Shifting Paradigms

Paradigms are a set of assumptions, concepts, values, and practices that constitutes a way of viewing reality for the community that shares them. (From a definition found at www.thefreedictionary.com/paradigm.)

When a paradigm in an industry changes, the business “winners” after the change most often are not the old-line companies who were the winners before the change. They are fresh new entities with new ideas for satisfying the market. The winners have no entrenched personal empires, no buildings and factories to amortize, no rigid ways of doing business – all of which prevent the old companies from changing.

What the new companies do have is a large dose of outside-the-box thinking, a willingness to take risks, the energy to get things done quickly, few layers of management….

Old, classic examples of paradigm changes include the railroaders who hauled passengers but thought of themselves as railroaders, and who were overwhelmed by the airlines who entered the business of hauling passengers in airplanes instead of trains. How would our landscape look now if the railroads, instead of scoffing at the airlines, had become the movers of passengers by airplane as well as trains?

Consider the Swiss, whose paradigm of a watch included a spring, escapement, gears, hands and a dial face. Enter the Japanese, whose paradigm for a watch includes a battery, a chip and a digital readout. The watch making business all but disappeared from Switzerland in its rush to Japan. The Swiss, who were offered the digital watch designs but passed on them, had a capital and emotional attachment to the old paradigm. Later, of course, the Swiss adopted many of the features of electronic timekeeping and do continue to make many fine watches. The volume market, though, theirs for many years, is now owned by companies in the Far East.

Almost every day paradigm shifts are taking place.

Consider the impact of NetFlix, with a new paradigm for distributing movies for the home market, had on the video store of the old paradigm. How many video stores remain, and how big a share does NetFlix have of the market? In watching the postal worker put mail in the boxes near my home, and seeing NetFlix envelopes in almost half the boxes, the question is answered.

Another recent shift is the advent of Craig’s List, the Internet classified advertising giant. From a small beginning in San Francisco, Craig’s List now has free nationwide classified advertising. It is very effective. Newspaper owners are crying about the demise of their classified advertising revenue, lost to Craig’s free list. Why did the newspapers not start the free lists? Did their thinking not go out of the box? What would be the situation if they had been the ones to start the free list, and receive advertising revenue for display ads on their pages? Would they be in such dire straights as they are now?

Now we see several paradigm shifts in the auto industry. Fuel prices will soon rise again, creating greater and greater demand for fuel efficient vehicles. Electric cars, and hybrid-electric cars will eventually dominate. Lithium ion batteries will replace older technology. Are the old-line battery companies leading the charge to lithium ion? It does not seem so – the bulk of the companies manufacturing them are in the Far East.

There will be many paradigm shifts resulting from the deep economic recession. The next posts to this blog will explore ideas about them.

Sign of the Times

As sometimes I do, today I looked in the Daily Camera, the Boulder (Colorado) daily newspaper, at the “Hot Jobs” listings. It was startling. As little as two months ago the number of jobs listed for Boulder and surrounding towns was over 500. Today it was just slightly over 300.

That is a 40% reduction of job availability in slightly over two months. Probably the end of season has some effect on the numbers, but not 40%.

The shortage of jobs is a grim reminder of the depth of the recession. It portends a long and slow recovery of consumer spending, the primary driver of our economy, and thus a long and slow recovery in the economy.

Bailout or Failure?

It is Wednesday evening and so far, there is no bailout program for the auto industry. Although a bailout is not the greatest idea, compared to certain other options, it is by far the lesser of two evils when considering the consequences of the failure of at least two of the three American auto makers.

Without an immediate bailout, GM and Chrysler will no doubt file for bankruptcy in the next sixty days. Executives of the companies have said bankruptcy would be q disaster because customers would not buy their cars. That does not make complete sense, though. If the manufacturers maintained their warranty programs throughout bankruptcy, and dealer service departments continued to operate, it seems people would buy the vehicles. The bigger problem of revenue generation is the lack of the right vehicles for the market, not a bankruptcy.

As earlier written on this blog, it still seems that bankruptcy of GM, with post petition financing guaranteed by the government; a line of credit for Ford guaranteed by the government; and the breakup of Chrysler makes the most sense.

If in bankruptcy, GM can quickly deal with the problems of high labor costs, high legacy costs, too many dealers and debt overload. They can shed models and factories and dealers, and renegotiate their debt, and in two years exit bankruptcy as a smoothly operating company with the beginning of a competitive model lineup. Many thousand dealers will be out of business, with great dislocation to customers and employees – unfortunately that is the consequence of the Big 3’s poor management through the years.

Although Ford is stronger than GM, they also may need to go through a Chapter 11 proceeding in order to achieve all their goals in the time available. Union reaction will have great importance in determining the issue.

The next few days will decide the fate of the companies, their employees, their customers and the many other stakeholders. Too bad I will not be the “Car Czar.”

GM and Bankruptcy

Executives of General Motors Corporation are saying GM cannot survive a bankruptcy, and needs government money to continue operation.

