bizzXceleration: Performance, Value and Profit

Three weeks ago today GM filed for bankruptcy, taking an iconic company into a new chapter of its history along with its industry. GM wasn't just A company, or the world's largest manufacturer at one time. It was THE corporation. Following the filing everybody, and we mean everybody, published long and extended commentaries including the Economist, Business Week, the NYT and the WSJ. And they all said, despite being well-written, well-research and worth reading, the same thing: we saw it coming. The questions then become what lessons are to be learned ? The gist of all these commentaries was that we saw the natural, evolutionary consequences of decline and denial stretch out over decades. In some ways one of the best was the Charlie Rose interview, , where Paul Ingrassia (ex-WSJ Detroit Bureau Chief) along with Ed Altman (dean of bankruptcy) and John Stoll (of the WSJ) basically said, paraphrased, "it's a darn shame that the government had to do for Detroit what it couldn't do for itself". And further commented that the Auto Task Force did an exemplary job that was thorough, complete and rigorous and further highlighting the great irony that a Democratic Administration did what a good Private Equity firm is supposed to do.

More Great Ironies: Where Were the Naysayers When It Mattered?

We found most of the analysis to be spot on but were greatly amused at the "we saw it coming" argument that was part of all of them. Now there's been a great deal of critiscism of the of the industry for some time in the business press, to be fair. But nowhere do we recall the rather damming indictments about executive failure and the triumph of ostrich-thinking that we read. In some contrast we're on the public record for almost two years here and almost six years in writing that the Industry was on death watch. In fact we'd argue that the hand-writing has been glowing on the wall for over three decades even though Ingrassia himself wrote a book on Detroit's recovery and revival in the mid-'90s (Comeback: The Fall & Rise of the American Automobile Industry). The graphic will take you to a downloadable PDF file of all our prior blog posts plus selected readings and provide a great deal of background that we think is worth your time. In it we address market analysis and business strategy, the marketspace, product design and development, manufacturing and the industry management system as well as providing some integrated assessments of the overall status of the industry and individual players. Partly as back up but mostly to put all the machinery all in one place.

A Blueprint for Failure

Ten years ago was the height of the Tech/Telecom Bubble yet earlier this month Nortel also filed for BK. There are some real lessons beyond one company in GM's demise and the Telecom industry reinforces them. What we're seeing and saw was a failure across the board, partly thru a failure of executive leadership. If you were to take the major components of the accompanying graphic and rank the Detroiters from 1-10 for each one we think a 3 would be generous, at best. You could make a good case for much lower rankings. That's what makes GM's failure sad, poignant and a lesson. We've several friends who worked for GM and they thought this day would never come. They further objected to the idea that government had to do this - it was the companies and industry's responsibility. But they couldn't...and not because they weren't a lot of smart folks who didn't see this all coming for years. To quote Peter Drucker, who made his bones by channeling Alfred P. Sloan, in his magnum opus (Management: Tasks, Responsiblities and Practices) in his section on Managerial Organization, specifically in the chapter on "New Needs and New Approaches":

" Finally, GM has been a "managerial" rather than an "entrepreneurial" business. The strength of Sloan's approach lay in its ability to manage, and manage superbly, what was already there and known. GM has not been innovative - altogether the automotive industry has not been innovative since the days before WW1".

That was written in 1973, when the Japanese were first putting the glowing handwriting on the wall, next to the sales and marketshare reports showing the accelerating decline of the industry. The industry failed because of organizational sclerosis, or organosclerosis. It put satisfying internal political agenda ahead of the need to keep creating value and made its decisions in detachment from the marketplace. The Telecom Industry has been facing one perfect storm after another since 1999 and as a result Nortel, Lucent, Alcatel, et.al. are all in trouble and have been for decades; and for the same reasons. A failure to adapt because of the dominance of internally focused decision-making. THAT is the real lesson that should be drawn.

The Next Tsunami

And it's not over yet. In fact in some ways it may be just beginning. In the readings section you'll find some selected excerpts on GM's bankruptcy that's worth digging into in our opinion. And in the PDF file you'll find even more extensive readings excerpts that speak to each of the major components as well. The questions post-BK now become what's next ? Where are they going, how are they going to get there and who's going to lead the charges ? But a three-decade plus decline and denial thru a failure to adapt was against an old world. Also in the readings section you'll find other excerpts pointing to the next Tsunami that's beginning to build up, and has been building for years as well. That Tsuanami is a massive worldwide re-structuring of an industry that is vastly over-capacity and one facing rapidly accelerating capabilities in new, foreign competitors. Some years back we were walking thru the parking spaces after a concert and saw a Mercedes lined up, strangely in serial order, a Lexus, Honda and Hyundai. There was little or no difference in fit or finish, none discernible in functions and little in features. What happens when a foreign auto maker can deliver a quality car with all the bells and whistles for 1/2 the price ?

Lessons in Resilience and Adaptation

The lessons of GM, Detroit and the Telecoms are that you can't just focus on today's challenges or keep on doing what you've been doing. You've got to balance that with an eye toward the future. That is, each players in each line of business has to have an answer for the "Theory of the Case". In other words what are you going to do about strategy, business model, marketing and sales, manufacturing, infrastructure, logistics and product design and development now, in five months, in five years or in ten. Sadly, it's not clear that any of the domestic manufacturers has answers for any of those challenges.

More sadly it's not clear that many other industries or companies do either ! Therewith ended the sad and dangerous lesson for this post.

UPDATES:

 The world is full of surprises, synchronicities and serendipities. On the same day we put up this post Bloomberg covered a deep-seated re-thinking Toyota, Booz had a very thoughtful piece about long-term structural changes and we discovered another wonderful BCG piece on business response asking what happens after you apply the meat-axe to emergency cost costs; in other words it ain't working, now what do you do. Taken all together these three pieces, each deserving it's own discussion and dissection in separate posts, form a whole that reinforce the fundamental messages about enterprise resilience and leadership we're trying to communicate.

