THE ENTERPRISE
A DISMAL 1Q '09--NOW IS THE TIME TO REDUCE COMPLEXITY--WHY WON'T MORE PEOPLE LISTEN
Ever since I started writing THE COMPLEXITY CRISIS I have been encouraging everyone to reduce complexity. It is a wonderful cost reduction technique and refocuses and entire organization on the products and customers that are profitable and valuable. Now, when everyone seems to be cutting staff, complexity reduction will reduce the amount of work for the staff remaining--so they can work on the "good stuff." I expect the 1Q of 2009 to be dismal. Retailers are dropping like flies and each one takes some suppliers with them. Industrial companies are reeling for capital expenditure cutbacks as companies scramble to met covenants in their lending agreements. Exporters are wounded by the recovery of the dollar abroad, and the fact that Europe and other developed markets are also in recession.
THERE IS NO BETTER TIME TO GET RID OF UNPRODUCTIVE PRODUCTS AND UNPROFITABLE CUSTOMERS
Complexity is a huge, hidden waste. Worst of all, it consumes precious time and money that could be spent supporting winning products, serving the best (most profitable) customers and INNOVATING which is the true, best avenue to profitable growth. When everyone is "hunkered down" a company that can stay aggressive, innovate and serve customers will nearly always gain share. And those who lose the share will be slow to retaliate, since they will attribute the loss to the down market/economy.
DELL--ADDING COMPLEXITY IN PLACE OF INNOVATION
Dell finally decided to get innovative. The problem they have encountered is that unlike Apple, they can't quite do it the same way. So Dell chose colors and designs...and it appears to be right at the wrong time...into a down, price sensitive market. Deliveries will certainly suffer. Service will falter, because forecasting a wide array of colors and patterns is very tough. Apple, on the other hand, does many fewer, kills off products before they have fully matured, and seems to find ways to add "cachet" when there appears to be no easy way to do so. Is it Steve Jobs alone? I think not. But it is certainly his spirit and his incredible demand to always find something special. There's a lesson here. Innovation is hard. Great innovation is very hard; and very valuable.
FOR A DOSE OF COMMON SENSE REALITY
You don't have to read anything on this one. Simply go to this web site and play the video. It won't make you feel a lot better, but you'll understand how this economic crisis is being expertly handled. (NOT)
http://hotair.com/archives/2008/12/02/video-fred-on-the-economy/
A CAR CZAR FROM THE GOVERNMENT--WHO ARE WE KIDDING? (See G. Will's column below)
Is this the same government (Congress) that can't seem to get out of its own way, and still spends money like a drunken sailor on shore leave? And it is going to monitor the US auto companies? Are you kidding me? Congress is playing to its constituencies, and playing politics. There is no way it can provide the kind of oversight the US auto industry needs. Frankly, neither can Paul Volcker. First he's 81 and this is a demanding job. Second, his expertise in the area of economics and finance is far more valuable to the country and President-elect Obama than to the car companies. A "car czar" may be a good idea. Sort of like a bankruptcy judge/referee without the negative connotations. But it has to be an astute, tough-minded businessman, and someone who has the right experience. Jerome York is one name that comes to mind. He's the right hand man for Kirk Kerkorian, has been on the GM board, worked closely with Chrysler as an investment, and had involvement with auto parts makers too.
BAIL OUT OR AUTOPSY--LET CERBERUS & THE UAW PAY
Cerberus owns most of Chrysler. Let Cerberus fund it--or put it into bankruptcy. Chrysler as is, is "dead," but it just doesn't know it yet. It can only continue is a totally different form and Cerberus is far more qualified to figure out what that is than the US government. And they have a lot of others money at stake--and their reputation, such as it is. Sell off the pieces that are worth anything (JEEP, Dodge, and the C300) and shut down the rest. Potential buyer: Mitsubishi, who has shared parts & pieces in the Chrysler cars for years.
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GEORGE WILL GETS IT RIGHT--THE LEADER IS CRITICALLY IMPORTANT
Too bad Ford's CEO couldn't also have led the Big Three's other two
Thursday, December 18, 2008 3:40 AM
By George F. Will
Designed by architects from Skidmore, Owings and Merrill, the New York company that created many icons of postwar modernism, Ford's headquarters building has the sleek glass-and-steel minimalism that characterized up-to-date architecture in the 1950s, when America was at the wheel of the world and even buildings seemed streamlined for speed. Ford's building opened in 1956, a peak of American confidence -- one year before Sputnik shook Americans' faith in their technological supremacy and the Edsel shook their faith in the acumen of corporate America grown slothful from complacency.
