We are living in amazing times. When else have we seen large conglomerate companies tumbling to the dirt, face planting themselves into the annals of history? Worldcom, Enron, AIG, GM, Refco, Delta, all crumbling to pieces before our eyes. Some of these have been involved in scandals, while others, just poor earnings. No doubt the state of the economy has helped push some companies with weak balance sheets over the edge. My wife, recently left a struggling company that was forced to lay off 2/3 of its work force. Layoff by layoff, wave by wave people were let go. In many cases this paints a very gloomy picture for the future. However, in other cases, companies have been growing and it is because they are doing something good and right. Because of their strong positions in the market, they are able to sieze this opportunity to snatch up the market share of others that are failing. This isn’t a post about those companies though, rather it is a post primarily aimed at GM.
I recently had a look at the new Fortune 500 list for 2009. Low and behold, there is GM in the top ten, taking the #6 spot to be exact. Last year GM posted annual gross revenues of $149 billion according to the Fortune 500. In the seventh spot was Ford at roughly $ 146 billion. I find this astounding because I keep hearing over and over how they are bleeding money at the seams! I can’t imagine how a company can make almost 150 billion over the course of the year and still end up losing 30 billion. Simplistically thinking, this would mean GM would have to post revenues of $180-200 billion just to break even. In fact, just three years ago, in 2006, GM recorded its record year at $206 billion dollars and was actually able to turn a small profit.
What this means is simple: GM’s operating costs are too high. If you’ve read anything in the news these days you’ve probably already heard this. The health care costs the company is paying out is essentially driving the company into the ground. GM is paying for the people sitting at home playing parcheesi and every current employee is working to support 2 retired employees. The operating model is too expensive to sustain! You might be thinking to yourself…well why do they keep doing this? The problem is, management worked out a deal with these workers long ago, and cannot turn around and start doing something else. They are simply stuck.
The other thing GM probably did, was spend this money when they had it, instead of choosing to invest it into a fund that would be available to pay health care costs for people retiring. When it comes to pensions and retirement costs, it would make sense to set some money aside every year from wages so that it would be available when the time came. Whether GM had this type of thinking or now, here we are with the situation where the health care costs are draining the company of profits.
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Thinking farther than 10 minutes down the road…
This brings me to my first point about the management at GM; they do not plan for the future. In fact, right now they can’t even see past the next day because they don’t have any money. Long before we got to this point though, management was failing to look ahead and realize what might happen when their pensioned workers started retiring. Typically a large company will have a group managing a huge amount of investments. One of the responsibilities might be to manage the investment fund for the pension plans and medical packages given to retirees. Ooops, I think we might have either under-estimated the need or maybe even spent all that money a long time ago. Akio Morita, founder of Sony once gave a speech entitled, “Ten Minutes vs Ten Years”. He argued that many US companies only plan 10 minutes ahead of them, compared to Japanese companies that plan 10 years out at a time. In this respect, the US companies will eventually falter and GM is a great example of this principle.
In our own lives as Americans I see this principle happening also. Especially when considering debt, Americans have become infatuated with the concern that they must have something now whether or not they can pay for it at all. This can be called the “convenience factor”. Its convenient to charge things to credit because you can start using the item right away. In the old days (like maybe 1950′s?), there was a plan called lay-away. If you could not pay for something, you would ask the company to put it on lay-away for you. Over time, you could make payments against the cost of the item and once your payments equaled the total cost of the item you could come pick it up and it was yours to keep. Now days you simply open up a Home Depot account, or Circuit City account, or Best Buy, or Nordstrom or Macy’s and wherever you’re at and purchase on credit. This is the get it now mentality, the fact that all we can think about is 10 minutes down the road. I need it, I want it, I’ll just charge it.
Unfortunately though, the people who developed the credit system were way too smart and crafty. In fact, its down right insulting sometimes. Credit has become more of a trap than anything. I was recently posting in a discussion forum about the lack of personal finance education within our school system. While I was in High School I learned numerous things, some of which I’ve forgotten and others which haven’t exactly been very useful, however, something that I could use every day in my life I was never taught and that is personal finance. Today, you cannot do anything without money, and yet nobody has every taught me it, not even in my undergraduate studies. Much the same as everything else, if you don’t have money for college you can always take out loans. Credit is costly and it is interesting to me that the bailout is following along the same lines as the rest of us. Instantly, billions of dollars are produced and transfered to GM.