1. Toyoda Asks How Many Times Toyota Errs Emulating GM Failures
2. The Best Years of the Auto Industry Are Still to Come
3. Collateral Damage: Function Focus—Leaders Have Made the Quick Cuts—Now What?  

Continue reading "Detroitosaurus: Iconic Death vs. World Industry Futures (Updates)" »

Posted by dblwyo at 10:19 AM | Permalink | Comments (0)

There is of course the old curse of may you live in interesting times which takes on new weight day by day, especially if you live and work around Detroit.Challenges are one things however but crisis that threaten fundamental disruption and, on the downside, existence need a new classification. The Cold War was, literally, an existential threat to the US so we can't go that far and we end up with labeling what's going on here and there as existential crisis. The interesting thing about Chrysler and Detroit, as well as the Finance Industry (lest we forget) is that the level of denial of how serious this is and the long-term structural consequences that are going to result. The Auto Industry as we know it is forever changing right in front of you eyes but as late as this time last year the executive leadership was talking about this as if it were just another cyclic downturn. Let's hope we don't evolve from crisis to threat ala the Cold War ! The "funny" thing is that all of this has been visible not just for years but for decades. If you've never read Halberstam's The Reckoning by David Halberstam you'll find it strangely prescient. Better yet at least start by reading some of the book reviews on Amazon.

Refresh: in the last section we decided to add a couple of graphics to conceptualize the real future challenges facing the industry - or at least to frame them. Details to follow....see below.

From Publishers Weekly

Powerfully developing his thesis that the complacency and shortsightedness of American workers and their bosses, especially the automakers of Detroit, have led to a decline of industrial know-how so critical that Asian carmakers, particularly the Japanese, have virtually taken over the market, Halberstam tells in panoramic detail a story that is alarming in its implications. Immediately ahead lies a harsh scenario that will see America's standards of living fall appreciably only sacrifices will restore our "greatness." This lengthy book with its skilled, dramatic interweaving of two little-known stories the inside struggles of the Ford organization (including the firing of Lee Iacocca) in the 1970s and the growth of the Japanese automotive industry, notably Nissan, since the 1950scompletes the trilogy Halberstam began with The Best and the Brightest and The Powers That Be. Here is fresh and crucially meaningful material researched with notable thoroughness, replete with graphic portraits of top American and Japanese industrialists competing blindly on the one hand and with brilliant cunning on the other. The book is among the most absorbing of recent years, every page contributing to the breathtaking picture of an America that is going to learn to retool or else. 200,000 first printing.

 We were struggling to pass on from Fiatster and the Industry but the news over the weekend kept accumulating for one thing, we ran across a bunch of interesting related stuff and we noticed that the big picture implications aren't being much discussed. So in the readings you'll find excerpts with current updates on Chrysler, Fiiat and the re-shaping of the global auto industry as well as the consequences and lessons more broadly. But we look beyond that to raise and reinfoce some of these other strategic issues. Two in particular: 1) despite some marginal improvements in quality and design Detroit has yet to repair the damage and make cars that offer value, appeal or are credible and 2) they've manuvered for decades to avoid dealing with the issues inside the industry and outside, particular energy usage and mileage, which now has severe economic and national security implications as well as putting them behind the eight ball for long-term futures.

The Public Image of Detroit's Cars

Let's start with how the customer's view things by creating a chart from the most recent Consumer Reports Brand Image surveys. The numbers just about speak for themselves, don't they ? Toyota and Honda continue to dominate though Ford and Cadillac have improved their images and positions considerably while Mercedes continues to suffer the fallout from the last several years of poor quality (and likely a halo effect of it's failures with Chrysler). Nonetheless the gaps are huge between the top and bottom of the Strongest let alone from there to the Weakest . Perhaps the saddest number in that whole table is Saab's where under GM's anti-stewardship one of the world's best brands, strongest innovators and great values has been nearly destroyed. Let's hope someone comes along who realizes what jewels are left and revives it.

Realities Behind the Images

Bear in mind, as Consumer Reports emphasizes, that brand image is just that whereas the underlying realities may be changing. In fact in the last "decade" some parts of Detroit have made some progress on some models and issues. But not all...and unfortunately a few years progress does NOT recover three decades of neglect, fit and start progress and avoidance and denial. But sooner or later the Piper demands his pay and that day is here. Which leads us to this table, which again almost goes without words on it's own merits. Take a careful look, beyond the obvious of who's on the left and right, the huge differences in the scores, etc. Notice for example that Hyundai somehow found it within themselves to get on the top of the top while Ford's mainstay (or one of them) an F-pickup is just the opposite. Sad, sad, sad....worse stupid, self-inflicted and unnecessary.

Consequences

This stock chart dates from last summer since we're to lazy to update the comparisons and to ill to want to see a current one. But the key points remain. Notice that Ford had a great runup in the '90s on the basis of the Taurus - a car that it failed to keep current, updated or relevant. For a few brief shining moments it actually displaced the Honda Accord as the best-selling sedan in America. A market niche that should have been, and must become, the bread and butter of the future industry. Why ? Because a) it didn't suit the internal politics and agenda and b) Ford retreated to SUVs, pickups, etc. and abandoned the field to the Japanese and now the Koreans. If you don't believe us check out Taurus: The Making of the Car That Saved Ford by Eric Taub. And for a previous discussion of cause and consequences let us point you toBusiness Performance III(Readings): Sad Stories, Good Stories & "Fixes".

Past Imperfect to Future Potential

All of that is Detroit as it was not as it either will be or must be. It's also about the internal characteristics of the industry as it is in terms of market segments, production methods, dealer networks etc. etc. But where's our 50 MPG car ? New materials and ideas ? New approaches to ordering, delivering and manufacturing ? All things we know are feasible, probably affordable and just not workable with the current culture and attitudes.

