What’s wrong with General Motors?

It seems that #GeneralMotors has deteriorated and is in trouble yet again with:

• ·      GM posted a decline in net income of 141% in 2018.
• ·      GM registered a $4 billion net loss in 2017.
• ·      GM recently announced the closure of 6manufacturing plants.

Meanwhile, Toyota actually increased netincome almost 40% in 2018, and earned a net income of $17 billion in 2017.

Why is #Toyota thriving?  While #GM struggles? 

Does corporate staff dominate decision making?

To support its line management large companies develop staff organizations that include advisory services for corporate planning, manufacturing services, market development and finance. Line management produces sales and profits through the functions it manages including manufacturing plants, sales force, supply chain, plant cost accounting, etc. These are separate organizations.

Is General Motors’ driven by its staff organization versus line management driven? In actual practice does General Motors’ staff organization run the company? Do they set goals? Do they develop and write the strategic and operating plans? Do they specify what products are to be sold? Are line officers subordinate to the directions from staff officers?

If its staff organization dominates decision making, this is a serious fault that will lead to continued failure.

Line management leads successful companies, Staff organizations do not.

Out of touch management.

It was once reported in a #Bloomberg article that General Motors’ senior management may not have been informed of the infamous ignition switch failures that resulted in consumer fatalities. The astonishing reason provided was simply,“people didn’t want to push bad news upward” within the company.

Was GM management truly unaware of this stunning problem for a decade?

Depending on a company’s culture, lower ranking employees may not come to a chief executive officer’s office to reveal a problem. Some may not speak up in a meeting with higher ranking officers. Even senior officers may remain silent so as to not violate an unspoken pecking order, keeping vital information from being considered.

If we are to believe that management was unaware of this extremely serious defect for a decade, it suggests General Motors is dysfunctional, lacking an informed leadership. This raises the question of what other hidden operating problems remain at GM its #CEO may not be aware of today that can affect its performance and reputation.

One example: The Chevrolet Volt electric vehicle was first introduced in 2010. It will be discontinued in 2019. Why did it fail? Why did it take 9 years to realize it was a failed product? It was reportedly considered a failure some years ago – well prior to the decision to discontinue production. Was senior management even aware of this failure?

Does GM have a hidebound culture that isolates senior management from accurate and timely information? Thus failing to have a basic understanding of GMs’ operating fundamentals and its internal operation.

Absence of hands-on management by senior officers.

Focused hands-on management requires that the Chief Executive Officer and senior officers submerge themselves into lower organization levels. One must enter into the “bowels” of the company. Go down to the plants, warehouses and administrative offices to talk to hourly employees, non-exempt office and exempt individual contributor employees. The goal is to develop healthy and candid relationships. This grows insight, understanding, functionality, and success. It will result in improved morale, problem resolution, efficiency and reduced costs.

Does GMs’ CEO and senior line officers meet face-to-face with car and truck dealers? Do they occasionally physically visit manufacturing plants, warehouses and remote offices? A couple of times a year is sufficient. Relying purely on staff memos is not going to provide the essential knowledge for sound decision making.

Establishing broad based communication is not hard to do.  It just takes time, effort, discipline. If GMs’ senior management does not have the time in their schedules to periodically do it, they are working on the wrong priorities.

If not, GM will continue to stumble and decline.

Effective headcount reduction.

Reportedly General Motors’ will attempt to reduce costs with a salaried headcount reduction.

In my experience, management will often report the salaried headcount reduction has been executed. Yet, later examination of this action reveals only the removal of hourly employment. To be truly cost effective, headcount reductions must include all within the company beyond just hourly employees. It must include senior and junior officers, managers, salaried exempt and non-exempt staff.

This is important, as this action will affect the morale of the company. Without a reduction across all levels of the organization, a sense of unfairness will be established within the business. Also, the workload will most likely be disproportionally increased on lower ranking employees, ensuring the greater possibility for mistakes. Other essential tasks may not be addressed. In this case, costs will increase as profits decline.

For any corporation with a staff organization, it is best to reduce it to a skeleton organization. This creates a lean, focused, informed, unified leadership. With a streamlined approach, dedicated to promoting healthy relationships, it will become quickly apparent if other levels of the company need improving.

#TurnaroundCEO #GeneralMotors

China's Debt Crisis

China may be forced to continue to increase its debt position. Their cash flow future looks grim.

China’s debt is largely held by corporations. The problem is a fair number of their small and large companies are poorly managed. Their inefficient equipment and systems results in high-cost, money-losing operating companies. This results in deficit cash flows which severely limits the capital available for the repayment of debt.

