LESSONS LEARNED #43: “If business ain’t selling, business ain’t hiring.” -Old Pithy

Posted by PITHOCRATES - December 9th, 2010

Before Competition, the Big Three were Living Large

President Obama bailed out GM and Chrysler in 2009.  And why did they need financial help?  The same reason any company needs financial help.  They weren’t selling enough.

I had a finance professor who said few companies have a debt problem.  Companies struggle because they have a revenue problem.  They’re simply not selling enough.  And when a company goes into bankruptcy reorganization, they emerge with the same revenue problems.  Which is why so many still fail after reorganizing and slashing their debt costs.

For decades, the Big Three had a monopoly on the automotive market.  Wherever you lived in the world, if you wanted a car you bought a Ford, GM or Chrysler product.  So the Big Three could charge whatever they wanted for their cars.  That is, until the Japanese entered the market.

Unskilled Line Workers Living Better than Doctors

It was their great success that led to their downfall.  Selling cars with fat profits allowed the Big Three to pay fat wage and benefits.  And they did.  Then the UAW got greedy.  An unskilled line worker could own two houses, a boat, 2 new cars, take expensive vacations, own the latest in toys, etc.  They lived better than doctors.  And doctors were highly skilled.  They spent 8 years in medical school.  And spent a decade of their life paying off the debt from that medical school.  And to add insult to injury, doctors worked 80+ hours per week during that decade when they lived like paupers.  Line workers worked only 40.  And lived like kings.

It was nice work if you could get it.  And many did.  Before the Japanese.  But it all started to come apart in the 1970s.  When the Big Three were selling junk.  Cars that rusted out in a few years.  Unreliable.  Ugly.  These just screamed “we just don’t give a damn anymore.”  More money went to the workers.  Less into making quality cars people wanted.  No problem for the UAW.  I mean, who else were you going to buy a car from?

Hello, what’s this?  Honda?  What’s that?  I’m not sure but it costs less.  And looks pretty good.  Nice quality.  So why should I continue to pay more for less and buy this junk from the Big Three?  Or so went the thinking.  Yes, the Japanese had arrived.  And they were selling something the people wanted.

Fat Wage and Benefit Packages come back to Bite the Big Three in the Ass

So that was the beginning of the end.  Those fat wage and benefit packages for unskilled labor required higher sticker prices than the market was willing to pay.  So they sold fewer cars.  And the Japanese (and, in time, the other imports) sold more.

But it got worse.  Not only were their revenues falling, but their costs were rising.  The Big Three were around for awhile.  They had an aging work force that was retiring.  And getting sick.  Pension and health care costs soared.  Costs per car soared.  While the Japanese were enjoying economies of scales (the more you sell the less each unit costs to make), the Big Three were bleeding red ink all over their balance sheets.

I was in a meeting one time on the floor of an assembly plant.  I was staring at the part of the line where a worker threw insulation into the bottom of the trunk.  She threw in a pad.  Walked over to her coworker at the next station.  Chatted a bit.  Walked back to her station.  Talked to someone else.  Then threw a pad into the next car on the line.  I could just see the red ink bleed.

The Big Three screwed themselves.  In order to cover those fat wage and benefit packages for their unskilled workers, they have to sell cars for a whole lot more than their competition was.  And they couldn’t.  Imagine McDonald’s workers receiving the same wage and benefit packages as the UAW.  And cooking hamburgers at the same pace.  You’d have to wait in line for 45 minutes for your burger.  And you’d pay over $20 for a Quarter Pounder with Cheese.

Buying American is not Necessarily American

I often see those bumper stickers that ask, “Unemployed?  Keep buying foreign.”  Or something like that.  What these people don’t understand, or choose not to understand, is that more people buy cars than make cars.  Paying more for less helps the few people that build cars.  While they enjoy a very good life, the greater number of buyers of those cars have to get by on less.  So the economy as a whole gets worse.  To help a group of unskilled workers live a better life than our own.

Is that fair?  Making the majority subsidize a minority elite?  Unless you live in North Korea or Cuba, the answer is, of course, ‘no’.  So we choose to buy what gives us the most value for our money.  Which is why the Japanese upstart Toyota would see the day when they would sell more cars than GM.  And why did they reach this remarkable milestone?  Because they were selling what people were willing to buy.

Interestingly, the GM and Chrysler bailouts were not your run of the mill reorganizations.  By the power the government gave itself, they walked all over the Rule of Law.  These companies didn’t have a debt problem.  Not anymore, at least.  Because the government screwed the bondholders.  And who did they reward?  That’s right, those unskilled UAW line workers.  The reorganization gave them shares in the new company for no other reason other than being politically loyal to the Democrat Party.  They weren’t even in the line of secured creditors, but that didn’t stop them from jumping to the head of that line.  Remarkable, really.  The Rule of Law had become merely a suggestion.

And when the union sold those ‘gift’ shares of stock they funded their unfunded pension liabilities.  While retirees who invested their life savings into GM bonds lost everything and had to get a job at McDonald’s.  Because McDonald’s is always hiring.  Because they are always selling something people want to buy.

McDonald’s can still Hire during Bad Economic Times

Like my finance professor said, no company fails because of a debt/cost problem.  A debt/cost problem happens when something happens to revenue.  And the biggest reason a business has a revenue problem is because of competition.  Someone somewhere is selling more for less.  Giving the people more bang for the buck.

During bad economic times, revenue problems quickly turn into cost problems.  For some.  Auto manufacturers may idle a shift at an assembly plant, laying off hundreds.  Because there’s no point in making cars no one is buying.  And these manufacturers simply cannot afford to pay these fat wage and benefit packages if they’re not selling cars.

But not everyone has the same financial problems during a recession.  Some still hire during bad economic times.  McDonald’s for one.  Why?  A couple of reasons.  Their workers don’t belong to the UAW.  Because of this we can still call McDonald’s fast food.  And your typical McDonald’s worker doesn’t own two houses, two cars and a boat.  So we don’t have to pay $37.50 for a #2 combo meal. 

We’re buying what McDonald’s is selling.  So they can hire people.  Even during bad economic times.

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