We've talked before about the Theory of the Case, i.e. what core logic drives performance in each issue/business segment over the key timeframes. Well in that context we're only pointing out the the challenges and breakdowns in the short- and intermediate-terms. What about the long-term and structural change ? That doesn't appear to be on the horizon ! We also talked about Drucker's Principles of Management which called for enterprise performance, efficient and effective/satisfying work and social responsibility in the sense of anticipating and managing problems before they got out of control. It'd be hard to grade any of Detroit much above a D/D+ on the best criteria, an F on most and "terminate with extreme prejudice" on several. For example Healthcare, Mileage and Energy, etc. The first graphic here looks at the major market segments and the major players - while we haven't filled in the details (after something has to be left for the guys purportedly running the industry) the two initial key points are this: 1) these are the issues and timeframes that we need answers on and 2) the content of the cells will determine the roadkill vs survivors vs winners. If you read Halberstam this same chart could have been put together in 1980 or earlier !

So even after Chrysler gets thru whatever it's going to get thru with GM most likely soon to follow (can you believe we just said that - stop and think about GM going BK !!) there's years of repair work just to get to the real challenges. No, Detroit's NOT going to be the same in any way, shape or form. Which leads us to this little conceptual chart - take a minute and treat it as a take-home test. How do you think the Industry and the players should be graded for each requirement ? Enterprise performance - well on the surface several major players are lucky to get D's and clearly some are failing. How 'bout long-term - worse, right ? How 'bout an efficient and effective work environment ? Nope - and the rub there is that a workplace that's more effective is also more profitable. Finally how about Social Responsibility for all three facets ? If anything the Industry's been grossly irresponsible - a record only exceeded by the Finance Industry because Autos are merely threatening the livlihoods of millions and aren't a systemic, "existential" threat to the world economy !

All in all not a good track record - the real question is who do you hear talking about addressing those issues ?

Continue reading "Living In Existential Times: Fiatster, Detroit, Autos and Futures (Refresh)" »

Posted by dblwyo at 07:42 PM | Permalink | Comments (0)

It's been since last August since we've covered the Auto Industry per se with a specific post though we had enough separate posts to generate a dedicated archive walking thru the news and key strategic and functional issues from product strategy, development, manufacturing and marketing and sales as well as governance and management systems. But we have been tracking the news since then and after the break you'll find a roughly chronological/thematic set of selected excerpts that talk about 1) the runup to the disaster last summer and fall, 2) the struggles of Washington to come to some workable rescue plan and 3) key issues for the future. In fact we've been arguing for many years, not least since 2004, that the industry was mal-adoptive, non-resilient and so trapped in it's boxes as not to see a way out. The last major US industry to let denial and willful blindness carry it to the same precipice and then over was the US steel industry. With yesterday's Chrysler bankruptcy filing the poster child of American industrial history and performance malfeasance joins it. Let's hope it also joins it in a gradual, structured, re-thought re-birth. It's certainly long over-due, for the 30 years since the Japanese proved that good quality cars more suited to the modern world were possible in fact ! Something the leadership of the industry has been aware of for decades as well:

•  Stefan Jacoby, Volkswagen of America, Pres. & CEO(CSpan) Volkswagen of America Pres. & CEO Stefan Jacoby joins us to discuss how the economy and public policy impacts the automobile industry.

Looking at the Numbers: the Dinosaur Killer

 The "asteroid" for Detroit has always been a clear and present danger and it arrived last year (actually in late '07). If you look at these two charts you get Auto Sales and YoY% change in sales for Jan07-Jan09 and then back to 1977. Several interesting things pop out. The 16 million vehicles/year being sold recently are clearly an abberation. The announcements that everyone was preparing for a bad downturn by positioning for 13mil/yr were clearly specious and historically ignorant. If Detroit couldn't make money hand over fist at 16, it was in dire straits at 13 and going to face extinction at the 10 level. Yet going forward as consumers become more cautious, as financing no longer subsidizes frequent turnover the fundamental strategic question becomes - what does the industry look like at 8-10 million cars/year ? How does Detroit build cars people want, that are affordable, high-quality and long-lasting ? What does it need to do ?

Re-Thinkings I: Detroit by Segment

Detroit mortgaged it's future to SUVs, Pickups and high-end vehicles on which it thought it could make money and retreated from all other segments of the business. The primary driver for not investing in new development, manufacturing, for not re-engineering the dealer network and the order-to-delivery cycle and the way suppliers were managed or even in the way cars were marketed and sold was not because internal debates didn't discover that these changes were required. It's when they came down to where they had to put the resources to meet these challenges they came face to face with legacy costs in healthcare, retiree benefits, labor contracts and the ways they did business. To meet these challenges required thinking and acting outside the box of existing structures and relationships and for thirty years Detroit has refused to do that. As have, admittedly, everybody involved - from dealers, to suppliers to union members.

Re-thinkings II: Company Specifics

If you apply the same analysis to specific companies as well as the industry as a whole the picture doesn't get much prettier. Here we rank each company on a 1-10 scale and indicate, for the industry, where's it was, where it is and where it needed to be to minimally adapt to the requirements of this crisis. If you look at the evaluations for Ford, GM and Chrysler you'll find the current situation with regard to bankruptcy pretty well anticipated. The really interesting question becomes who can get to Level 5 performance in each of the critical operational and strategic categories in time enough to survive ? Of the three Ford looks to be the only one - and why ? Because Alan Mullaly came in and started insisting on honesty, team leadership, good management controls and facing brutal realities. And he started almost three years ago while the management of GM and Chrysler fought rearguard actions (though to be fair Nardelli and his team took what actions a very bad hand let them to some extent; but they also badly mis-read the future as well. Thinking a plan for a 13mil year was satisfactory !)

Re-thinkings II: Legacy vs Future

We're not the first people to suggest that Detroit build good cars that people actually want instead of what their internal agendii and self-imposed financial constraints forced them to. But the net results are that over 30 years Detroit backed itself into a corner. And by giving up more and more ground lost the business volume that would support their R&D, manufacturing re-engineering and dealer networks. When you let yourself be forced to shrink you've got to give up a lot of things. Hopefully voluntarily and intelligent instead of involuntarily by force-majeure. The Japanese entered the marketspace at the low end and won by providing better value. The profits from that combined with Detroit's unwillingness to face off against them let them grow that entry point into dominance in major parts of the space. When they leveraged their capabilities to create new lower-priced but higher-value luxury brands another self-accelerating virtuous business cycle was created. Detroit meanwhile had trapped itself into a vicious cycle where retreat lowered the profits required for investment in futures and there you have. That was a thirty year process - the current BK's are nothing more than Triage to save what's left.

