability: The Hard Road to Sustainable Advantage” on StrategyStreet.com.) The National Highway Traffic Safety Administration measures the complaints it receives about automakers and their products. Their measure is number of complaints per 100,000 vehicles sold. Honda is the leader here, with about 64 complaints. Ford follows at 81, then Toyota at 91 and GM at 104. So, Ford’s quality seems to be somewhat better than Toyota’s today. That is at least one reason why Ford is in the ascendant, and while Toyota is falling off the pace.
Monday, March 8, 2010
Pricing Myths
There is a price war going on in the retail liquor department. This is good news for those of us who enjoy a drink but bad news for the liquor companies.
It seems that consumers have been switching their purchases to less expensive brands of liquor during the recession. They are not drinking less, though. (See the Symptom & Implication, “Low end products are gaining share of the market” on StrategyStreet.com.) The volume of spirits sold in 2009 was up by 1.4%, but the revenue remained flat due to price discounting and consumers shifting to cheaper brands.
Diageo, the world’s largest liquor producer, is part of the industry’s problem. This company has been aggressive in reducing its prices with the two-fold purpose of holding on to their current customers and gaining share against other liquor producers. The falling prices are most obvious with vodka, tequila and gin. Some competitors of Diageo are refusing to go along with the price discount. For example, Patron, the maker of Patron tequila, has resisted the price cutting. (See the Symptom & Implication, “Some competitors seek price increases more aggressively than others” on StrategyStreet.com.) The CEO of Diageo believes that his discounting has helped the company gain market share and retain consumers. Still, his revenues are off compared to the previous year.
The equity analysts believe that price discounting will hurt Diageo’s brand equity. I disagree.
The history of many markets is replete with examples of branded goods who have had to discount during difficult times. Remember Marlboro Tuesday? How about the price wars in the 80s and 90s in beer, disposable diapers, fast food, tires, farm machinery, construction equipment, appliances and personal computers, to name just a few? Companies must respond to shifting consumer preferences and most price discounting.
An industry in overcapacity is certain to experience price discounting. It is true that this causes customers to become more price-sensitive, but that price sensitivity lasts only as long as industry competitors will discount against one another. (See “Video #11: What Ends Hostility” on StrategyStreet.com.) Once the period of discounting has passed, companies regain pricing power and branded equity is as strong as it ever was. For proof, consider the brand leaders in the industries cited in the previous paragraph.
Part of a company’s brand equity with consumers is the fact that the company is viewed as pricing “reasonably” with competitors. If a company will not price with rough equivalence to its competition, it also destroys its brand equity. Consider General Motors in the 80s, IBM in the personal computer market and Xerox in copiers. You don’t want a reputation as someone who prices high just because you believe that your brand is better than everyone else’s. That way leads to big troubles.
It seems that consumers have been switching their purchases to less expensive brands of liquor during the recession. They are not drinking less, though. (See the Symptom & Implication, “Low end products are gaining share of the market” on StrategyStreet.com.) The volume of spirits sold in 2009 was up by 1.4%, but the revenue remained flat due to price discounting and consumers shifting to cheaper brands.
Diageo, the world’s largest liquor producer, is part of the industry’s problem. This company has been aggressive in reducing its prices with the two-fold purpose of holding on to their current customers and gaining share against other liquor producers. The falling prices are most obvious with vodka, tequila and gin. Some competitors of Diageo are refusing to go along with the price discount. For example, Patron, the maker of Patron tequila, has resisted the price cutting. (See the Symptom & Implication, “Some competitors seek price increases more aggressively than others” on StrategyStreet.com.) The CEO of Diageo believes that his discounting has helped the company gain market share and retain consumers. Still, his revenues are off compared to the previous year.
The equity analysts believe that price discounting will hurt Diageo’s brand equity. I disagree.
The history of many markets is replete with examples of branded goods who have had to discount during difficult times. Remember Marlboro Tuesday? How about the price wars in the 80s and 90s in beer, disposable diapers, fast food, tires, farm machinery, construction equipment, appliances and personal computers, to name just a few? Companies must respond to shifting consumer preferences and most price discounting.