Today the building is home to high anxiety. Yet CEO Alan Mulally, a boyish 63, seems preternaturally pleased, in spite of his recent participation in Congress' ritual pillorying of the leaders of the so-called Big Three auto companies. Ford took a full measure of the abuse for the failures of "Detroit," while asking for none of the money urgently sought by General Motors and Chrysler, aka the "Too Big One, and a Fraction."
Twenty-seven months ago, Mulally, who probably thought he had seen the worst that events could throw at his business career, came to Ford from Boeing. There, when civilian aviation became collateral damage of 9/11, he presided over downsizing the work force from 127,000 to 52,000. One of his first moves at Ford was one of the great gambles in U.S. business history: He borrowed $23.5 billion, most of it secured by almost all of Ford's assets, even including the intellectual property in the company's blue oval logo. Today, Mulally says "Ford would have adequate short-term liquidity" even if throughout 2009, industry sales levels were worse than in October 2008. That is why Ford is not asking Congress for money. It is asking only for access to money if there should be what Mulally delicately calls "a significant industry event."
By that he means GM filing for bankruptcy, which would, he believes, threaten many of the nation's 3,000 parts manufacturers, which already are owed $13 billion from the three domestic companies. Ford uses 80 percent of the suppliers GM and Chrysler use, and 25 percent of Ford's highest-volume dealers also own GM and/or Chrysler dealerships. That is why Mulally appeared like a good soldier before Congress with his GM and Chrysler counterparts as those two pleaded for cash to avoid bankruptcy. Mulally says bankruptcy, which has become almost routine for airlines, would be fatal for a car company: Passengers will fly on an airline undergoing reorganization in bankruptcy because their tickets are short-term transactions, whereas customers cannot be confident that a car company in bankruptcy will be around to honor its warranties years hence.
While Mulally was at Boeing, where he was responsible for developing what became the very successful 777 aircraft, he brought to Seattle for consultation the Ford team that had made the Taurus the best-selling car in America for five years. It, however, became stale, was supplanted by Toyota's Camry and was discontinued in October 2006. It has, however, come back and is being revamped as part of plans to build all the company's products on a few "platforms" --power-trains, underpinnings, suspension systems. Many of these platforms are used in cars that are consistently profitable in the European, Asian and Latin American markets.
Having reduced its work force by 50 percent in three years, by February Ford will have cut salaried personnel costs by 40 percent. Most important, it is now on a path to prune, soon, almost half of what have been 76 nameplates. Having shed Aston Martin, Jaguar and Land Rover, it seems to be moving toward the sale of Volvo and of what remains of its reduced investment in Mazda. Soon the company will consist of Ford, Lincoln and, perhaps, Mercury, with consolidated dealerships (currently 3,790, down from 4,396 three years ago).
Total industry sales in America this year -- about 10.5 million, down from 17 million in 2005 -- are, on a per capita basis, the lowest since World War II. There is zero likelihood of industry sales sufficient for three U.S. companies to share them profitably with "transplants" -- factories producing cars with foreign nameplates. A 1979 bailout enabled Chrysler to survive to be a problem today. It almost certainly will not survive. So the task of the proposed "car czar" -- silliness on stilts -- would be to supervise the pruning of GM's nameplates and dealerships. Anyway, the most qualified person for that ill-conceived and unenviable position already has a more promising job, as Ford's CEO. George F. Will writes for the Washington Post Writers Group. [email protected]
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DOUBLE STANDARD--CHARLIE RANGEL & THE GANG
Old-time politics. Once a Congressman gets elected, s/he is golden. Incumbents get reelected about 95% of the time. But they don't get paid enough to support a life with a place in Washington, DC (a very expensive city) and a home with a family back in their district. Thus, the temptation to find other ways to make money is great. The temptation to help family members is even greater. Greatest of all is the temptation to use the power and influence a long time member of Congress accumulates. But old Charlie has stepped over the line way too often. Owning multiple rent-controlled condos in NYC; failing to pay taxes on income from a Condo in the islands; paying his son 5-10x the normal fees for web work; and so on. Someone has to stop this, and he is the perfect example to make. Will anyone? I doubt it. Should they? Damn right. And they should also raise the away from home living allowances for members of Congress so the junior ones don't have to room together like college kids. Something has to stop this insidious trend.
CREDIT CARD DEFAULTS LOOMING LARGE
The next credit crisis will be in credit card debt. With the average American carrying about $8000 of this high interest debt, a downturn, job losses, etc. will make a lot of that delinquent and ultimately unpaid. it is a big number. Not nearly as big as the sub-prime mortgages, but a real burden on stressed consumers. The banks carrying it will feel the pain, and that will further reduce their ability to lend for an economic recovery.
