General Motors – Has It Lost Its Credibility?

The news is full of criticism of General Motors’ announcement that it has repaid the money it owes the United States government for bailing GM out with TARP money (Troubled Asset Relief Program).

General Motors' April 2010 announcement: “G.M. is able to repay the taxpayers in full, with interest, ahead of schedule, because more customers are buying vehicles like the Chevrolet Malibu and Buick LaCrosse.”

The facts:

General Motors' April 2010 repayment totaled $6.7 billion.

The United States government gave General Motors $49.5 billion in 2009 to finance its bankruptcy. Thus only 14% of the total aid GM received from the government has been repaid. Not a full repayment.

Further complicating the issue comes from Mr. Neil Barofsky, the Inspector General overseeing the troubled asset program, when he testified before the Senate Finance Committee on April 20, 2010 that G.M. was using taxpayer money to make the loan repayment – not General Motors’ earnings.

Apparently the $6.7 billion came from the $13.4 billion of the United States government’s TARP money that had been put in a General Motor’s escrow account when GM was in bankruptcy. Thus the company is using US government money--to pay back the US government loan.

Further complicating the issue is the General Accountability Office’s December 2009 report that: "The Treasury is unlikely to recover the entirety of its investment in Chrysler or GM, given that the companies' values would have to grow substantially more than they have in the past."

Also coloring GM’s financial condition is that:

● It has applied to the Department of Energy for a $10 billion loan to retool its plants.
● In 2009 it was unprofitable with deficit gross profits and operating losses.
● In the first months of 2010 its market share declined.

Is all of this true? If it is, the real issue is General Motors' loss of trust and credibility. Will consumers figure out that General Motor’s announcement is not true? That it was a misleading public relations ploy? If consumers do not trust a manufacturer, will they stop purchasing its product? For this short-term gain, will GM lose in the long run?

Sources:
New York Times.
Power Line.
Reason Foundation.

Criticism of GE’s CEO, Jeffrey Immelt

A March Money Watch article on Jeffrey Immelt, titled 'GE Has Been An Investor Disaster Under Jeff Immelt', is strongly critical of his relatively high level of compensation as it relates to GE’s depressed stock price. Mr. Immelt is General Electric Company’s Chief Executive Officer.

An example of the criticism:

"By any measure of shareholder value, GE has been a disaster under Jeffrey Immelt. Investors haven't made a nickel since he took the helm as chairman nine years ago. In fact, they've lost tens of billions of dollars."

There is certainly room to criticize Mr. Immelt’s salary, bonus, common stock grants and retirement plan while GE’s stock price and profit performance are in the doldrums. However the article does not analyze the condition of GE’s operating businesses. Have its divisions deteriorated? Are there market share losses? Are its operating units registering Operating Losses? Or is its poor profit performance related solely to the 2007-2010 financial and economic crisis?

During this crisis most blue-chip, well-run companies have experienced sales and operating profit declines of 20% - 30% with large declines in the price of their common stock. Although slightly improved recently, many prices are still sluggish and down.

This even includes my Alma Mater, Emerson Electric Co., one of the best managed companies in this country. Emerson has registered sales and operating profit declines of 20%-30%. But their operating divisions have continued to perform well.

Chief Executive Officers are responsible for the operating performance of the businesses they manage – this is their primary role. Granted their tenure is also dependent on the stock price. If the performance of GE’s operating businesses has deteriorated, then Mr. Immelt should be criticized and replaced as CEO.

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?

CHINA - Its Past, Present, Future

The following is an op-ed article written by Tony Gleason of Neuberger Berman. In this interesting work, Mr. Gleason studies essential history, reviews present issues, and predicts future trends, regarding business within China. It is very helpful for those of us, who have operational dealings and investments in China. Extremely worthwhile reading:

China Wakes, the World Shakes
by Neuberger Berman’s Tony Gleason - November 17, 2009

As we have all witnessed, the economic system that drove much of world trade buckled in the financial crisis of 2008. It appears that the U.S. will no longer be the insatiable source of demand for the world’s manufacturing countries. Our credit has unfortunately hit its limit with our creditors, namely China and Japan. From an investment point of view, understanding the new financial, economic and political system that is evolving from the 2008 crisis will be a key to making and preserving capital in the decades ahead. China, as I will explain, is re-emerging on the world stage and will likely play the leading role in this evolution. Within this piece I offer my perspective on China today and how I believe it will influence the investment landscape.

I’ve had the extraordinary good fortune of traveling frequently to China. Each time, I’m startled by the progress the country has made since my previous visit. The most recent trips are no exception.