An industry in overcapacity is certain to experience price discounting. It is true that this causes customers to become more price-sensitive, but that price sensitivity lasts only as long as industry competitors will discount against one another. (See “Video #11: What Ends Hostility” on StrategyStreet.com.) Once the period of discounting has passed, companies regain pricing power and branded equity is as strong as it ever was. For proof, consider the brand leaders in the industries cited in the previous paragraph.
Part of a company’s brand equity with consumers is the fact that the company is viewed as pricing “reasonably” with competitors. If a company will not price with rough equivalence to its competition, it also destroys its brand equity. Consider General Motors in the 80s, IBM in the personal computer market and Xerox in copiers. You don’t want a reputation as someone who prices high just because you believe that your brand is better than everyone else’s. That way leads to big troubles.
Thursday, December 3, 2009
One Up, One Down, One Sideways
Three of the leaders of the automobile industry are presenting some interesting new stories. First, General Motors. The new Chairman of General Motors is Edward Whitacre. He is not a car guy. He came from the telecommunications industry, most recently as Chief Executive at AT&T. The Chairman recently asked the head of engineering at GM to call all the customers who had turned in their new cars under a recent quality program. This program offered customers a 60 day money-back guarantee. It allowed a customer who was unhappy with his automobile to turn it back to GM for a full refund. The head of the engineering group charged with calling the new customers noted that the focus on customer satisfaction was new at GM…and long overdue. This is a hopeful development for GM.
GM, for years, has had a poor reputation for reliability and durability. That problem seems slow to change, as witnessed by the recent quality survey by Consumer Reports. This survey criticized the company’s quality, finding it lower than the models from Ford, Honda and Toyota.
If the new top management attention to quality takes hold of the company, it is bound to improve its fortunes. It should move up with this development.
Fortunately for GM, its main competitor, Toyota, seems to be moving down, at least for now. Toyota became the leader in the automobile industry because of its reliability, but that reputation has begun to falter under the blows of recalls for rust problems and sudden acceleration in several models.
In a surprising upset, Hyundai Motors passed Toyota in J.D. Power & Associates survey measuring how many problems an automobile has in its first three months. A few years ago, Hyundai’s reputation for quality was equivalent to Madonna’s reputation for virginity. However, the Korean company instituted stringent measures to improve its quality, measures that seem to be paying great dividends today with their improved reputation and fast-growing market share. (See our blog on the quality changes at Hyundai HERE)
Ford seems to be moving sideways. On the one hand, its 2009 automobiles are getting good reviews from critics and the marketplace. The company is gaining market share. It also reported its first quarterly profit in four years. So, sideways, you ask? Yes, because Ford has a real problem with its cost structure. In October, the UAW refused to grant Ford the same contract terms that it had previously granted to Chrysler and General Motors. The most important part of the better terms that GM and Chrysler won was relief from the many work rules that restricted the work that an individual employee could do on the production line. These work rules make employees inefficient and idle. They reduce the company’s productivity. Not even Ford can face down a cost structure that is higher than those of its domestic and international competitors. Many of these competitors produce in non-unionized plants in the U.S., where work rules do not hinder productivity.
So, Ford is heading sideways until we see what it does to overcome this cost disadvantage. If the company follows the old GM approach of cheapening its fits, finishes and styling, it will lose market share and plunge into big losses. If, on the other hand, the company maintains the style and quality of its new cars, then it has a chance to address its longer term cost problems in ways that might be somewhat less disruptive to the UAW. (See the Perspective, “Achieving the Low Cost Position” on StrategyStreet.com.)
Ford’s situation is not promising. Many industry leaders, when faced with high and fixed labor costs in their industries, cheapen their products in order to eek out some profitability in the short-term. This always hurts them in the long-term. (See “Video #54: Cost Reduction by Winners vs. Losers in Hostility” on StrategyStreet.com.) The plight of the legacy airlines serves as an ample reminder of this tendency and its results.
GM, for years, has had a poor reputation for reliability and durability. That problem seems slow to change, as witnessed by the recent quality survey by Consumer Reports. This survey criticized the company’s quality, finding it lower than the models from Ford, Honda and Toyota.
If the new top management attention to quality takes hold of the company, it is bound to improve its fortunes. It should move up with this development.