Fossils or Futures: from Triage to Survival & Recovery ?

One of my favorite military novel characters talks about the privilege or command when he says, "there is nothing more rewarding and nothing more horrifying than having to ask good men to die...once you've done it you'll do anything to do it well again". Unfortunately leadership in Detroit failed all those tests and now are faced with the most horrifying battlefield decision - triaging the wounded created by their decisions. On a battlefield where a medic must decide, right then and there, who's can be saved eventually, who needs urgent help but has a chance and who's beyond hope so as to allocate his limited time and supplies that process is Triage. A beautiful word for an ugly process.

A friend of mind served as a fairly senior auto executive and talked about GM's deliberate decisions to not invest in Saab which has led to the ruination of a once proud, innovative and value-creating brand. Similar things could be said about Saturn. Both companies are, IOHO, potential long-term survivors if they get the necessary life-support and long-term care. In fact we think they could be brought back as highly competitive warriors in this metaphor. But the parents who abused them look to be abandoning them, sadly. Hopefully the LBO/PE guys are paying attention and are prepared to do more than financial engineering (unlike Cerberus).

UPDATES: an Existential Moment for the Industry and America

The news just continues to get better and better. Auto sales continue to tank (btw to pick up the themes of "look at the real data" from a prior post on the GDP numbers we took yesterday's Consumption data and updated the accompanying chart. So much for an uptick ! Dan Gross appeared on Tech Ticker and made a couple of key points. One on the late-coming bondholders who held up a negotiated deal and forced bankruptcy proceedings. The bottomline is what were they thinking ? They got in late, got on their high horses about their rights as senior creditors, invested in the bonds of a company on it's deathbed knowingly and again put the public interest far below private gain - the Finance Industry as a whole seems determined not just to be guilty of malfeasance but po'ing the entire population. Talk about voluntary self-destruction ! Dan had another portion of his interview on Private Equity as well that points out the implications for future LBO buyouts. All of which are worth paying attention to.

• UAW Gets the Goldmine: Did Chrysler Creditors Get the Shaft?
• Chrysler Bankruptcy: End of "Dumb Money" Era for Private Equity
• US auto sales fall 34% in April

Does it get any better ? An existential moment indeed ! Otherwise known as both life-threatening and a fundamental structural change at the deepest levels.

Continue reading "Legacy, Losing, Resets: a Future for the Auto Industry ? (Updates)" »

Posted by dblwyo at 09:15 AM | Permalink | Comments (0)

Well with a lot of the economic news and analysis posted we can segue back to business analysis but let's keep in mind that one feeds the other - a fact, for example, that all the most lauded names in value investing have lost sight of. And paid some terrible penalities for. Again the mantra: Economy - Industry - Company. In other words you can never neglect the macroecon news in general but right now the metastasizing worldwide economic slowdown is driving everything. Just to put it in context and remind you we offer up this little tidbit from the WSJ:

Personal Income Falls, Sentiment Is Weak  Falling personal income and weak sentiment suggest consumer spending, the juggernaut of U.S. economic growth, could be headed for the first sustained decline in nearly two decades. "Consumer spending is poised for a major slowdown," Wachovia Corp. economist Mark Vitner said in a note to clients.

Auto Industry Outlook

The executives of Detroit have been wrestling with the consequences of decades of bad decision making - struggling might be a better word. They've trimmed up their legacy costs by taking retirees off the healthcare gravy train and re-negotiated their labor agreements. They're also downsizing to reduced total sales and much smaller market shares, among other major moves we'll talk about. Unfortunately they didn't anticipate as bad a downturn as they're getting and left key decisions very late in the game. It wasn't until about late Spring apparantly that they true magnitudes of the downdraft came to them. This chart shows YOY% changes and absolute auto sales for two timeframes. The first strategic oopsie was that these guys set themselves up for a 16million unit sales year with the downside being 15mil when you read their annual strategy presentations. They started to change that to 14mil with a headge in some cases, primarily Chrysler's team, for 13mil. Well as you can see those were wildely optimistic. And - if you find any credence to any of our economic analysis - shouldn't have been a surprise. In fact when you look at these numbers - a point we've made before - 16mil is aberrational. In fact they should have been strategically re-building themselves to make money at 12-13mil. But actually the situation is even worse than these charts make it appear.

 Mike Donnelly over at CEO Economic Update put together this fascinating chart a while back where he takes the same long-term timeframe but adjusts sales by looking at the % of the workforce buying a new car. While my charts would indicate major strategic problems and a dismal outlook Mike's tell you that the industry has crossed a major tipping point into a whole new buying environment. One that they are, despite all the headline announcements NOT positioned for. Nor one that they appear to be anticipating yet.

Auto Industry Business Performance

One of those key announcements is that all the majors will start making smaller cars in the US and will do so rapidly by first selling marks they're already making in Europe while they invest in and ramp up domestic manufacturing capabilities. Two things struck us as really total astonishing about this. First, that they could make announcements with such short timeframes for serious transitions, which imply they've had the capabilities for years but have avoided committing to them. And second that they waited until the wall was knowcked down on them and ignored the handwriting for as long as they could. The old George Carlin joke that "the '60s were good to them" seems to be entirely true and, sadly, they just now seem to be enterring into the drug rehab program from whatever they were smoking since then. On a strategic and operational basis they're facing three clusters of challenges. First, they've got to survive the next 3+ years, not 1-2 like they keep saying, and find the financial wherewithal to keep themselve alive. That by itself looks extremely unlikely, at least for all of them. Can you spell bankruptcy - which would be a disaster for them and us. Second they have to start selling and then making decent sized, high-quality and appealing small and mid-size cars asap. Preferably in 3-5 years or sooner. Bear in mind the design and development cycle for cars is 3-6 years long so shortening it up is a huge problem and they'll have to depend on what they can quickly lay they hands on that's already in the pipeline or production. Third, in the long-run, they need a complete re-tooling of operations, development and the product/market mix which again requires money they haven't got. In a previous post we pulled all this together using our performance analysis framework to assess the industry on the whole and the individual players, with the results you see here. Which may turn out to be too optimistic even yet.

