Saturday, November 08, 2008

Savings

Hey, you know, maybe the reason that GM is in such trouble is that it made such shitty cars for so long, that it kept adding features to a signature line of vehicles that consisted of an inefficient engine and a big heavy box on a cheap-ass pick-up chassis. Maybe if the central operating assumption of their entire business hadn't been that things were going to remain exactly as they were forever, only better, they wouldn't be in such a fix. This is really the central and unaddressed issue in the whole economic clusterfuck--not that no one saw it coming, but that no one thought it prudent to plan in general for contingencies. None of the finance firms thought it wise to have some backup just in case there was a downturn. No one at the American automakers thought it smart to have a rainy-day plan just in case there was a tightening in the energy market or a rise in commodity prices. "No one could have predicted" is a red herring. The issue isn't prescience; it's basic foresight.

Posted by IOZ at 10:45 AM | email »
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20 comments:

Cüneyt said...

You see, this is what I keep coming back for. I haven't seen common sense discussed so frankly, at least not in the last few weeks.

Sorry to be a noisome cheerleader, but that post nails it.

11:06 AM
The Promiscuous Reader said...

But as the President-Elect has been saying for months, when GM only sells about 5,000 cars in Korea and Hyundai sells half a million cars in the US (or whatever the figures are), something is wrong. His remedy: affirmative action for GM in the form of a Free Trade Agreement.

12:01 PM
cthulhu's mom said...

To borrow from a commenter on another blog:

"A corporation's obligations are defined by the corporate code of the state in which it's incorporated. The most common one is Delaware for a variety of reasons, but one of which is that the Delaware General Corporation Law does indeed obligate the corporation to maximize shareholder value as its central purpose, and create a cause of action for shareholders to sue the corporation for failing to adhere to that obligation."

GM didn't decide to make cheap cars in order to maximize the bottom line - they were obligated to make them, if the sale of such cars added a few extra cents of shareholder value. Hell, they would have been sued if they decided to put cash aside for a rainy day.

Companies are required by law to be short-sighted idiots. It's the American way.

12:03 PM
Phillip Allen said...

cthulhu's mom is correct in that Delaware law makes 'shareholder value' the primary responsibility of a corporation's BoD. It's been that way for a very long time. What changed at some point in the past 20-30 years is the idea that 'shareholder value' is defined as rate of quarterly return. 'Long term' began to be seen as, at best two, three or maybe four quarters out. If anyone tried to suggest that a perspective of years was more appropriate, and that uninterrupted growth was not the only possible scenario, they found themselves silenced and/or unemployed.

When GM goes bankrupt it will be hard to defend their stewardship of their shareholders' 'value'.

7:10 PM
Anonymous said...

Subsidizing ineptness is a hallmark of American "capitalism". Witness our agricultural policy.

We can pay to have millions of cars parked on the million squared acres of asphalt we have laid down (another example of the above).

10:21 AM
MR Bill said...

Phillip Allen is right on this one: this country has been ruined by little bastards who thought gettin' a good quarter was more important than long term and sustainable growth.. As someone said, "there a folks who would burn up the planet for a few extra bucks.."Money, not good cars, was the idea, instead of making money off cars..And blaming the unions for getting good pay and benfits is not acceptable.The rest of the world can do it, or at least the Japanese and Germans..
And GM (as well as Ford and Chrysler) have been wedded to marketing instead of making cars.
I blame Harley Earle..

10:23 AM
Anonymous said...

W4B;

Fixing the country's healthcare system would be the number one fix for America's auto industry, but we're led buy folks who are scared shitless that they'll be required to wait in line behind poor black kids at the doctor's office.

Fixing the country's healthcare system would be the number one fix for America's auto industry, but we live in the only place on the planet that would pass a law to disallow collective bargaining for the price of drugs.

Fixing the country's healthcare system would be the number one fix for America's auto industry, but we blindly accept an obvious fallacy that 'market forces' have already resulted in our having the best healthcare system in the world.

And besides, how can we fix the American auto industry if they haven’t fired the design team that gave us the Pontiac Aztec?

2:01 PM
Patrick D said...

What changed at some point in the past 20-30 years is the idea that 'shareholder value' is defined as rate of quarterly return.

Which might be relevant if GM and the other U.S. auto producers hadn't sucked for the last 40 years.

this country has been ruined by little bastards who thought gettin' a good quarter was more important than long term and sustainable growth..

in other words, the majority of the population.

Fixing the country's healthcare system would be the number one fix for America's auto industry,...

Sorry. How is picking up the Big 3's healthcare tab going to result in American cars that don't suck?

... but we're led buy folks who are scared shitless that they'll be required to wait in line behind poor black kids at the doctor's office.

What scares me shitless is not waiting my turn behind poor black kids but linking my future even more closely to the health of people who think a plate of food that would fill a slop bucket represents a "sensible portion" and channel surfing counts as “regular exercise”... again, the majority of the population.

8:27 AM
Anonymous said...

"...in other words, the majority of the population."

60% of stock is owned by the top 1%
80% of stock is owned by the top 10%
90% of stock is owned by the top 20%

The majority of the population is ill served by the "little bastards", who are a relative few but whose screw-ups and malfeasance have put us in this situation.

"Sorry. How is picking up the Big 3's healthcare tab going to result in American cars that don't suck?