Fortunately for GM, its main competitor, Toyota, seems to be moving down, at least for now. Toyota became the leader in the automobile industry because of its reliability, but that reputation has begun to falter under the blows of recalls for rust problems and sudden acceleration in several models.
In a surprising upset, Hyundai Motors passed Toyota in J.D. Power & Associates survey measuring how many problems an automobile has in its first three months. A few years ago, Hyundai’s reputation for quality was equivalent to Madonna’s reputation for virginity. However, the Korean company instituted stringent measures to improve its quality, measures that seem to be paying great dividends today with their improved reputation and fast-growing market share. (See our blog on the quality changes at Hyundai HERE)
Ford seems to be moving sideways. On the one hand, its 2009 automobiles are getting good reviews from critics and the marketplace. The company is gaining market share. It also reported its first quarterly profit in four years. So, sideways, you ask? Yes, because Ford has a real problem with its cost structure. In October, the UAW refused to grant Ford the same contract terms that it had previously granted to Chrysler and General Motors. The most important part of the better terms that GM and Chrysler won was relief from the many work rules that restricted the work that an individual employee could do on the production line. These work rules make employees inefficient and idle. They reduce the company’s productivity. Not even Ford can face down a cost structure that is higher than those of its domestic and international competitors. Many of these competitors produce in non-unionized plants in the U.S., where work rules do not hinder productivity.
So, Ford is heading sideways until we see what it does to overcome this cost disadvantage. If the company follows the old GM approach of cheapening its fits, finishes and styling, it will lose market share and plunge into big losses. If, on the other hand, the company maintains the style and quality of its new cars, then it has a chance to address its longer term cost problems in ways that might be somewhat less disruptive to the UAW. (See the Perspective, “Achieving the Low Cost Position” on StrategyStreet.com.)
Ford’s situation is not promising. Many industry leaders, when faced with high and fixed labor costs in their industries, cheapen their products in order to eek out some profitability in the short-term. This always hurts them in the long-term. (See “Video #54: Cost Reduction by Winners vs. Losers in Hostility” on StrategyStreet.com.) The plight of the legacy airlines serves as an ample reminder of this tendency and its results.
Monday, June 8, 2009
How 'Bout We Throttle This Golden Goose?
Now that GM has entered bankruptcy, there are many opinions crossing the wires about the likelihood of the new GM being a successful stand-alone company. I thought I might as well add to this crowd noise.
First of all, let’s consider the problems that caused the bankruptcy. The first, and least forgivable, cause was the management team. The management team, some years ago, gave away the store to the UAW. They promised wages, benefits and work rules that were non-competitive in the world market. They agreed to numerous, costly work rules, high wages, generous time off and extensive retiree benefits. Once they had made these concessions, management was afraid to face the prospect of a long strike that might have recaptured some of the company’s cost competitiveness. Effectively, labor costs became fixed.
The second source of the problem was the UAW or, more specifically, the leadership of the UAW. Once labor costs became fixed, they “owned” the golden goose called GM. They have watched for years as GM gradually ebbed away because of the high costs that the union contracts imposed on the company. They stuck to unbelievably ill-advised programs like the Jobs Bank, even while GM was hemorrhaging losses. Tell me. What did the leaderships of General Motors and the UAW study at school that led them to conclude that they could withstand an uncompetitive cost structure on the world stage? Who teaches that economics course?
Once management realized that it had put itself in an untenable cost position, it made changes to its products in order to reduce all the other costs of the product, other than wages. (See Video #47: Rules for Cost Cutting in Hostility on StrategyStreet.com.) Among these changes, the company created look-alike cars across its various platforms. It reduced the quality of its finished product so that the company developed a reputation among consumers for poor workmanship. This reputation caused the resale value of GM cars to fall below those of its international competitors and raised the cost of ownership for its customers. In another similar move, the company cheapened the interiors of its automobiles so that a customer sitting in a GM car found its quality of finish well below that of its competition. All of these, of course, were self-defeating cost reductions. This is a common phenomenon in tough markets. Common, but destructive. These changes caused GM to see its market share fall by about 1% a year for many years. The further the company’s market share fell, the more onerous was its labor cost structure with its high fixed costs.