Cities visited in the past few months include:

• Tier one cities: Beijing, Shanghai, Guangzhou, Hong Kong
• Second tier cities: Nanjing, Hangzhou and Chongqing
• Small, but important cities: Li Jiang and Macau
  

Along the way I met with over 60 companies, various government officials and many interesting people. Since the crisis began almost a year ago it’s become abundantly clear that the Chinese government recognizes they can no longer grow the country’s economy based on exports to the United States and Europe. Recognizing that economic growth is necessary for harmony and its own ability to stay in power, Beijing has shifted gears quite dramatically and so far has managed its way through one of the most significant financial crises in a century. Many will argue with how it got there, but China is on track to leave 2009 growing at a better-than-8% rate. While China has many goals, in our view, the three with the greatest implications for the investment business are to:

1. Increase domestic consumption;
2. Accelerate infrastructure; and
3. Diversify away from the U.S. dollar.
   

In the investment business, getting the big picture right is key; we believe the ability to appreciate what is going on in China—and act on it— will have a significant impact on investment results. For some perspective on where China is headed, it pays to look back a few years. Therefore I’d like to provide you with some history intertwined with my observations on this most fascinating country...

An Op-Ed on Federal Spending and Legislation

The following is an op-ed article written by Dave Farr, Chairman and Chief Executive Officer of Emerson Electric Co. His concern is the affect federal spending and legislation are having on the ability of USA manufacturers to compete globally, and to successfully invest in USA operations. It is a non-partisan, truly objective article, and thus worthwhile reading:

To: Emerson U.S. based employees

Attached is a copy of an op-ed that I recently wrote and submitted to local St. Louis newspapers relative to my concerns as the CEO of Emerson -- a global manufacturing company.

As the leader of this company of 120,000 employees, hundreds of thousands retirees, and 350,000 shareholders, I must be concerned about strategic global issues that will impact Emerson and our ability to survive, compete and win.

We are a diverse company and I realize that opinions vary. My responsibility is to do my best to represent the overall interests of our shareholders, our employees and our customers. In this instance, I want first to share this piece with you as employees of this great company.

I wish all of you a very special and joyous holiday season and a prosperous new year.

My personal regards,
David N. Farr

---

America's Survival as a Prosperous Nation is at Risk

Major manufacturers today must compete in global markets if they want to survive, prosper, and grow. Emerson is no exception. We compete head-to-head with Asian and European companies here at home and in virtually every market of the world. The ability to manage quality, innovation, logistics, customer support, manufacturing cost and many other factors determines which companies survive or don't.

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.

Sun Tzu - “The Art of War”

Sun Tzu’s book “The Art of War” was written in 400BC. Peter Drucker’s and Sun Tzu’s management tenets for success are essentially the same.

Sun Tzu was China’s first professional General. Prior to him the Sovereign (i.e., King) led his army which was frequently disorganized, under-funded and unsuccessful. He developed strategy and tactics of war but also detailed financial budgets, manpower required, basic training and logistics (e.g., the number of helmets, chickens)

It is a surprisingly practical manual of war with basic advice, such as: “Dust spurting upward in high straight columns indicates the approach of chariots.” “There are five methods of attacking with fire. The first…, the second…”.

In his tenets listed below, I suggest as helpful guidelines for substituting a Board of Directors, an Owner, a Ruler, or a Chief Executive Officer.

1. “There are five qualities that are dangerous in the character of a general..."

• "If he is reckless..."
• "If he is cowardly..."
• "If he is quick-tempered, he is obstinate and hasty - does not consider difficulties. The essential temperament of a general is steadiness..."
• "If he is defensive. One anxious to defend his reputation pays no regard to anything else..."
• "If he is too much of a humanitarian..."

"These five traits of character are serious faults in a general and in military operations are disastrous.”

2. “The ways in which a Ruler may bring misfortune upon the army is by interfering with its administration and operations. He whose generals are able and not interfered with by the Sovereign will be victorious. There are occasions when the commands of the Sovereign need not be obeyed.”

3. “If one ignorant in military matters is sent to administer the army, then every movement will be hamstrung. This engenders doubts in the minds of the officers. A confused army leads to another’s victory.

4. “He whose ranks are united in purpose will be victorious. Thus, command them with civility and imbue them uniformly with martial ardor and it may be said that victory is certain.”

5. “And therefore the general who in advancing does not seek personal fame, and in withdrawing is not concerned with avoiding punishment, but whose only purpose is to protect the people and promote the best interests of his Sovereign, is the precious jewel of the state. Few such are to be had.”

6. “It is the business of a general to be serene and inscrutable, impartial and self-controlled. If serene he is not vexed; if inscrutable, unfathomable; if upright, not improper; if self-controlled, not confused.”

Basically his book describes the development and execution of a strategic plan. His emphasis on doing the unexpected is a synonym for Peter Drucker’s innovation.