Paradoxes of Performance

Charlie Rose recently did a three evening set of interviews on the Auto Industry starting with a session on design which was very interesting and encouraging. More so if we thought something would come out of those discussions quickly enough to have an impact. The set concluded with Bob Lutz talking about design in general at GM and the Volt in particular. GM's versions of a high-stakes, high-reward, very high-risk "Manhattan" project. Gutsy and courageous and illlustrating a return to their roots IOHO. But the most interesting and valuable was the middle show which was an hour-long interview with Rick Wagoner. Talk about a guy facing enormous pressures and coping well. And starting to do some of the right things. We urge you to watch that one in particular and reach your own conclusions. But some of ours would include a sense of sadness and shock that he rationalized the commitment to big SUVs and cross-overs as the result of the CAFE standards and the unwillingness of Americans to buy and the unintended consequences of too low gas prices. A nice thesis but one that falls on the simple fact that Toyota, Honda and Nissan have been very good mid-size and smaller cars that are attractive, appealing, high-quality and innovative and profitable for years. And as a result have started in one part of the auto industry ecology and gradually taken over more and more of it. Hondo in particular illustrates what happens when you define a strategic vision, translate that into good design and back it up with superb operational execution and functional capability. In their case that's particularly true of their commitment to flexible manufacturing which gives them a capability to switch what they make from what's not selling to what is. If you want some interesting backup on these assessments watch the several prior interviews with Wagoner and notice the evolution of the rationalizations and explanations !

The bottom lines here are that the Auto Industry is facing as big or bigger a set of challenges as the Finance Industry who we've taken such "joy" in bashing, runs a serious risk of bankruptcy in the near-term, faces major investment requirements to switch over their product mix and more to re-engineer their operations. All told they may in fact be an even less appealing investment than the Finance Industry ! Auto Industry Failure Odds

Continue reading "Back to Bizzness: Escalating Troubles for Auto Industry" »

Posted by dblwyo at 02:16 AM | Permalink | Comments (0)

Continue reading "AutoFutures: Re-Thinking the Car Business, or NOT ?" »

Posted by dblwyo at 09:28 AM | Permalink | Comments (0)

Now that all the market excitement has gone away it's time to return to our roots and talk about business performance some more. Specifically the Auto Industry whom we don't mean to abuse to much but have done so before and will likely have future opportunities. Actually, all things considered, we hope so. Oh wait...the Industry employs 13 million people and is 4% of the GDP. And Goldman just said sell GM after it, or because or something, reached a 53 year low. We'll leave it to you to graph out the stock prices of the Failing 3 but's pretty scary. We've covered the industry several times before and actually had both good and bad things - good in that they were finally gingerly sneaking up on their fundamental requirements for deep structural changes. Bad in that they were sneaking up, were kidding themselves about the state of the industry and economy and we thought they were going to get body-slammed real bad. Ahem....

After the break we've got our little collection of readings from which there are some primary take-aways. Detroit has finally conceded - knowing and doing are two very different things mind you - that the future is NOT pickups and they need to change their model mix. And they're also willy-nilly converting to the high church of not 16 million in annual sales. More interestingly they're starting to be willing to tackle the kind of revolutionary changes needed to survive. The example being GM's Volt - which could be a real game changer. And is the kind of innovation that made Detroit great. The sad things in all this is there's plenty of talented people who knew what was wrong, know how to fix it but opted for incrementalism because the didn't feel the boiling water. No matter how many dashboards run back how many years. One of our favorite quotes suggests that the Industry can't survive at 14 million cars for two years. Check out the chart - they did just fine for three decades between 13-14mil !!! What misplaced fantasy of lease-financing, discount subsidies and over-production of ancient models nobody really wanted made them think it was graven on stone ?

The problem is that the let themselves get trapped in a corner by their own manufacturing - though admittedly there have been major improvements. Here's one of the things that have gotten them into three decades of up and down. When TOY created (actually borrowed from Westinghouse) their Production System (TPS) the changed the traditional economics of manufacturing. Before the lowest unit cost was from processes, then assembly lines and then batch manufacturing. So you made money by keeping the lines running at any cost and shot for enormous scale. By moving to more flexible, cellular manufacturing TOY could run their lines in much smaller sizes, they got lower unit costs and they kept getting better and better. This may seem a little arcane but manufacturing competence is one of the two core requirements for Detroit's success. Just as much as software development should be Redmond's. In all cases start falling down, or loosing ground big time on those core capabilities, and you're writing out your own death warrent. When Kirkkorian put money into GM a while back I though he was nuts because GM was dodging the issue; contrawise when he put money into Ford this spring I thought he was a darn smart risk-taker because Ford under Mullaly is starting on those changes. Now in a matter of a few months everybody's conceeded. Do they have time ? The need to make money at 12-14Mil cars - in fact they need to defend their turf in much smaller corners than that.

Bear with us on this one - it should be worth your while but amateur graphic artists that we are, using PPT and trying to capture ideas in 3D and then blog 'em leaves some challenges open. Nonetheless with a little imagination and sympathy this may be clear - the Auto Industry (or - we emphasize - any) is driven by the key dimensions of its' ecology and their dynamics. Here the dimensions are vehicle type, customer socio-graphic and car size. Detroit had this space all to itself but the Japanese got in in the econo-box and used manufacturing excellence to expand into the rest of the space while Detroit kept retreating to Pickups. The Japanese even did an end around by attacking the flank and creating their own luxury models. When you give up marketspace you lose economies of scale. If you lose economies of scale you need to change your own processes and economics but Detroit was trapped and kept retreating. When you loose marketspaces to a competitor who can make money in smaller niches thru better products where their profit and returns are higher at any concievable scale they become cash-flow generating machines. And you become profit-sucking machines. Instead of milking SUVs and Pickups for profits, x-subsidizing the rest of their products and brands and fighting rearguard Detroit would have been better off re-investing in development,manufacturing, marketing, distribution, logistics and everything else.

