Tuesday, December 16, 2008

49. Bailout? We don't need no stinking bailout!

I figured I had better touch on this before it becomes old news what with President Bush considering using the TARP funds for an auto bailout as we speak.  By the way, my wife warned me that I shouldn't write really long entries as people wouldn't have the time or desire to read them... I told her that that was exactly the point of minutiae, it's all the details - and that's how I am!
A few months ago I had a strategic international business class where I had the arduous task of writing a weekly essay on current events as they pertained to international business.  I found an article from MSNBC regarding GM’s efforts to cut costs to stave off the serious dangers that it was facing.  It’s funny how hindsight really is 20/20.  This article was from July 15th – long before they would be faced with the major issues that they now face.  I have included some analysis from that essay.  It basically had to do with the fact that GM needed to cut costs or increase sales in order to have the cash necessary to pay its bills – it was the proverbial writing on the wall.

According to the text from one of my previous classes, a business can make money in only a few ways.  Logically, two of the most effective ways to manage this are to increase revenue and to lower costs.  As with personal finances, these management tools are fairly simple to understand – either you need to make more money or spend less.
There are several strategies for increasing revenue.  Basically the goal would be increase sales of your good or service, raise the price, or expand your company footprint.  Several volumes have been and could be written on any one of these approaches. A company will usually try to increase sales or raise their prices before they look to increase their footprint – assuming they are fully expanded into their domestic market.  This is usually due to many of the hurdles that have to be overcome as a company expands its global footprint.  Some companies may need to expand globally but are constrained by various internal and external forces.  Externally they might have a corporate structure or ownership that isn’t permitted in a different market.  Much like some government controlled companies from China find it hard to expand into Africa.  (Behar, 2008) [This is a really cool article about CHINA’S role in AFRICA from Fast Company magazine and is really worth reading]  They might also be constrained internally by lack of funds, no strategic direction, management incompetence, or a myriad of other items (sound's vaguely familiar).
At first brush I didn’t think that this article really had much to do with the assigned reading for the week.  However as I read this and ancillary articles the picture it painted was pretty clear.  GM has clearly become a huge international company.  In many of its markets outside of the U.S. it is a dominant force in the automotive industry.  Holden Motors, in Australia, continues to have the top selling cars for the last 35 years – they are owned by GM.  Opel in Europe is a brand that is found along every curb and on every street – also a GM brand.  Obviously GM had some well defined global strategies for entering many of the markets around the globe.  But what happens when a global company has to figure-out how to “reenter:” its own market?
Much of the success that GM has experienced outside of the U.S. comes from the fact that it is just that – outside the U.S.  Many countries where they are growing and continue to have success do not have the same regulations and “red-tape” that is found in the U.S.  Labor unions, which had their day in the sun to benefit the American worker, are seen now as a major burden.  I could write a enormous blog entry about the Labor Unions and how they have outlived their usefulness in the American Market Economy.  They had their moment…and now it is gone.  It’s interesting to breakdown the COSTS that the Union places on the Big Three.  Many of the costs faced by GM are pension and healthcare for their retired employees (you know, the guys that made the CRAP that made them so famous during the 70s and 80s…yeah, those guys, they still pay for them!).  Much of the strategic moves they are making now are an attempt to mitigate their overhead costs in the domestic market.
In essence they have to determine how to stay in business in the market that they call home.  The landscape of the U.S. has changed such that there is a completely different culture than when they started here.  Wall Street is so much quicker to punish a company than ever before.  They will need to manage their plan so that they can not only thrive in the current market but also adapt to the new culture.  Seems to me that it would be beneficial to them to treat the U.S. as a newly opened market and start over with a new entry strategy in a “new market”.  For some reason this strategy is working great for Honda, Toyota, VW, Mercedes, and other foreign companies that have moved into the US - bringing with them lostsa jobs that pay less than GM, Ford, and Chrysler.
As we now know they have gone to Washington twice to beg for money.  The first time didn’t bode so well for them as they walked in assuming that they still had the stature that they once did (GM acts like it's 1980 and they still have 50% market share when in actuality they only have 20% - and that's a tie with Toyota!)  The second time they entered, hat in hand, in graphic images of humility.  They were sent away the first time because they didn’t have any plan to present as to what they were going to do with the money – nor did they have any idea how they were going to compete and become viable in the new market.  I bash on the strategic plan, or lack thereof, by the upper management of GM and Chrysler.  But Lee Iacocca doesn’t think they should be booted just yet – and he should know!  Since the first trip and even before, there have been many people – successful businessmen like Mitt Romney – that have publicly opposed the bailout, er, I mean bridge loan/bill thingy.  But why don’t our elected REPRESENTATIVES listen to us?  If they really listened they would see that there aren’t many people who want to risk our tax dollars on poorly managed companies – early pollmost recent poll.
But why are so many people opposed to this and not the financial bailout?  I think it is for many reasons but a big part of it is the fact that the Big Three are three of the Biggest Whiners in the country.  Not to mention the fact that Chrysler is privately held by Ceribus Capital.  But they are continually strong-armed by the biggest union in the world, the UAW.  And every time they get kicked while they are down by the UAW’s arm twisting (mixed metaphors, I know) and they end up conceding just so they can continue production, fully aware of the fact that they will have to do it again in a few month’s time.  They continue to cry that their woes are the product of the economic downturn, but I think that it’s just the downturn that exposed the festering sore that was being covered by bandaid after bloody bandaid.  Let’s just see if the newly appointed CAR CZAR (just what we need, someone else who will get into a pissing contest with Ron Gettelfinger) will have any power to make the changes necessary to keep the big three from crawling back a third time.
I could go on, but I need to finish working…at least I don’t cost my company $73 an hour!


  1. What? Most of it made seance....but then again the black and white in a dark Christmas tree lit room maybe i didn't really get it.....i will read it again 2morrow, i'm going sleepy cross eyed. night.

  2. Great analysis, Heath. But, what in the world are doing working at almost 10pm? Makes me not look forward to become a salaried man. . . :)

  3. Would bankruptcy be a bad thing for the Big3? I've heard warnings that nobody would buy a car from a bankrupt company. . .there's some truth to that, but my first reaction was maybe I could get a really good price on a GM truck. . .