The second part of their statement is certainly true. In the latest report, GM is asking for $4 billion to keep operating through December and another $4 billion for January. With more to come.

The first part of the statement, about not surviving a bankruptcy, seems wrong. There are many, many cases of companies going into bankruptcy, emerging and regaining successful operations. Two come to mind – the Dana Corporation, and automotive and truck parts and accessories manufacturer; and Harnischfeger Corporation, a mining and heavy equipment manufacturer. Both now are successful, generally thriving companies.

Think about the airlines – most have been, are in, or are going into bankruptcy. People still fly on them. Usually there is an interruption for a few days, and then service is as normal as airline service is.

Then there are the the retailers. Kmart and Winn Dixie stores have been through bankruptcy, along with many others. Each is better off after the event than before. Customers continue to do business with them.

GM executives say people will not buy GM vehicles if the company is in bankruptcy. What is new about people not buying GM cars? People are not buying GM cars now because they are the wrong ones, and of lower than desirable quality.

Bankruptcy will give GM the tools to deal with the killer problems they face as they go forward. It will allow reworking legacy costs, labor costs and an unwieldy dealer organization. Yes, enormous problems are involved in restructuring those items. They can be overcome.

Car buyers would no doubt rather buy cars from a revitalized, restructured GM that from the one that exists now, propped up by massive infusions of our (taxpayers’) money.

Let the government infuse the money into GM after bankruptcy. Everyone except some GM executives will get more bang for the buck.

Bailout Anyone? Get in Line

Whoee!

The homebuilders want a bailout, with the government offering to guarantee low interest mortgages and a $22,000 tax reduction incentive for homebuyers. Outrageous.

Next ought to be a bailout for underemployed management consultants.

It makes just as much sense.

Who is on your "top ten" list of bailout targets.

Practical Suggestions for the Auto Industry

A monolith is a geological feature, such as a mountain, consisting of a single massive stone or rock

In some respects, the US auto industry is monolithic. The three major US vehicle manufactures, GM, Ford and Chrysler all face: a difficult credit crunch – both from the lack of credit available to its customers and to the companies; high fuel costs that have almost destroyed the market for expensive, profitable large vehicles; and the impact of the economic recession, low consumer confidence, and low consumer spending. Additionally, the companies have very similar business models.

However, that is where the monolith ends. When considering rescue (or bailout) of the industry –each company’s situation is quite different.

GM, for example, has an approximately 22% share of the US market, is using cash at a very rapid rate; is almost bankrupt; has an impossibly limited lineup of vehicles consumers want; has high labor costs and high legacy costs. Already obtained autoworkers union concessions will allow savings in long term, but the kproblem is not long term, it is now. GM quality is low compared to most imported vehicles and to Ford. From an outside perspective, Rick Wagoner, its CEO, seems almost detached from the reality of current conditions.

Ford, on the other hand, with market share of approximately 16%, has reported cash reserves to last it for six months to a year. although Ford may face bankruptcy, its situation is not as dire as that of GM. Ford has introduced small, fuel efficient, cars (Focus and Fiesta) that consumers seem to like. Ford quality is almost to the level of imports. Ford CEO Alan Mulally joined the company from a career outside the automotive industry, and appears willing to, and is changing, the business model. Were it not for the credit crunch and the recession, Ford could have reached profitability in the near future.

Chrysler (10% to 11% market share) is the anomaly in the industry. Ownership of the corporation is private, unlike public companies Ford and GM. Available analyses indicate Chrysler has no cutting-edge designs or potential big sellers in its Chrysler, Dodge or Jeep brands. There will be no company rescue from vehicle sales – what models they will sell in the future remains a mystery. Chrysler quality is low. The situation at Chrysler is grim.

So, what are the solutions?

Bankruptcy with management change seems the only reasonable solution for GM. Bankruptcy will allow relief from high labor cost, legacy costs and other contractual situations (dealerships.) The government can provide post-petition financing, allowing time for the reorganization. The cost to the government will be far lower than if it provided funds to rescue GM with its present management and business model. As to the problem of the lack of small, fuel-efficient cars, perhaps GM can buy basic models from other manufactures, create its own trim packages, and have something to sell during the time it will take to bring GM small cars onto the market. Some ideas from the two previous postings on this blog could help too.

For Ford, the government’s rescue makes sense. The company is poised for profitability. If credit becomes more available, Ford will sell vehicles. They will continue to revise their business model for greater profitability. All the government will need to do is keep Ford supported for the interim. Loans or loan guarantees seem best.

Chrysler is a lost cause. Reducing the size of the company to a much smaller one, with limited vehicle models and market share, could work. Breaking up the company by selling brands and the factories to build them is another thought. The private owners of Chrysler took an enormous risk when the bought the company. Had the economy not sagged (collapsed) they might have won the bet. Now it looks like they lost. Government intervention with Chrysler makes no sense.

Let me know what you think by sending your comments.

