Bold Exec

Lingo is Important

Would you buy a used car from this person?

There are many companies in difficulty, requiring expenses to be reduced. One key expense, of course, is personnel wages and salaries. So one obvious requirement then is laying off or firing employees--sad and tragic for those affected but, if done wisely, hopefully saving the remaining jobs and providing for the possibility of employment growth in the future. There are many ways to reduce employee costs, and usually the easier but typically wrong methodology is utilized (see category F. Progressive Downsizing in the right hand column).

But regardless, the message sent by the CEO is all telling. An honest, straightforward, you-can-bet-on-him CEO will say it like it is, along the lines of "we have to terminate x employees in order to have the opportunity for our company to stay alive". But when a CEO uses one of these spin lines of obfuscation, if i have an equity position i sell it--fast like a scared bunny:

     *downsized
     *rightsized
     *synergy related headcount adjustment
     *actions to simplify the organization
     *offboarding
     *rationalizing
     *surplusing
     *de-verticalization

If you have to take tough decisions, first do them right but at the very least have the guts to say it like it is.        

So----if a CEO uses one of these or any other obfuscating spin description for a program to terminate employees, find another place for your equity investment.

GM, Crisis Management, Opportunity, Life Hereafter

Why not a structured, disciplined, at-least-partially-pre-packaged bankruptcy for GM?

"Bankruptcy is not an option--we can't afford all the job losses." Come on, it's rather remarkable that many politicians and pundits still don't know that bankruptcy doesn't mean close the doors; it might, but rather it is a process that can lead either to a shut down or to all parties taking giant haircuts in a command (vs. voluntary) environment with the threat of a shut down bringing them to their senses. ONLY through a process where ALL parties take GIANT reductions (see my previous blogs below on a ten step plan for GM) does GM have a CHANCE to be a viable company. Catch these key words; ONLY, ALL, GIANT,CHANCE.

"No one will buy a car from a company in bankruptcy."       Why would anyone buy a car from a company not in bankruptcy but surviving only on the back of government issued short term loans? While there is some reality in this point, it is primarily a mantra eminating from the UAW who don't want to see their authority, high wages and benefits, and choking work regulations threatened. Anyway, this threat of extinction while in bankruptcy is actually a good thing; it can lead all the parties to rapid resolution and a rapid re-emergence. If necessary the government can issue, while in bankruptcy, a temporary guarantee on car warranties. There are creative ways around this issue.

"No one will provide DIP (debtor in possession) financing to this company." True. But if the USGov. has an option to provide bailout funding (clearly throwing good--well anyway recently printed--money after bad), or providing DIP financing (with at least some chance of recovery), then the latter is a much, much wiser bet.

The auto industry is in a real crisis. Crises bring opportunities, sometimes once in a generation opportunities. Poor leaders squander such opportunities. Great leaders take full advantage and create a new and potentially prosperous future.

U.S. Energy Policy

  The world frets over oil usage, shortages, wild price fluctuations, global warming--many recommended solutions involve integrating China into the world oil groups, setting world-wide policy, using tax breaks, and other typical governmental bureaucratic solutions. They won't work. We go round and round and no real progress has been made; ever. 

Any tough and major problem needs to be broken down into it's individual elements, a determination made as to which are the most important, and then working on individual solutions in ways that provide sustainable and lasting effects. Obviously one of the key sub-problems on this subject is U.S. automobile gasoline consumption. So let's work on it, and break it down even further. Here are the relevant objectives and constraints.

Objective #1: create a natural desire on the part of the U.S. driving public to want high fuel economy cars.
Objective #2: create a plannable horizon for various fuel efficiency and alternative energy investments.
Constraint #1: Using tax breaks to aid investment returns is bad policy; it is generally too slow and has the Congress making industrial decisions in response to lobbying pressure.
Constraint #2: Simply legislating higher fuel efficiency standards, while a good idea on its own, is completely insufficient if the consuming public isn't demanding fuel efficient cars; no car company can tell its consumers what to purchase.
Constraint #3: raising gasoline taxes sufficiently to affect the U.S. consumer's gasoline purchasing decisions and simultaneously providing a sufficient ceiling to entice alternative energy investments w/o tax breaks has been viewed as political destruction.
Constraint #4: the world is, and consumers are, likely to see continuing oil/gasoline major price fluctuations which significantly impacts low/middle income people's budgets

So let's do something our government isn't particularly good at, and think long term. Here's a solution that, in today's environment, could gain support.

Point #1: raise the gasoline tax in one piece of long-term legislation as follows:
 *2009  10 cents
 *2010 another 10 cents
 *2011 another 20 cents
 *2012 another 25 cents
 *2013 another 25 cents
 *and so on at 25 cents/year until it reaches $2.00
Point #2: send all these taxes directly into U.S. infrastructure building via a newly formed disbursement agency. Given the predictability of the cash stream, bonds could be issued to accelerate short term funds.
Point #3: to dampen price fluctuations; when the price of gasoline at the pump reached certain price thresh-holds for a given quarter, the tax would be reduced in the subsequent quarter in an amount sufficient to drive the price downward toward that same thresh-hold. That thresh-hold would be increased on a yearly basis by a CPI-like adjustment--for example;
 *2009  $4.00
 *2010  $4.12
 *2011  $4.25
Here's an illustration. If in the third quarter of 2010 the average gasoline price at the pump was $4.27 (15 cents over the thresh-hold), for the 4th quarter the tax (which at that time would be 20 cents) would be reduced by 15 cents.