They're smart people who're backed into a corner and if they don't make it they'll take a chunk of our economy with them. Not good. As an investor though these are the strategic issues to consider,  unless you want to go back and ride the old roller-coaster with the old Kirk. BtW our two prior posts on the Industry had some interesting charts that flesh out this picture and assessment. (Auto Industry:Boil, Boil, Toil and Trouble) 

Continue reading "Once More Into the Breech: 3 Decades of Auto (Industry) Delusions" »

Posted by dblwyo at 02:27 PM | Permalink | Comments (1)

Let's start with the market situation as captured by these charts on sales. Toil and trouble indeed...the top chart shows YoY changes in GDP vs annual sales in millions for autos. Odd correlation but striking, eh what ? Particularly that sales appear to have run an average of ~ 14+ million since '76 with a dip to 13Mil in the last bad downturn. And were only bumped up over 16Mil during the tech boom and maintained there by incentives since ! What kind of industry can barely stay in business running at 114% of ideal capacity ? Instead of making money at 90%, or 80% or 70% ? Detroit built and subsidized it's own trap here.

They chose to argue "we can't make money on small cars" despite the clear evidence that the Japanese and all other foreign manufactures could. Instead they chose to retreat from huge swaths of the marketspace, abandoning those potential profits and cash flows, and keep older factories running at losses because of labor and other fixed costs until their hand has been forced. And keeping things alive by subsidizing money losers with higher premiums from SUVs, etc. Instead of figuring out how to design and build cars people would buy, changing the manufacturing, distribution and procurement operations to support those innovations and putting in place the kind  of management systems and infrastructures necessary. Which is where the funds should have gone.

We've tried to capture what was, is emerging and the vital next steps in this composite assessment of the industry and some of the key players from Detroit. Note: this is not a depiction of an ideal, if it were we'd have Toyota with a 9 on Manufacturing and Honda with an 8 on design and so forth. Nonetheless this is our best judgment on the key factors, based on our enterprise framework (Performance Assessment Basics: Five Fundamental Factors), of the requirements, the composite average for Detroit and some guesstimates on each of the Dying Three. You might want to a) look at each of the factors and short-hand requirement note to see if it makes sense to you. And then b) come up with your own ranking. The only good news is that things have improved...the bad that they haven't improved much at all...and the really bad that the possible next steps are most likely still many steps below long-term requirements.

The auto industry has to deal with a wide variety of sub-spaces in its' markets and you could break them down in many ways. But at the heart of the Detroiters deepest structural short-comings is the inability to make money except in one very "narrow" band of products. The one that's clearly under the most threat now from environmental conditions and has been for decades. BtW - on the whole we mean the color coding to represent the outlook for that sector largely with respect to Detroit; and how they are or aren't positioned in it, both strategically and in terms of operational capability. In that sense the Hybrid space probably shouldn't be green but there are some promising models coming even though it's a small space.

The correct choice was to use the cash from those segments to re-engineer the others...or abandon them. That would have meant facing many harsh realities, which until the last 24 months or so, nobody was really willing to admit. Cerberus takeover of Chrysler was a sign as well Mulally being brought into provide adult supervision and normal good business practice to Ford. Here's the rub - all the plans that the MSM has been applauding are cost-trimming around the same underlying structural problems. Not a headon attack on those deficiencies.

Given our druthers we'd all like to be grasshoppers and not ants. The problem is that ants do better in tough times and senior corporate executives are paid to be the whip-cracking foremen of the ant colony. And it's not like any of this is a mystery to anyone...just take a gander at GM's l.t. stock chart and tell me that this isn't what the market consensus has been expecting ! 

As you skim the excerpts after the break you'll find a longish collection of readings that sketch out the strategic situation, the current sales and outlook picture - which apparently has blindsided everybody, and individual company discussions. The lead off is a great WSJ article that basically comes to the same conclusions we're arguing here. The last is a vidclip interview with Chrysler's new executive team that's more than a little coy but also, reading between the lines, pretty deeply insightful on what needs to be done. It stacks up nicely against our little blueprint checklist. And finally, at the top, are some very recent CNBC, et.al. vidclips worth your time. Particularly the one from Bloomberg where Mr. Johson of Lehman (how ironic) discusses the state of things.

BtW - the original quote from Shakespeare is "Double, Double, Toil and Trouble" and the entire scene certainly describes the witches brew that the auto industry has created for itself. Also at the end you'll find the pointers to a couple of prior postings on the industry that might be worth reviewing. Especially inasmuch as they have some interesting newsclips along with some useful graphics, particularly on manufacturing. 

Unfortunately climbing out of the cauldron they brewed themselves is going to be long, difficult and painful for the industry. And before you get too overwhelmed by the schadenfreude remember that the industry is still a major part of the overall economy. Not what it was, certainly, but its' troubles are still our troubles.

Continue reading "Auto Industry:Boil, Boil, Toil and Trouble" »

Posted by dblwyo at 08:57 AM | Permalink | Comments (0)

Let's focus on the Auto Industry which is important, and still gigantic, in its' own right but also the exemplar of much that goes on in the business world. Now in case you haven't noticed the US auto market is facing a severe and accelerating downturn which appears to have been somewhat unanticipated, particularly by GM. On the other hand the turnaround team at Chrysler at least claims to have positioned itself for a sharp drop in total demand and a major shift in its' structure. And Ford, who'd have thunk it, actually did pretty well all things considered. In fact we'd argue that Ford, relative to what might have been reasonable expectations, is turning in an amazing performance.