Note: The last two articles meant to elicit comments from readers, and succeeded in doing so. Some comments were serious, some in jest. For example, one email asked, “Do you really want your auto industry run by the same people who run Medicare and the Post Office?” Another said, “First priority will be to entice Steve Jobs to take on GM. Would you please ask him to reserve one of the first iCars for me?”

What do you think?

HAVE A GREAT THANKSGIVING!

More on A Different Thought about the Auto Industry Bailout

Response to yesterday’s post was quick, and plenty. Most comments came to my email address, but one was posted to the blog.

This follow-up article is a reply to the question asked, “How can we do it?”

As to the other part of the comment about political courage; among current leaders there is not enough to take action such as suggested here. Perhaps Barack Obama will have it….

Your comments are encouraged and all are welcome – pro and con.

To bailout, or not bailout, that is the question.

On the one hand, some say the loss of jobs in the industry and related fields would cripple an already weakened economy. The ripple effect would be enormous: auto parts makers and auto dealers are the obvious; the trickle down effect is not so obvious, but towns, families, retailers, etc. would suffer.

On the other hand, some say the foreign auto producers will step into the gap left by the demise of the American auto companies, and the effect of the demise will not be such a disaster. In addition, with millions of US cars on the market, parts and service requirements will continue for many years. All we would really lose, in the long term, are the profits that the car companies might generate and keep in this country. That may all be true, but no one mentions the timing. It will take years for auto production in this country to rebound, regardless of who is making the cars.

Lastly, is $25 billion dollars enough or will the car people come back for more? At the rate they are burning cash, probably the latter.

Therefore, here is a more complete new thought.

Rather than loan or invest billions in Ford, GM and Chrysler, why not quickly nationalize them, removing management, installing new people, new energy, new thinking, a new model for doing business, and possibly even new pay rates and health insurance and retirement plans, and get on with the job. Bring in a Bill Gates or Steve Jobs, or one of hundreds more innovative thinkers to lead the charge. Use the $25 billion to create new, trim, companies rather than propping up old stale ones. Along that line, fire the entire core of lobbyist, especially those who fight against higher fuel efficiency standards.

That sounds very easy. Obviously, it is not. Here is a blueprint that might work if given a chance.

Consider the GM situation. GM stock is hovering slightly above $3.00 a share, and the capitalization of GM is somewhere near $3 billion. For the plan, have the company create a new class of voting stock and let the government buy $5 billion to $10 billion worth. The funds go to GM for immediate use. At the same time, voting the new shares, completely replace the GM Board of Directors. Get new people; with no auto industry experience; with creative minds; not willing to work the old, failed model; and let them go to work. Replace the current executive staff without bonuses. Let the lawyers begin!

Bring the best and the brightest to the Board and the executive ranks to lead the company. Develop a new model for doing business. Perhaps the DELL model of building to order, having dealers only to provide a few demo cars, take orders, and supply parts and service. Without saying, “It won’t work,” say, “It is a good idea, let’s make it work.” If not that though, what others ideas are there? Remember, the old model failed.

Here is another thought: Rather than manufacturing so much of the vehicle let others do so. Become a design and marketing organization. Buy engines from someone else – Honda, for example. Transmissions from another source. Fit the cars together in less than a year rather than taking two or three years to bring a new model to market. Alternatively, buy immediately salable cars from other manufacturers, customized to be the GM model. That is certainly not a new idea. Think about the Isuzu Rodeo and the Honda Passport of a few years ago. Honda sold Passports by the thousands. It was not a Honda vehicle though; Isuzu built a Rodeo, changed the trim and interior, sold it to Honda and then Honda sold it as a Passport. There are other examples.

Get vehicles with fuel-efficient engines on the market in a hurry. Give GM and/or its dealers something to sell.

Fuel-efficient small cars, and hybrids, have proven themselves as sellers in the market. There are more than a million of Toyota’s Prius on our roads. Rather than taking two or more years to do the research, design and testing, buy the technology. Now is the time for action – not development and design.

Get vehicles selling and cash flowing. Then, when operations are stable, start investing in research, development and design. At this moment, what difference does it make who manufactures the major assemblies? Later build a goliath of an industry and be a technological leader. There is no time now.

With no lobbyist fighting to keep fuel efficiency requirements low, the government can move forward with stringent regulation to reduce carbon emissions. In spite of what the auto companies and the oil companies have said, global warming is real. Let the bailed out auto industry be the leader in reducing carbon emissions, not the fighter against reduction.

There are many creative geniuses in our country. Let them “have at” the auto industry. Forget the words, “We have never done it that way,” or “We tried it once and it did not work,” or, even worse, “It can’t be done.” A long time ago, people said that about landing on the moon.

Adopt the cry, “We know it will work and we can do it.”

How many years will it take to move the inertia of the auto industry to make it into something new, different, and PROFITABLE and FLOWING CASH?

Probably close to three years. On the other, without the bailout suggested here, the existing companies, working the old auto industry model, will take at least five years IF they can do it at all.

It is exciting to think about. It would be exciting to participate.

Your comments are invited.