This accomplishes all our national objectives. Consumers know that higher gasoline prices are coming via this infrastructure tax and can make their long term decisions accordingly; alternative energy investors can plan on a minimum level of fuel costs and make their decisions accordingly; automotive companies know that the price of gasoline will be continuously higher over a planning period and adjust their strategies to high efficiency cars; and infrastructure and jobs-creation objectives are enhanced. This also gives the U.S. some moral standing with respect to other countries' fuel consumption practices and policies. Note, this would be even better applied on an oil consumption basis--i however have used gasoline in this example as the numbers are more familiar to the general public.

Show Me The Plan: GM Part II, items 6-10

Here's Part II, items 6-10, of the required GM (show-me-the) plan. First, to repeat from last week:

GM has to go through bankruptcy procedings, but (a) a long drawn out bankruptcy  will degrade from a Chapter 11 (reorganization) to a Chapter 7 (liquidation), and (b) no lender is likely to step up to provide DIP (financing during bankruptcy) lending. So instead this crisis requires (c) a pre-packaged bankruptcy which allows for a rapid in/out and (d) government financing when the necessary reorganization conditions are met. Pre-packaged bankruptices aren't typically used because all the parties involved won't agree without long, stressful negotiations on actions they individually don't want to do. Too bad, they have to and any other course just postpones the inevitable and wastes government/taxpayer funds. Congress needs to say--here is the plan; do it or forget it.

#6. Fuel efficiency standards. Let's cut the crap. Even the current congress-mandated fuel levels and standards (CAFE) are beset by industry-lobbied gimmicks. First, Everyone knows that the EPA established mileage criteria for each car is bogus by about 15% on average; no one ever gets in actual use the posted mileage on new car stickers--so the measuring criteria needs fixed. Then, secondly, eliminate all the exceptions that have been lobbied in, the 10mpg "adder" for cars that have an ethanol sticker on the gas cap, vans, SUV's, etc. No exceptions: no exemptions. Third, the standards are to apply to all cars sold in the U.S. by each manufacturer regardless of where they're made. Fourth, let's set real but stretch standards that increase over a 10 year period. All manufacturers (not just GM) that don't meet these objectives pay huge fines.

#7. GM's board. I'm sorry but the board has been awful. There may be some on the board that have appropriate credentials and attitudes but clearly they have not been a prevalent force. So they all must go. The board should have tough experienced managers, including representatives from some high performance LBO groups--for example--overseeing the bankruptcy/government debt conditions and making sure they are all followed; folks looking forward to renewed performance not looking backward at what has been. This board-cleansing includes the CEO.

#8. I have saved the labor union issues for last for a particular reason. Everyone bangs on these issues and they are critical, but items 1-7 are equally critical. Within the category of labor union issues wage rates, per se, are not the most important, but do need addressed. The average hourly rate should be established at the same level as the wage rates paid to similar workers in non U.S. based automotive companies with plants in the U.S. Simple--just do it. This, however, I believe to be a minor issue as you will see in items 9 & 10.

#9. The first real critical labor issue relates to work rules. Labor leaders have stated publicly "look at all we've given back on work rules." Well, giving back an item or two out of dozens or hundreds of efficiency stifling rules isn't scratching the surface. The encyclopedia of work rules prevents operating efficiencies and retards productivity. So, they all go. Period! Start-up companies don't have work rules. Non-unionized companies don't have work rules. They are an absolute block to one of America's greatest strength; steady and ongoing productivity increases. Example: two companies pay exactly the same wages; one has work rules that hinders production changes and productivity improvements and hence needs 50% more employees. Guess who wins; who dies!  All work rules have to go.

#10. Ongoing labor costs after retirement, after termination, after layoffs. I don't even know how to address this one. These three categories require a major haircut if not complete extinguishment. There are many specific issues here relating to fairness and alternatives so I don't want to, and don't have the insight to, create an exact formula. But no company can afford this giant overhang, and the bulk--or all--of these costs need to go.

Items 1-10 comprise the reason GM cannot make money on anything other than hogs (if even then). Their total labor and overhead costs are so extraordinarily high that they have to be amortized over the large amount of material and components included in the large fuel-gulping and high-priced hogs. With items 1-10 enacted, the resulting costs will allow GM to produce a fleet of cars meeting government policy and consumer dictates for excellent fuel performance and price.

That's the plan. GM's constituencies, executive, middle management, labor, and the board, will fight this plan on their own. That's why chapter 11 of the bankruptcy code exists. If all these constituencies don't agree on this set of pre-packaged conditions, then let the company file, see sales start to plummet, and see if this package then prevails. When they stare into the abyss, attitudes change and previously completely unacceptable conditions don't seem quite so, well, unacceptable. There's another problem. The government doesn't have the faculty to manage this process or to make a clear determination on a change plan that will work (mine above was an apporoximation), so the government should go in parallel with one of the top LBO groups (like Texas Pacific, KKR, Blackstone) with the highly experienced and knowledgable LBO group setting the conditions and then then the government co-funding. If GM then won't meet these conditions, then the country is better off without GM.