Yet all told all manufacturer's are experiencing a very bad and worsening market (& if you don't think that says something about the economy we need to revisit the Into to Macro discussions...). Below in the readings you'll find an overview from Ghosn, some specific stories (BMW, Daimler, GM, Ford) that support these points including the applause for Ford and some big picture discussions of Toyota's structural and strategic advantage as well as the issues with completely re-thinking the stables of brands that need to be downsized. Those last two should be taken together as they define the Yin and Yang of the Auto Industry. At the end of the day, beyond the Business Model - Strategy - Execution - Accountability mantra we've defined for performance what're the necessary changes ? At their heart Auto companies really do one (two) things. They build cars, which more properly broken down, they design and manufacture cars. And coming from the industry that defined the world's model of manufacturing excellence those roots seem to have been lost.

Let's consider manufacturing excellence and the state of the world using the graphic at right. Where this is important is that the argument applies to any manufacturer anyplace in the world so as stakeholders in any such, whether the Auto guys, John Deere, Caterpillar, or whomever here's a simple model to think about. When you think about it you can make things as 1-Offs, that is completely to order, like a new prototype or an F1 Racer. Or start with some basics but go thru extensive customization like, for example, the Bugatti Veyron. There's a reason that a Veryron is so expensive or a suit from an English bespoke tailor will look great but cost you. The next alternative is to run in batches - that is invest in some capital equipment and make more than one of pretty much the same thing. Make enough and pretty soon the cost/unit is less, and then far less. Which suggests that if you set up a manufacturing assembly line you can just churn those suckers out for lower and lower unit cost. Finally there's the notion of making things a continuous process, as say, an oil refinery or chemical plant does. Or for that matter, in a way, Intel or TI do. The reasons more don't do that is pretty obvious - not everything's a barrel of oil, a gallon of chemical or a one of a million chips. (admittedly stretching the point). So for most things where market size, product characteristics and manufacturing technology dictate you end up choosing between custom, batch or line processes.

What Toyota introduced many years ago was a manufacturing process that didn't require a giant, rigid, very high volume, inflexible and non-interruptible manufacturing process. Otherwise known as the Toyota Production System or "Lean Manufacturing". What they discovered was a way to organize manufacturing where one could achieve comparable economies thru more flexible and cellular manufacturing. Which by it's very nature was also more flexible in terms of both setup and interrupt and different models. In other words it was profitable to make just enough to suit a particular market and then switch to different models. Now in the first picture what you see is the shift of unit manufacturing cost, that is direct operating cost, as the result of this innovation until a Lean Manufacturer can beat a line manufacturer on direct costs. Sadly we've known about all this for several decades. More sadly of the companies who've started Lean initiatives some 70-80% are abandoned. But the consequences are even more dire.

Because you see we were talking just about direct manufacturing costs. If you're committed to a full-roar line process you keep it pumping no matter what - which means you build as much as possible and stuff the market with stuff the customers may not want so you end up with lower prices. And worse yet because you're running these giant machines you've got these equally huge procurement and distribution operations that are just chock-a-block full of inventory, costs, delays and disruptions. On the other hand a Lean Mfg who's running in much smaller lots, who can stand to be interrupted, who can start & stop, change models, etc. etc. and doesn't mind as much idling his operations enjoys benefits in Total Operating costs and Revenue per unit. The end result is two strategic benefits. One is a much higher unit profit than a traditional manufacturer. The other is a long-term dynamic advantage as and if they keep improving - able to make more and more profit from more and more targeted products that add value and command higher prices.

Now we've argued that the US Steel Industry was a perfect model for what the Auto Industry is going to have to go thru. It looks like Ford and Chrysler have finally realized that and are well-started. But what other industries and companies need to get on this bandwagon. Give it some thought. Better yet ask who's on this journey to a complete re-think and re-work of manufacturing operations. Those will be the folks you want to invest in. Contra wise the ones who aren't, or who abandon these sorts of initiatives, are going to face an increasingly inhospitable world.

Continue reading "Business (Auto Industry): Worsening Outlook, Improving Peformers, Key Issues" »

Posted by dblwyo at 05:06 PM | Permalink | Comments (0)

When Lee Iaccoa was booted to Chrysler he managed to save them with a combination of an innovative nwe product (the Minivan - which Ford had turned down), draconian cost controls and product manufacturing rationalization on shared platforms. In the process the US gov't actually made a profit on its' bailout funds. Yet over the next three decades Chrysler has cycled in and out of profitability depending on whether or not it had a hit for a few years. From the auto company known for the sustained excellence of their engineering and product they became the boom-n-bust kids. And that's despite several extremely innovative transformational efforts that deservedly made the Harvard business case files. This includes a revamp of the design process using CAD/CAM technology, re-structuring the inbound supply chain and supplier relationship management processes and similar major innovations. What it didn't manage to do was change the fundamental DNA of the company - the processes, culture, decision-making processes.

In a way Chrysler's story, suitably modified, is the story of the Detroit auto industry - once the examplar for manufacturing excellence, product design and development, quality and customer focus. How long has it been since any of those have been true, at least generally ? So after "coasting" for those same three decades on its' historical legacies the industry is facing a huge amalgamation of challenges: inefficient and broken processes, cost pressures, lack of manufacturing quality, products that customers, shall we say, don't love and nearly tonedeaf marketing, sales and service. The greatest irony of all is that the Industry knew and knows all this but could't find ways and reasons to change.

Well those reasons, and the decades of denial, have been presented. Not only the contininuing challenges from the Japanese, e.g. TOY, and some reborn European manufacturers but a change in the global car market and rising worldwide competition. All of which is reflected in the readings excerpts. NA sales are in the tank and the product mix was wrong for this energy inflation environment. It turns out that Europe, ha for decoupling is in the same boat, and even companies like TOY are facing major challenges.

Yet Mullaly at Ford, the Nardelli team at Chrysler and Waggoner and the GM team have made major strides by trimming costs, downsizing to the markets and starting to revamp operations, development and go-to-market. The real question is whether they'll get enough speed to lift off before they can lift off. Pilots talk about V1 - the speed going down the runway where you start to get enough lift to rotate the nose up. Mullaly in particular is doing all the right things at the sickest of the Big Three but V1 is coming up awful fast and it's not clear they'll get the speed they need.

