Was GE correct in replacing its CEO?

A nagging thought kept running through my mind when I read General Electric had replaced Mr. John Flannery as Chief Executive Officer after just 14 months on the job: Was he given enough time to fix this huge severely distressed $120 billion company?

My answer is no...

It would take at least 3 years to fix a company with the complexity and size of General Electric. It is extremely difficult to even save a smaller company with sales under $300 million in only one year, based on my own experience completing a number of turnarounds as CEO. This type of challenge takes time.

In my experience, although the chief executive officer I replaced had failed, the Board of Directors were at times also at fault and contributed to the failure. In more than one turnaround, the Board was more at fault than the chief executive officer.

It is not difficult to determine that a company is failing but surprisingly, in my experience, some Boards did not recognize that management failed and that the company was in trouble until the decline was at a desperate crisis level.

One has to wonder....

Why wasn’t General Electric’s decline identified some years earlier when it would have been easier to fix the problems? Siemens, one of General Electric’s competitors, realized it was headed for trouble in 2003 and began a restructuring. Now Siemens is reportedly successful.

News reports suggest GE's entire Board of Directors will be replaced by 2019. There are currently six new Board members.  But 5 of the 11 current Board members recently involved with removing Flannery were also on the Board during the company's decline. Did these five Board members participate in the decision to replace Flannery? If yes, how can anyone be certain the latest move was sound? Or did this Board make another poorly considered decision that got General Electric in trouble in the first place?

Personally I find General Electric’s demise particularly sad, since I started my career at GE. I would have thought this decline would have been virtually impossible after the excellent job Mr. Jack Welch completed in building GE from its troubled condition when he took over.

Bloomberg: GE Ousts Flannery After Slump, Names Lawrence Culp CEO 

Washington Post: Why GE is making a dramaticoverhaul to its board of directors

CNBC: GE was once America's most valuable company. Today it is fighting junk-bond status.

Wall Street Journal: GE Powered the American Century—Then It Burned Out
 

Lenders Change their Treatment of Troubled Loans

An interesting recent Reuters article, titled 'Lenders More Willing To Own Bankrupt Firms', documents a fairly significant change in the distressed and bankrupt marketplace. Lenders, it reports, are no longer selling their delinquent and troubled loans. They are not selling the loans at steep discounts. They are converting loans to equity ownership and managing the companies themselves.

Reportedly lenders are “kicking the proverbial can down the street" by granting waivers. They are no longer forcing companies to default, or marking loans to market. This is quite unusual, as compared to prior practice.

Will this continue? Once the economy improves, will lenders focus on lending money? Or will lenders continue to be owners and manage the operating companies? Or will they return to selling troubled loans?

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.