The Jaguar and Land Rover Turnaround

I was pleased to read the New York Times recent article “Tata Motors Finds Success in Jaguar LandRover”.

The article describes the turnaround of the troubled England based manufacturer of Jaguars and Land Rovers by Tata Motors an automobile manufacturer headquartered in India.

Tata purchased the company from Ford Motor Company in 2008.

The sad aspect of this story is that an Indian automobile manufacturer could fix and turnaround this complex operation but the venerable Ford Motor Company could not.

Surprisingly, this may be an indication of some weakness in Ford's management ability.

Allegedly foreign manufacturing operations in developing countries are not capable of matching the management abilities of USA companies.

Can Ford's failure in this regard, be applied to studying the weakness in the USA's overall manufacturing capability?

The question remains, “Can Manufacturing Return to the USA?”

General Motors – Industry Leader?

Regardless of various company officials and politicians assurances that General Motors Company’s rescue is a success, several facts cast a cloud over its viability:

● Its products are not cost competitive.

Hourly union labor costs are too high at approximately $58 per hour. Its USA based Asian competitors have lower labor costs. Two are at $40 per hour – a significant 31% difference.

In this recessionary economic climate the recent union contract settlement seems to be a continuation of GM’s past practices of agreeing to a high cost settlement. Did it increase GM’s labor costs?

High labor costs have been and continue to be GM’s Achilles’ heel and needed to be corrected during its bankruptcy process.

● The Chevrolet Volt does not appear to be a viable product. High price at $40,000. Limited performance and cost disadvantage. Not competitive versus alternatives.

● Its Chief Executive Officer does not have in-depth experience in a manufacturing company – his experience is largely in service companies. This is a negative. In comparison, Ford Motor Company’s CEO has the in-depth background and experience operating inside a manufacturing company that bodes well for Ford’s success.

Mr. Jack Welch is an example of a highly successful chief executive officer of a manufacturing company. He started at a relatively low, entry level position at General Electric Company. As he progressed upward, he gained knowledge of all the functions in manufacturing which gave him the experience and instincts to develop GE into a successful company.

Can GM return to its leadership position with a number one USA market share in the next several years? With its high labor costs and questionable product line-up it is doubtful that GM can be successful competing with lower cost, well-run Asian competitors.

Sources:

The Daily, May 2011

The New York Times, September 2011

Ford Motor Company Reports Profit – Positives and Negatives

The Positives:

“…the only major U.S. automaker to avoid bankruptcy, posted third-quarter net income of $997 million and its first operating profit since early 2008…”.

“…finished the third quarter with $23.8 billion in automotive cash, up from $21 billion at the end of the second quarter.”

“…U.S. market share increased to 15.8 percent for the first nine months, compared with 14.8 percent from a year earlier…”.

Certainly, registering a third-quarter 2009 positive profit with a market share gain are excellent and solid signals. Unfortunately it overlooks Ford’s negatives, which give pause and concern for the future.

The Negatives:

“…workers have overwhelmingly rejected contract changes that would have allowed the automaker to cut labor costs.” “Ford sought the deal to bring its labor costs in line with Detroit rivals Chrysler Group LLC and General Motors Co….”.

Bringing Ford's hourly labor costs in line with General Motor's and Chrysler's should not be the priority. The priority is to become cost competitive with USA based Japanese automotive manufacturers. Ford's, GM's and Chrysler's hourly base wage rates and benefit costs are reportedly $20 to $30 per hour higher than Japanese competitors. Doubtful these costs were reduced in the GM and Chrysler bankruptcies. This remains a huge problem.

“…workers felt they were being asked to sacrifice more than the company's executives. Ford CEO Alan Mulally made $17.7 million last year…”.

There is some justification in the Unionized Employees position on this issue. Hourly employees are well aware that officers of a major company have significantly higher incomes. This is not an issue in healthy economic times. But in poor economic periods, if Management is perceived as not sacrificing with all on board, then a disconnect is created, and polarization with contract rejection occurs.

A helpful signal for Unionized employees, to convey Management is being serious about reducing overhead costs, is if Ford has cut back on some Executive perks. Does Ford still have an executive dining room, replete with waitresses, multi-course menus, and silver finger bowls?

“He (Alan Mulally, CEO) hasn’t presided over an annual profit at Ford, which has posted three straight full-year losses totaling $30 billion.”

Other questions exist. For example, did the quarterly profit rely heavily on favorable product mix and pricing? Will these same conditions be available in future fiscal years?

The list of negatives should not detract from the solid job Mr. Mulally and his team has done in beginning Ford's turn around. The challenges are enormous, and Mr. Mulally has clearly moved it in the right direction.