Someday we'll try and go into a broader assessment and diagnosis but for  now let's look at one of the most fundamental problems that's just beginning to be addressed - the vast differences in cost structure between world class and the Big Three. Short-trimming, even the major surgeries performed, only help. This requies fundamental re-thinking and re-engineering. When you face a competitor who's cost structure is innately, organically lower than yours they can make a profit while you loose money at any scale of operations. When costs rise or the market shrinks then the superior operator has a long-term DYNAMIC advantage. Worse, in shrinking AND more finicky markets a manfacturer can no longer appeal to economies of scale to survive but must learn to make money at smaller scales in each market niche it serves. Oh my aching head....

Continue reading "Auto Industry: Pressures, Changes & Outlook - Finding V1" »

Posted by dblwyo at 07:09 AM | Permalink | Comments (0)

Somehow or another all the business news is either finance or technology news these days. I'm sure that's not true but that's the net effect give my readings. The huge wave of finance industry news is, under the circumstances, not a surprise and we covered it yesterday. It's worth bearing in mind that the Industry was a whole appears to a) be as badly broken thru its' own self-inflicted wounds compounding and b) as the credit markets go thru an extensive de-leveraging process that the industry will be badly shaken up and re-structured. And perhaps c) we may have a long way to go.

The first two stories below are on Chrysler and Pfizer - both of which industries have backed themselves into similar corners. The Auto industry by getting stuck in its' own rigidities and denying the need for change for 3+ decades. As we've mentioned the core of the Pharma industry is their R&D activities and, very unfortunately for them, their core business model of chemistry-based drug development is broken by exhaustion. And the nextgen replacement (bio-chemical/biological) is not a near- or intermediate-term potential (though depending your horizon you should be lookin at systems biology and what's going on with "synthetic" life). Whic leaves us a bunch of Tech industry stories. Which in turn are stories about escalating pressures for cost control and change, companies failing to innovate and some succeeding.

In the latter class are Apple and TIVO both of whom have focused on defining and delivering value. Preceeding them is a story about one MS fantasy about Yahoo - that it'll help take them into the on-line software arena by combining Yhoo's on-line DNA and MS's software development DNA. Excuse me - their core strategic value propositions at which they've been failing miserably for years now ? Yahoo obviously but for those of you not enchanted with Longhorn, excuse me Vista the pitiflul remenants of a grand(iose) vision terribly executed and perhaps flawed in conception (btw do a search on Code Red and MS sometime for an understanding of how badly their supposed core competence in programming failed them). The other side of the coin is HPQ which is well on it's way to re-balanced and re-factoring itself, illustrated by a story on Hurd's moving to the next step by starting in on re-directing their R&D labs toward a stronger commercial focus (a step Gerstner took at IBM back around the mid-90s).

The first two tech-related stories are more general interest tech stories which define the ecology of the industry. One counseling IT departments to start putting pricing pressure on their vendors. The other on the topic of business vs technology alignment. We've all heard the stories about businesses able to change an industry thru the strategic use of technology. The problem is that for 20 years it's generally the same small handful of exemplary firms, e.g. WMT, FDX, Schwab, et.al. What you may not be aware of is that there's a huge gap between the MIS department and the operational business which the industry has been struggling with for decades. And despite the bottom of the "stack" becoming a commodity the top part where business solutions live is as much about magic, mis-communication and 70% failure to deliver rates as it ever has been.

As a friend of mine with almost 40 years in the business said:

La plus ca change, la plus ce meme chose.

Continue reading "WRFest 9Mar08(Business):Auto, Pharma & Tech News" »

Posted by dblwyo at 11:54 AM | Permalink | Comments (0)

We're still plowing thru last week's news in digestible chunks having split our weekly reader not only into Economy, Markets and Business but also split Business into this, the 3rd of 4 sections. Given the volume and importance of the various stories it seemed like a good idea and also allows us to wrap a little framing around them as well. A metaphor that captures the approach is that we try to take both an ecological view and a species specific view and look at the interactions. The Economy defines the longer-term geo-climatological context that everybody has to deal with while the markets capture the shorter- and intermediate-term cycles and behaviors. And the Industry/Company studies (Ganesh Filters III: Analyzing Businesses Blueprints) look at the status and outlook for key species. So far this round we've covered the Finance Industry, which at 30% of the market is important in its' own right but also heavily influences the flow of "energy", directly impacts the behavior of the Traditional and Technology businesses. And we specifcally broke out the LBO industry this round because it's on the cusp of what the industry is beginning to view as a major change in its' environment and what it will take to survive. To continue with the biological metaphor/model the LBO industry has contributed perhaps 20% to the rise in stock prices, perhaps more in the '07 over-trend "bubble" but is now facing a huge structural shift where different characteristics will be favored over agility and financial engineering genes. THERE WILL BE A SHIFT in the population as a result. Which will in turn impact all the other players.

Which sort of leads us to the old-line traditional industries in general and the Paper, Auto and Retail industries in particular. In each of these cases we'll return to a constant theme - what does it take to run a good business - in a new perspective. What are the functions, capabilities and processes required to execute a strategy and deliver value. And since several of the most interesting stories are about Retailers we'll frame the discussion using the chart at right (click to enlage) which shows the a complete, architected Retail enterprise. Hopefully you can imagine similar illustrations can be developed for other industries as well. Given a strategy and business model those must be EXECUTED by daily Operating efficiencies, managed by good Tactical planning and, over-time, adopted & adapted by Strategic changes. In the chart what you see is a complete, representative inventory of these capabilites structured to show, to some extent, how these all related to one another. As you evaluate an investment what you're really asking is how are these processes being performed at each of these three timeframes. And unfortunately the answer is all too often not particularly well.

Continue reading "WRFest 2Mar08(Business): Paper, Auto and Retail News" »

Posted by dblwyo at 04:14 PM | Permalink | Comments (0)