What Leads to Business Failure?

Donald Keough’s book “The Ten Commandments for Business Failure” is an interesting, creditable book useful to Chief Executive Officers with a company culture that needs improvement. Donald Keough is the former President of The Coca-Cola Company.

The book is a short, easy read that covers all the elements of a positive culture. Some of it is self-evident. But if officers, second and third tier managers all read it, it would contribute to a re-focused culture. It would put everyone on the same page.

Commandments that lead to business failure:

One:
Quit Taking Risks

Two:
Be Inflexible

Three:
Isolate Yourself

Four:
Assume Infallibility

Five:
Play the Game Close to the Foul Line. (i.e., a culture of self-dealing and corruption.)

Six:
Don’t Take time to Think

Seven:
Put All Your Faith in Experts and Outside Consultants

Eight:
Love Your Bureaucracy

Nine:
Send Mixed Messages

Ten:
Be Afraid of the Future

Eleven*:
Lose Your Passion for Work – for Life

(*The title of the book is “Ten Commandments…”. Mr. Keough has included an Eleventh as “a little added bonus”.)

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

Outsourcing from China – Avoiding this Horror Story

A recent article in Manufacturing News described the outsourcing horror story that has engulfed Fellowes Inc.  The large paper shredder manufacturer has suffered a significant loss in China.

A Chinese joint venture partner stole Fellowes Inc.'s proprietary assets and forced the operation into bankruptcy. The estimated cost is valued at a $100 million. Now the former Chinese partner is planning on entering the shredder business independently, in direct competition using Fellowes' seized assets.

While I am sympathetic with the impossible position encountered by Fellowes, this is largely the result of not employing a quality China based law firm to prepare and execute the initial contract. China is a country of rules, not laws.  Success depends on highly skilled, tough attorneys completely knowledgeable of China; Chinese culture, mores, dangers. One cannot be naive, for any investment in foreign environments requires extreme caution, due diligence, and a fundamental acceptance of the risk involved.

There are other examples of similar problems of doing business in China.  Often, the main source of the problem usually has occurred because a USA manufacturer has relied on a USA based law firm to develop legal agreements. Also, some difficulties have been encountered employing a China based expatriate law firm staffed with British or American lawyers. Again, it is essential to retain a law firm staffed and managed by China born and raised attorneys.

Unfortunately, once a Chinese company takes hostile action, similar to the one detrimental to Fellowes Inc., it is almost impossible to reverse the outcome because of the challenging Chinese legal system.  

To avoid such devastating potential pitfalls, do not enter into a joint venture to manufacture products in China. It is best, to construct a 100% owned and operated manufacturing plant in China. Ironically, it is nearly as easy to build an operating plant in China as it is to build one in the USA.  But the end product is far more secure, providing complete control of the operation, particularly the essential proprietary and confidential factors.

See the original Manufacturing News’ article  by Mr. McCormack here:

A Cautionary Tale Of Outsourcing To China: There Is No Recourse, You Could Lose Everything                        

by Richard McCormack                     April 15, 2011

Thousands of American companies that have moved production to China to take advantage of cheap labor might want to consider a case study that is unfolding for a U.S. manufacturing company. Fellowes Inc., one of the world's largest makers of office and personal paper shredders, is witnessing the destruction of its business, as its large Chinese manufacturing plant has been shut down by its joint venture manufacturing partner.

Can Manufacturing Return to the USA?

The need to move USA manufacturing operations to competitive economic climates, has been essential for a Company's survival.  This exodus to a number of foreign countries, mainly to China and Mexico, has had a negative impact on the USA – its economy, median incomes, standards of living.

Today, New Balance Inc. is a rather unique exception to the migration trend.  For more than twenty years, this successful Boston manufacturer of athletic shoes, annually produces 7 million pairs of its shoes in the USA.

New Balance CEO, Rob Demartini, admits it's a challenge to stay competitive in the world market but says the company's commitment to domestic manufacturing is firm. It's really part of the fabric of the company. we've been manufacturing athletic shoes since 1938," said DeMartini. "We think in an industry where there a lot of shared manufacturing, knowing how to make the product, helps us. It also gets us a lot closer to the consumer."

This piece, titled “New Balance: U.S. Manufacturing Commitment” lists many of the principal reasons for the impressive ability.  New Balance credits a productive employee base and the use of lean manufacturing protocols.  The New Balance story is admirable, especially in relation to the many challenges faced with US Manufacturing.

There were many understandable reasons for the shift to foreign environments, but in my opinion, a great deal of the losses in US Manufacturing could have been avoided with superior, A-level Management - particularly at the Chief Executive Officer level.

Regrettably, poor Executive Leadership, bad decisions, deficient strategy, etc., impelled much of the manufacturing exodus.  Reducing labor costs became an easy convenience.  Admittedly, a number of  relocations were necessary, even critical for survival.