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Accumulation of stuff in an effort to get big…
GM is a great example of being too big. America is obsessed with moving money around. Merger, merger, merger it doesn’t change the fact that your business model doesn’t work. GM houses 8 different makes of cars: Buick, Cadillac, Chevrolet, GMC, Hummer, Pontiac, SAAB and Saturn. Have you ever stopped to think about this though. GM makes so many different cars that it is competing against itself. How many sedans do they produce within the same price gap? OK, well I went to their site and was going to count them but then I realized that there were 101 different cars and trucks to cycle through and I decided to save my index finger muscles for some other task (trying to think farther than 10 minutes ahead of time here). The point is, they have many, many cars that are essentially the same and yet compete with each other. You might think nothing of this…because whether a consumer buys a Buick or Chevrolet makes no difference because the money is coming to GM. The problem is GM is operating under a business model that is unprofitable. Whether its a Buick, Chevy, Pontiac, Hummer, SAAB, etc, doesn’t matter because GM will lose money on it because of their business model. Their business model should not be, purchase other companies and bring them under the GM banner. Their business model should be aimed at making money.
I have a sneaky suspicion that GM is operating under an average cost accounting system (aka standard cost accounting) and does not know which of their cars are in fact profitable and which aren’t. This makes for a very slippy slope when trying to discover how to become profitable again. Now the government has their hands in the mess and is suggesting they cut Pontiac and reduce their product lines down, focusing on fuel efficient vehicles. What if Pontiac is the only make of car that is making money though? What if the non-fuel efficient trucks and SUVs are actually turning a fine profit for GM? Without a better accounting system in place, like allocated cost accounting, GM has no clue which cars make money and which don’t. For that matter, neither does the Government.
As GM has increased in size by adding more and more car companies under its belt, so have Americans become infatuated with accumulating stuff. What happens to all this stuff? It gets stored in the garage! “Over the last two decades the average garage size has almost doubled and over the last decade we have seen a 60 percent increase in three car garages.”[1] In addition to the expansion of garages, many people don’t even have enough room to park their cars in their garages. This is a lot of stuff. The funny thing though, is that Americans generally don’t use their stuff because we’re too busy. It is almost like they just want to have it for peace of mind, even though it ends up being stored in the attic and never used for years. After enough accumulation, enough is enough and we start throwing garage sales to get rid of our stuff! The reality is that we don’t need as much stuff as we have. GM doesn’t need as many car lines as it has. There is something in us that wants to grow bigger and bigger, get more and more, but all this stuff causes us to become overwhelmed and accumulate debt. Too much stuff often leads to more money out of our pockets as we try and get rid of it by taking it to the dump! From a financial standpoint, its crazy, especially if that stuff was purchased on credit and is not paid for yet. We are then paying money for things sitting in a landfill.
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Change starts with YOU!
I believe that we’re in need of a shift of mind. We need to abandon the credit card model and swallow our pride when it comes to purchasing so many things. We don’t need to “keep up with the Jones’s”, especially if those purchases are put on credit. GM has showed us that poor planning for the future can lead to no future. In our own personal lives we must realize the importance of investing, so that we can have a fruitful future. Investing is not only a monetary thing, but also should be investing in ourselves. This means furthering our education, learning new skills that may develop into alternative careers for the future, being passionate about something, monitoring and improving health, and maintaining and increasing social and professional networks. Live within your means.
What I think is possibly more scary than GM though, is the fact that our government exhibits these same characteristics. How are these bailouts going to affect the country in 10 years, 20 years, or 30 years? What are the effects of the growing national debt for future generations? What are the effects of the growing national trade deficit in 10 years? Why does the government insist on growing the national budget to insane sizes, while still spending more than they earn? Things to think about.
1.) ”Garage Organization – Americans Lead the World in Accumulation of Stuff“, Viewed 05/05/09