The cost of health care impacts the big three to the tune of about $1635.00/car.

The last time I checked GM was loosing about $400/car, so health care makes the difference between making $1250, or losing $400.

As far as the product sucking, some does and some doesn't.

The American auto-makers have to improve their offerings, but making a profit can only make that easier.

I don't think it makes sense to trash the whole industry to cure bad management.

"What scares me shitless is not waiting my turn behind poor black kids but linking my future even more closely to the health of people who think a plate of food that would fill a slop bucket represents a "sensible portion" and channel surfing counts as “regular exercise”... again, the majority of the population."

You're painting with a rather broad brush Patrick, reform of our healthcare system will bring positive benefits to our economy, and there is no reason it has to negatively impact your future.

11:54 AM
Dunc said...

Contingency planning is economically inefficient, right up until the moment you need it. And then it's too late...

They key problem with an even notionally market-driven economy is that it has absolutely no foresight. It's like trying to drive whilst looking solely in the rear-view mirror.

12:43 PM
patrick d said...

Regarding investor math, stock ownership is not the sole indicator of the pervasive desire for immediate gratification. In fact, stock ownership rarely offers immediate gratification.

The American auto-makers have to improve their offerings, but making a profit can only make that easier.

In what universe do profits result in desirable products efficiently produced and services efficiently delivered versus the other way around? Having profits drop into one's lap rarely motivates harder work.

I don't think it makes sense to trash the whole industry to cure bad management.

Will you be deciding what to do with the auto industry before or after the real estate, food, pharmaceutical, and dog toy industries?

Seriously, I worked in the auto industry in MI and Asia for a bit. Denial and delusion in Detroit have been pervasive from the corner office to the factory floor for decades. Not allowing failure enables self-destructive behavior to continue and just sets the stage for a much bigger disaster later.

You're painting with a rather broad brush Patrick,...

Indeed. It is the same broad brush dipped in bright, snarky colors that numerous public health experts use (dipped in dark, solemn, politically-correct tones) to describe pervasive unhealthy behavior. They call it "unhealthy lifestyle choices" that cause "national epidemics". I call it an epidemic of self-destructive stupidity and underwriting it absolutely has, and will have, a negative impact on me.

4:03 PM
patrick d said...

Contingency planning is economically inefficient, right up until the moment you need it. And then it's too late...

dunc,

I see where you're coming from on this but I would say economic efficiency, broadly speaking, is all about balancing risk with reward. The problem is a pervasive lack of understanding of or respect for the risk part of that equation. IOZ's "innumeracy of optimism" is part of that. (Many thanks for that, IOZ. I've been looking for that phrase for 15 years.)

At the business level, I'd say it is one of the primary elements determining managerial competence. I was in internal audit at the best managed company I've worked for. We identified significant financial, legal, and operational risks to the company and determined whether there were robust processes in place to mitigate them. If not, the CFO and Audit Committee of the Board of Directors bashed heads until they were addressed.

At the company with mediocre management, risk mitigation was not as rigorous but at least my operations finance group was able to kill a lot of risky new business ideas before they lost a ton of money. Actually, "risky" is generous. Let's call them business ideas that only had a wisp of a chance of making money if the universe turned on a dime in our favor and nothing ever went wrong. "Innumeracy of optimism"... sweet!

The poorly managed company... well, they were just a bug waiting for a windshield.

4:53 PM
cb said...

I call it an epidemic of self-destructive stupidity and underwriting it absolutely has, and will have, a negative impact on me.

Dude, you're underwriting it already. Preventative care is much cheaper than last-minute fixes, on the whole. But, the vast group of uninsured Americans completely skips preventative care because they can't afford it (no insurance for routine doctor visits). This means that eventually something happens to them (usually the end result of a manageable but untreated chronic condition, like diabetes), and they wind up getting catastrophe care in the emergency room, which is the one place they won't be refused. And in case of non-payment for the expensive, expensive emergency room operations, the hospital gets its money from -- SURPRISE! -- your tax dollars. So chin up, buddy, you're paying for them anyway!

6:26 PM
Brian said...

But...But...But...if we REMOVE the ebil guv'mint requirement that hospitals treat the destitute, then those nefarious fat people and other untermenschen can just go die on the street! And corpse removal will cost our good commentator much less. Of course, there are plagues and such, but I am sure that as a Master of the Universe he will live in a gated community with filtered air and will thus remain totally untouched by the well deserved tragedies of the lesser races.

8:04 PM
patrick d said...

Damn. The assumptions are staggering.

I didn't respond to cb because I figured he/she wasn't paying attention (but was nonetheless was grateful for the moment of nostalgia for when I was a liberal and used that same argument for socialized medicine more than a decade ago). But geez, brian, WTF did I post that indicates that I was referring to the poor or minorities?

BTW, "poor" is such an abused term. I suggest getting yourself a passport and embarking on journey to see what poverty and destitution really look like. Someplace with refugee camps is ideal. Hanging around to work with and get to know the residents would be even better. You'll note that the primary concern of the poor and destitute is scrounging up more calories than they burn in a given day vs. seeking care for maladies resulting from obesity.

1:26 AM
patrick d said...

This time in the vernacular...

Dude, the poor and destitute are not the issue here.

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