China is reportedly attempting to have lenders restructure weak loans into equity. The majority of the lenders are banks. Banks will be converting their loans into equity in a number of financially distressed companies which may negatively affect a bank’s financial condition.

Will the current tariff challenge affect corporate revenue and further increase operating losses?

As a consequence China may need to increase its debt to support companies incapable of repayment or restructuring.

Debt Articles:

Forbes

South China Morning Post

China Power

Bloomberg

Tariff Articles:

Bloomberg

Politico

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Is China Facing a Growth and Debt Crisis?

"Will China Shake the World Again?” is a recent article written by Robert Preston. Preston is the Business Editor for the BBC. The piece discusses China’s ability to sustain its growth, manage its heavy debt positions and avoid a disaster equal to or greater than the 2007-2008 financial crisis

Preston believes China has an "unbalanced economy whose recent sources of growth are not sustainable.”

In 2007-2008 “…the Chinese government unleashed a stimulus programme of mammoth scale: £400bn…growth accelerated... But the sources of growth…have a limited life.” “…China's growth rate…really looking at 4%."

 “But what makes much of the spending and investment toxic is the way it was financed: there has been an explosion of lending. China's debts…have increased since 2008 from 125% of GDP to 200%.”

“…investing at that pace…it is a…certainty that much of it will never generate an economic return…debtors unable to meet their obligations…large losses for creditors; the question is not whether this will happen but when, and on what scale.”

Based on my experience working with operating companies in Shanghai and Guangdong, I have to agree. My expectation for China’s future is negative, as their potential for serious growth and continued competitiveness will prove to be very difficult.

Having inspected a number of Chinese owned manufacturing companies in mainland China, it becomes apparent manufacturing knowledge, processes, and systems are woefully behind the times. Contemporary manufacturing in China corresponds to the USA’s 1970 manufacturing capabilities.

Therefore, cost increases from higher wages and inefficient operations are to be expected. Also, unfavorable changes in currency valuation will be a factor. This will result in lower growth, employment and capital availability. This will make it far more difficult to service its debts and fund necessary initiatives.

Judging from my visits, the young and educated Chinese appear much more independent, aggressive and spontaneous. It may make its citizens more difficult to control. Social unrest could be a major issue affecting China's economic development as well.

Click on this link to read Mr. Preston’s article.

Here are some other posts on China:

Is China’s decline permanent?

China to surpass USA as World Leader in manufacturing?

Can Manufacturing Return to the USA?

My AMA article: “Hard-Won Lessons from a Turnaround CEO”

The American Management Association published my article “Anticipate, Focus, Execute - Hard-Won Lessons from a Turnaround CEO”.

An excerpt from the article is as follows:

“After 15 years at Emerson Electric Co, I have spent more than 20 years as a turnaround CEO.  During this time, I have discovered that companies get themselves into trouble, not because of technological advances in the marketplace, new competition, or other external factors, but because they have been mismanaged. Here are eight characteristics that separate successful businesses from those that are headed for trouble.”

Click on this link to read the total article.

Is China’s decline permanent?

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News reports are replete with China’s struggles and decline. China’s past success is frequently labeled a “Bubble” with the question – Is it bursting?

Yes, China is in decline. But not just due to negative Global economic struggles. China has entrenched problems that are contributing to its decline. Are these problems intractable?

Following are significant but an incomplete list of its problems:

● Manufacturing processes and systems are at the same capability level as were in-place in the USA in the 1970s. Relatively inefficient production operations coupled with the sizable increase in hourly factory labor wages are reducing profit margins and free cash flow. A large percentage of Chinese company owners and managers do not have knowledge of the more productive methods of operating.

● The absence of trucking and freight forwarding capabilities to support expansion into lower labor cost Western China. In addition, it is difficult and costly to get quality managers to move to these remote areas.

● China needs to maintain its historic growth rates to ensure that capital is available to clean up its environmental problems. In addition, high employment levels must be available to mitigate the current increases in social protests and riots.

There are several other negatives for China. Click on these links to see further details:

Where is China Heading?

China’s Achilles’ heel– Obstacles to Low Cost

Will China duplicate Japan’s decline from its 1980s success level?

Not exactly the same as Japan since China’s leaders have a history of responding and changing its formulas. But some of its entrenched problems will not be easily solved and China’s pendulum will swing to the negative side of the ledger.

UPDATES: 

August 23rd New York Times article, Manufacturing in China Slows, reporting on a worsening economy.

Business Week’s November 15 article, “Xi takesChina's helm with many tough challenges”, further documents the serious problems facing China’s new leader. 

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.