LIQUIDATIONS UNDERMINE RETAIL AS MANY CHAINS CUT BACK OR CLOSE UP SHOP
You only have to pick up any newspaper or go on the Internet, but here is a listing to show how bad it is. I didn't check each one of these for absolute accuracy, so some may now have changed (the list is about 30 days old, with only a few new additions)
--Circuit City in Ch. 11 closing many stores--Bombay Company in liquidation--closing remaining stores
Ann Taylor 117 stores nationwide are to be shuttered --Lane Bryant, Fashion Bug ,and Catherine's to close 150 stores nationwide
-Eddie Bauer to close 27 stores and more after January --Cache will close all stores --Talbot's closing down many stores
--J. Jill closing all stores --GAP closing 85 stores
-Footlocker closing 140 stores more to close after January
--Wickes Furniture closing down --Levitz closing down remaining stores
-Zales closing down 82 stores and 105 after January --Whitehall Jewelers closing all stores
--Piercing Pagoda closing all stores --Disney closing 98 stores and will close more after January.
-Home Depot closing 15 stores 1 in NJ (New Brunswick) and slowing new store openings--Macys to close 9 stores after January
--Linens and Things in liquidation and closing all stores --Movie Gallery Closing all stores
-Pacific Sunware closing stores --Pep Boys Closing 33 stores
-Sprint/ Nextel closing 133 stores --JC Penney closing an undisclosed number of stores after January
-Ethan Allen closing down 12 stores. --Wilson Leather closing down most or all stores
--Sharper Image in liquidation and closing down all stores --K B Toys in Ch. 11 and moving to liquidation sales, closing over 300 stores
-Dillard's to close an undisclosed number of stores
-Sears/Kmart will probably hang on for another year, selling real estate to compensate for terrible retail results. One brilliant move--reinstating Layaway sales--could help them do better than in the past--for Christmas anyway. The next smart move--try to sell it in pieces--the hard goods business & brands are still valuable!
With this massive reduction in retailing, there will be similarly massive liquidation sales. These sales will take business away from surviving retailers. They will also put price pressure on surviving stores. Vendors will fail as a result of customer failures. Shopping centers will fail (see below). Jobs will be lost by the thousands. Developers will sit with empty storefronts. Municipalities will collect much lower sales taxes. And so on.
GENERAL GROWTH PROPERTIES MASSIVE DEBT LOAD
GGP--One of the largest shopping center operators is perilously close to filing bankruptcy, under a staggering debt load ($27 Billion) used to expand via acquisition. They can't repay the current installment and can't sell properties fast enough or for enough money to repay the next installments. The entire country, indeed, perhaps the entire world has been using too much leverage. Borrowing sums in vast multiples of the underlying values of properties and assets. The USA and much of Europe simply must "de-lever" back to far more conservative levels of debt.
SPEED LIMITS HAVE A PURPOSE
Decades ago, banks had strict rules as to how much "leverage" they could use--and had to keep reserves in a reasonable relationship to what they lent on mortgages and other commercial loans. These rules were like speed limits on highways. Not everyone follows them exactly, but they set a level of speed that is acceptable vs. the risk involved. Then, sometime after Glass-Steagall act was repealed (in the mid-1990's) NO speed limit was put in its place. It was assumed that "prudent lenders" would watch how far, and how fast they went. Guess what. They didn't. It was like someone said, with no speed limit, go as fast as you can. It was more like a race to see who could go the fastest, loan the most and the highest leverage.
When this worked, the returns were great. If you didn't have to put any money down, the gains were an almost infinite return on the capital you invested (which was near zero). That was until property values started falling. Interest rates were so low that borrowing costs were almost negligible too. Until the borrowers could no longer repay the loans when they came due.
Then all hell broke loose, and that is where we are now. So now the government is going to spend us back to prosperity, and print however much money it takes. Of course that will lead to an even more enormous budget deficit, and probably a healthy dose of inflation. And with interest rates already so low, it will have to raise them to stem inflation, which will slow down the recovery, so then more spending will be needed. But by golly, we can make this change happen--yes, we can. Or, maybe not. Whichever?
WHAT TO DO? FIRST, FIND THE RIGHT LEADER(S).. THEN...
Go back to fundamentals: Cut costs hard. Sell hard--the best products to the best customers. Serve those customers. Conserve cash--without it, you are "done for." Now go back and cut costs again. And when you have cleaned out the complexity, devote that unnecessary wasted time and money on some really innovative new products. As we used to say, 2009 will be a "gritter" (make you grit your teeth a lot). The people and companies that do the right things will come out on top when the recovery comes--and one will come--but meanwhile, "grit away. "
Best, John
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