So, O.K., the company has entered bankruptcy and most of its investors have suffered disastrous losses. Will GM emerge as a successful company? After all, the UAW has surrendered some of its high wages and some other rights, especially the right to strike for the next several years. And, the UAW is now a major owner of the new General Motors.
We have seen this movie before, however, with United Airlines. The labor unions, especially the pilots’ union, became major shareholders of United Airlines in trade for wage growth, as that company sought to restructure in order to reduce its cost structure. Union members in the airline industry, though, quickly figured out that a dollar of wages was worth a lot more to the union member than was a dollar of profits to all shareholders. High and uncompetitive wage demands continued, despite the fact that United Airlines was losing both market share and profits. Eventually, the pilots demanded, and won, such a high level of compensation that United Airlines slipped into bankruptcy. So much for the benefits of union ownership.
There is a simple test to determine whether GM will be successful as a stand-alone company. It is not a test of management capability or will. It is more a test of the insight that this saga of destruction has brought to the leadership of the UAW. The current contract between the UAW and General Motors is the size of a telephone book. If the company and its key union end up with a contract more the size of a college term paper, the odds of success are high. If the contract remains the size of a telephone book, we tax payers can plan to spend a whole lot more money on GM for a lot more years. It won’t succeed as a stand-alone company.
First of all, let’s consider the problems that caused the bankruptcy. The first, and least forgivable, cause was the management team. The management team, some years ago, gave away the store to the UAW. They promised wages, benefits and work rules that were non-competitive in the world market. They agreed to numerous, costly work rules, high wages, generous time off and extensive retiree benefits. Once they had made these concessions, management was afraid to face the prospect of a long strike that might have recaptured some of the company’s cost competitiveness. Effectively, labor costs became fixed.
The second source of the problem was the UAW or, more specifically, the leadership of the UAW. Once labor costs became fixed, they “owned” the golden goose called GM. They have watched for years as GM gradually ebbed away because of the high costs that the union contracts imposed on the company. They stuck to unbelievably ill-advised programs like the Jobs Bank, even while GM was hemorrhaging losses. Tell me. What did the leaderships of General Motors and the UAW study at school that led them to conclude that they could withstand an uncompetitive cost structure on the world stage? Who teaches that economics course?
Once management realized that it had put itself in an untenable cost position, it made changes to its products in order to reduce all the other costs of the product, other than wages. (See Video #47: Rules for Cost Cutting in Hostility on StrategyStreet.com.) Among these changes, the company created look-alike cars across its various platforms. It reduced the quality of its finished product so that the company developed a reputation among consumers for poor workmanship. This reputation caused the resale value of GM cars to fall below those of its international competitors and raised the cost of ownership for its customers. In another similar move, the company cheapened the interiors of its automobiles so that a customer sitting in a GM car found its quality of finish well below that of its competition. All of these, of course, were self-defeating cost reductions. This is a common phenomenon in tough markets. Common, but destructive. These changes caused GM to see its market share fall by about 1% a year for many years. The further the company’s market share fell, the more onerous was its labor cost structure with its high fixed costs.
So, O.K., the company has entered bankruptcy and most of its investors have suffered disastrous losses. Will GM emerge as a successful company? After all, the UAW has surrendered some of its high wages and some other rights, especially the right to strike for the next several years. And, the UAW is now a major owner of the new General Motors.
We have seen this movie before, however, with United Airlines. The labor unions, especially the pilots’ union, became major shareholders of United Airlines in trade for wage growth, as that company sought to restructure in order to reduce its cost structure. Union members in the airline industry, though, quickly figured out that a dollar of wages was worth a lot more to the union member than was a dollar of profits to all shareholders. High and uncompetitive wage demands continued, despite the fact that United Airlines was losing both market share and profits. Eventually, the pilots demanded, and won, such a high level of compensation that United Airlines slipped into bankruptcy. So much for the benefits of union ownership.
There is a simple test to determine whether GM will be successful as a stand-alone company. It is not a test of management capability or will. It is more a test of the insight that this saga of destruction has brought to the leadership of the UAW. The current contract between the UAW and General Motors is the size of a telephone book. If the company and its key union end up with a contract more the size of a college term paper, the odds of success are high. If the contract remains the size of a telephone book, we tax payers can plan to spend a whole lot more money on GM for a lot more years. It won’t succeed as a stand-alone company.
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