The GM & Chrysler Bankruptcies

“The General Motors Corp. Chapter 11 bankruptcy marks the humbling of an American icon that once dominated the global car industry and sets up a high-stakes gamble for USA taxpayers.”

Reportedly both General Motors and Chrysler will exit from Chapter 11 Bankruptcy Court in 60 to 90 days. This sounds like wishful thinking and may involve some public relations imagery. To “correctly” restructure a significantly less complex and smaller manufacturing company, would require at least one year. The rush may produce more problems for all involved.

Regardless, one of GM’s and Chrysler’s most significant problems is that hourly labor costs are reportedly $20 to $30 per hour higher than their USA based Japanese competitors. It doesn’t appear that this most fundamental weakness has been addressed in a serious manner.

Most of the Japanese competitors have non-union hourly labor in their USA manufacturing operations. As such, their labor costs will not significantly increase over time. In addition, for the past few years, the Japanese Automakers have made higher capital investments to improve productivity. The cash strapped Big Three have not been able to match its competition.

Recent GM and Chrysler plant closings and operational restructurings have reduced their overall costs by billions of dollars, as well as their hourly headcounts by the thousands. However, the overall impact is misleading. The hourly cost for direct labor employees has not been reduced. And will continue to prove to be a vivid Achilles’ heel for the legendary USA manufacturers.

While the total of manufactured GM and Chrysler automobiles have declined significantly, the actual cost of each automobile continues to be higher than its Japanese competition. The Automakers will continue to prove unable to compete with this inherit weakness. Besides overt Labor commitments, another higher cost factor to consider is unabsorbed manufacturing overhead, since production is lower in existing plants. This is not a healthy sign.

However, the most important factor remains, has the UAW agreed to reduce the total cost for hourly direct labor employees?

Regretfully, there is no evidence of a reduction in hourly labor rates...

It is doubtful any labor cost concession will be meaningful if this is true:
"The fear at the UAW was that ownership in GM could eventually be worth very little.”

Thus, as it stands, GM and Chrysler will continue to lose money and will probably be forced to return to bankruptcy protection. We will have to wait to see what structure the FIAT buyout of Chrysler will produce. But, if there is a next time for GM in bankruptcy, it may have to execute liquidation under the Chapter 7 bankruptcy code. That is, if the US Government, which now owns 70% of the company, will allow it.

In addition, salaried headcounts appear too high. While this can be dealt with outside of the bankruptcy process, GM and Chrysler should analyze their salaried organizations and adopt Toyota’s performance target of 10% improvements in salaried productivity every year.

Regardless, neither company should exit from bankruptcy protection until the operations are restructured to allow a competitive, best cost manufacturing operation to emerge. We shall see, both GM and Chrysler face enormous challenges for survival.

Have two of the Big Three suffered such a loss in reputation over the years, their brands are too damaged beyond repair for today’s marketplace?

No, quality management can turn anything around with the right strategy, capital, cost structure, and culture. But it requires the tools needed to compete. Anything is possible.

Why William Clay Ford, Jr. Failed

In October 2006, the Ford Motor Company replaced William Clay Ford, Jr. as its Chief Executive Officer.

Why did Mr. Ford fail?

His own words, reported by Micheline Maynard of the New York Times on July 16, 2006, titled "Is Ford Running On Empty" revealed the answer.

"I bowed to managers on what I knew were product development mistakes”. “I can’t delegate to anybody…dealing with unyielding managers that stymie and condescend to me.” “… would have performed better if not faced with people obstacles”. - William Clay Ford, Jr.

Mr. Ford cited as one of his victories his environmentally friendly new River Rouge assembly plant. He believed this to be a victory because “…I did it over the objections of company executives.”

He brought in a new Chief of Staff and Gatekeeper, who is his best friend and brother-in-law, whose prior experience was as manager of the Henry Ford Museum. “He helps me decide which meetings and projects deserve my attention.”

One of his priorities was examining “…everything from how we’re going to treat each other in meetings to the trappings of our job.”

All of the priorities he listed in the article were essentially 'trivial many' when he had vital priorities that need attention. His “River Rouge” victory was quite minor with the intractable problems Ford is facing. Crowing about it publicly was a polarizing mistake. His new Chief of Staff, his brother in-law, further undermined him.

He made the fundamental CEO error, not persuading his managers to change their position on vital priorities. If he couldn’t persuade them, he should have made the correct strategic decision. He was not leading the company. He was not in command.

One example of Ford’s bloated overhead is its executive dining room replete with waitresses, multi-course menu, and silver finger bowls. Mr. Ford would have been more successful if he had executed an operational restructuring that significantly reduced salaried headcount in 2006 – not phased in over 3 years.