However, if a larger number of the CEO's within the USA had greater experience, better insight, the reality would be different.  With more "A-level" Executives in charge, plant operations would probably not have required this level of relocation.

Regardless, the USA can regain a portion of its manufacturing capacity in the next several years, if we see a number of positive developments.

Here are some important factors for success:

• Quality management down through the 3^rd organization tier;
• Disciplined strategic focus – with an honest and periodically updated situation analysis;
• Superior culture with the absence of hubris and politics;
• Best cost manufacturer – utilizing lean, kanban and kaizen protocols;
• Productive, lean salaried employee organization – not just lean for manufacturing;
• Regular Value Analysis of the product lines;
• Effective application of capital spending – which is essential.

Certainly, a growth in a number of negatives encountered in other environments, within China and Mexico for example, will contribute to the desire to return some foreign based operations to the USA.  However,  relocating manufacturing back to this country will remain a very difficult challenge.

In relation to overseas manufacturing competition, see: 

“China to Surpass the USA as World Leader in Manufacturing?”

Neuberger Berman's Recent Outlook

The following is Neuberger Berman’s (NB) 2^nd quarter 2010 economic outlook.  It is very thorough and well conceived.  In these challenging economic times, it is worth a review:

Neuberger Berman’s MLG Group’s Current Outlook 

THE WORLD IS STILL UPSIDE DOWN

August 18, 2010

Over the last decade, so much has structurally changed on Planet Earth that we believe the only informative perspective from which to view the world is…“upside down.” We first introduced this concept in our third quarter 2009 client letter and, as we think about the investment landscape currently, we believe this “paradigm shift” is underappreciated by investors.

Our team spent much of the second quarter 2010 pursuing an extensive global research effort to determine if this view of the world is still relevant. As you might expect from the title of this letter, our answer is yes!  Our research travels took us to China, Singapore, Indonesia, Mongolia, Australia and Brazil. Below, we share our takeaways from this research, some investable themes we have identified and how we are navigating this volatile and challenging investment environment...

4 Gloomy Scenarios

The US Economy continues to be unhealthy.  A review of various forecasts, suggests either a painfully slow recovery or future declines should be expected. One can never trust various predictions to be accurate, but there were four experienced voices who provided sincere concern.

Here is the first:

"The Hindenburg Omen reared its ugly head late last week, signaling more doom and gloom as stocks plod along amid the dog days of summer."

“Yes Folks, Hindenburg Omen Tripped Again” - Mr. Steven Russolillo

The second:

"The Dow Jones Industrial Average will lose about half of its value over the next couple of years as it follows a Nikkei-like pattern of several sharp rallies in an overall decline, according to Charles Nenner, founder and president of Charles Nenner research."

“Dow Faces Bouncy Ride to 5,000: Strategist” - CNBC.com

The third:

Some have predicted this continued deterioration of the economic climate.  Mr. David Farr, the Chief Executive Officer of the Emerson Electric Co., referenced a number of the circumstances contributing to this poor economy in an opinion piece from 2009.

Mr. Farr's Op-Ed is referenced here:
"An Op-Ed on Federal Spending and Legislation"

And finally the fourth:

Neuberger Berman’s MLB Group's 2nd quarter 2010 Economic Outlook is very thorough and well conceived.  It contributes positively with global investment opportunities as well as a potential Achilles' heel to the recovery. 

In these challenging economic times, it is worth a reading and can be accessed here:
"The World Is Still Upside Down"

China to Surpass USA as World Leader in Manufacturing?

The headline in a June 2010 Financial Times article was bothersome. It chronicled “US Manufacturing Crown Slips”.

In summary, the article reported:

“The US remained the world’s biggest manufacturing nation by output last year, but is poised to relinquish this slot in 2011 to China – thus ending a 110-year run as the number one country in factory production.”

“Last year, the US created 19.9 per cent of world manufacturing output, compared with 18.6 per cent for China, with the US staying ahead despite a steep fall in factory production due to the global recession.”

“If the figures are calculated in inflation-adjusted, constant price terms, then….the US will keep its top role in manufacturing…. On an inflation-adjusted basis….China is forecast to take over the number one position in manufacturing….”

In this article, population is a primary factor impacting the prediction. China is four times as large as the USA in terms of population. This size, coupled with a lower wage rate, estimated at one tenth of the average cost in the United States, makes it reasonable to expect China will surpass the USA in manufacturing production.

However, in my opinion, there are sincere problems with this premise. The USA is superior in several manufacturing categories, particularly in the innovative capability to create new products, technologies, and industries. A properly focused, capitalized USA manufacturing industry, can remain the world leader in output.

After having a number of business experiences within China, I now believe the Chinese will not retain the leadership in manufacturing in the world. I predict a pendulum will swing eventually. China will most likely stumble, similar to the historic decline of Japan's edge in business.