Better yet, he would have been well served to adopt Toyota’s performance target of 10% improvements in salaried productivity every year. If he adopted these principals, Mr. Ford, Jr. might then have been in a position to encourage unions to voluntarily modify contracts, base wage rates, pensions, and retiree medical care.

Leadership is learned. Taking command is learned. Mr. Ford held the CEO position for five years. He did not learn.

His lack of leadership and lack of prioritized focus, as demonstrated by his poor relationship with his managers, turned into poor performance at Ford. Only increasing Ford's low quality ratings, unimpressive new models, lack of worldwide integration in sourcing - product development, and the negative financial performance.

Alan Mulally, Ford’s new CEO, would be well served if he followed the practice of Neville Isdell when he was first named CEO of Coca-Cola. He was asked what are his plans for the company. Mr. Isdell's memorable response: "I plan to spend the first 120 days visiting employees and managers around Coke finding out what the state of the business really is."

Certainly the correct approach.

It is just that simple to get a company focused. Establish a rough-cut strategy, lead and motivate the team.

Mitt Romney Advises: “Let Detroit Go Bankrupt”

Governor Mitt Romney offers some interesting advice regarding the Big Three in his November 18, 2008 New York Times Op-Ed “Let Detroit Go Bankrupt” summarized as follows:

“If General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.

First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.

That extra burden is estimated to be more than $2,000 per car…But if this cost penalty persists, any bailout will only delay the inevitable.

Second, management as is must go. New faces should be recruited from unrelated industries…

In a managed bankruptcy, the federal government would propel newly competitive and viable automakers, rather than seal their fate with a bailout check.”

Governor Romney is correct.

In a July post on my blog I opined that running out of cash may be the trigger that puts them into bankruptcy, but it will be a blessing in disguise. My reasoning is that the Big Three’s hourly labor costs are reportedly $20 to $30 higher than their USA based Japanese competitors. In my experience as a Turnaround CEO, this will not be reduced in a voluntary agreement with their union. If it is not corrected, they will continue to decline and probably will not survive.

Chapter 11 Bankruptcy protection does not mean the end. The companies will continue to operate. While it will be a severe shock to the USA, it is not liquidation. It will allow modification of the factors contributing to losing money - including the high cost labor contracts.

Click here to review my July 28, 2008 post: “Bankruptcy – The Fate of General Motors, Ford and Chrysler?”

Bankruptcy - The Fate of General Motors, Ford and Chrysler?

General Motors, Ford and Chrysler may have to enter into Bankruptcy to reduce their hourly cost of labor. Running out of cash may be the trigger that puts one or all of them into bankruptcy, but it will be a blessing in disguise.

One of their most significant problems is that their hourly labor costs are reportedly $20 to $30 per hour higher than their Japanese competitors. Some of the differential will be reduced with the UAW’s assumption of retiree health care with VEBA -- Voluntary Employee Beneficiary Association – beginning in 2010. This could reduce employee health insurance costs by one-third but will only produce a relatively small reduction in hourly labor costs. This won’t be enough - including consideration of the two-tier wage structure.

Most of the Japanese competitors have non-union hourly labor in their USA manufacturing operations. As such, their labor costs will not significantly increase over time. In fact, they will probably decrease because of higher capital investments with more effective productivity improvements.

By comparison, GM, Ford and Chrysler are at a distinct disadvantage. They are strapped for cash which severely limits their ability to invest capital for operating improvements. Recent plant closings and operational restructuring have reduced their overall costs by billions of dollars, as well as their hourly headcounts by the thousands. However, the overall impact is somewhat misleading. The hourly cost for direct labor employees has not been reduced. While the number of automobiles manufactured by the Big Three have declined in dramatic fashion, the actual cost of each automobile continues to be higher than its Japanese competition.

Will they be able to negotiate “voluntary” hourly labor cost reductions with the UAW?

One negative example from my turnaround experiences:

I was CEO of a legally insolvent, severely distressed manufacturing company. We asked the local union members to accept minor “voluntary” changes in the union labor contract. Specifically, we needed a delay in the contracted 3% increase in the base wage rate and an increase in the co-pay percentage for health insurance. These proposals were rejected by the local union leaders, although we had the International’s support for the changes. The local labor leaders proved indifferent to the company’s condition and were hostile to essential requests needed for the restructuring required to help save the company.

Admittedly this distressed company was not the size of GM, Ford or Chrysler. However experience suggests the UAW will not “voluntarily” agree to the significant reductions needed in hourly labor costs. (Which may require cuts as large as $10 per hour or more). Thus, the Big Three will be forced to attempt to terminate the labor agreement in Bankruptcy Court. If they fail to do so, they will continue to decline. And their future will offer even more desperate operating and financial conditions.