A "Labor" Day Post - An Economic Allegory And The Process Of Relearning
I posted this in late August of last year so it is a repost. In late August and early September of last year, the world was vastly different. Financial markets had yet to collapse. Government officials were spoon feeding baloney to the American public. And a lot of people really weren't thinking critically about a whole lot other than what they were going to serve at their Labor Day picnic. The world has completely changed and more people are embracing critical thinking. So a post that last year may have seemed irrelevant may actually strike a chord this year. It should.
This is the Labor Day holiday weekend in the U.S. So, what could be more appropriate than a post on labor? And, in the spirit of many themes on this blog, let's make it a contrarian post. A different view than what is generally believed or taught in American society, business and its educational system.
The Detroit News, the best source for North American auto news, has a story that Chrysler would like to spin off its premium Viper car into a separate company. How much is it worth? I'm not being facetious but probably just about zero. It's a single car line that sells between 700-1,000 units annually, it's basically hand built so tangible assets would be minimal, brands defining excess are losing momentum, capital is restricted and it's a Dodge. ie, There is no elite brand appeal like Jaguar or Aston Martin. On that note, Cerberus most likely bought Chrysler because of the high profit pickup truck and brand equity of the Jeep business. What's that worth now? Not a lot given the deflating economy. How many people want to spend $40,000 for a Jeep? Not only that but how many people want to buy a $40,000 Jeep that gets 15 miles per gallon? So, what's left? The car business. And, how much is that worth? Well, they are void of high efficiency or compact cars so I'd say not a lot. Is there anything with any intrinsic value at Chrysler? I dunno. Do you want an empty auto factory in Michigan or Ohio? Well, you'll find companies or cities willing to give you one of those for free. Is Cerberus management worth anything? Not really. That is, unless they can design, market and manufacture automobiles.
The reality is none of the American auto makers have a positive book value. Think of this. We've had this generally accepted economic concept of a growing reliance on a financial economy or capital trumping labor for the last thirty or forty years and what did we get for it? A banking system in ruin and a collapsing Wall Street. As the topic pertains to this post, we got a completely bankrupt automobile industry. Of course, how many times have we said the most important source of capital is human capital. It is indeed labor. I'm not talking about unions or a socialist movement for anyone who becomes emotionally unglued when they find out another worker makes more than they do. An economy that favors capital over labor has created a self-reinforcing resentment on some level. So, now it is an often accepted position that the world is better off if everyone makes $5 a hour. That is, as long as it isn't me. Blaming unions, as has become extremely popular, is a non sequitur. It's a generational belief system that isn't based in truth. But, what I am talking about re labor is the value derived from economic work. Human capital. Not any political association of the term as would be construed by socialism or communism.
I'll tell you the only tangible asset at Chrysler that is worth anything. It's employees. The only value left at Chrysler is the cumulative abilities of its North American work force. Isn't it ironic that after spending three decades of treating employees like a bad habit, ie, doing whatever they can to rid themselves of a million employees, the only value left in the North American auto business is its employees. Because when everything is tallied up, the company is basically worthless. The only substantial value left in Chrysler is that its employees have a proven record of being in this situation before, and if given the money and time to do so, they can once again turn the company around. They can once again create tangible value within the company.
Compare this to Toyota. Toyota has temporarily shut down a fair amount of its manufacturing in the U.S. but they have not fired a single worker. While an extended downturn may result in a different outcome, Toyota is using this time to invest in its local business and to invest in its employees. Part of that very investment is the clear message that Toyota is committed to its work force. And, because Toyota is a conservative company where CEOs don't take $500 million retirement packages or blow untold corporate savings at exactly the wrong time as we highlighted in the PwC CEO post, they can afford to do so. Toyota's operating cash flow has averaged about $27 billion per year over the last three years while GM's has averaged about minus $10 billion. A difference of about $100 billion.
When was the last time your company invested in its most important source of capital -YOU- with significant training or re-training? Toyota is a profoundly different culture in today's disposable world. It is that culture which allows Toyota and Honda to continually beat GM senseless. If GM didn't have loyal employees and suppliers, I'm not sure who would have kept buying their cars. It is that culture which has contributed significantly to Toyota's positive cash flow delta. Why? Because as we discussed in the manufacturing series of posts some time ago, best practices or lean organizational genius is reliant on employees being the linchpin of any such program. The employee is the crown jewel of the Toyota way. And the CEO is carefully chosen to ensure the Toyota culture remains that way. There is a great burden of honor laid in the lap of the Toyota CEO and I can guarantee you he is able to clearly verbalize it. Was your CEO selected with such a rigorous process of ensuring a corporate culture of empowerment and commitment to employees?
So, while the donkeys in Detroit have tried to manage around their employees or down to their employees for ages, Toyota and Honda manage a substantial part of their business from and by employees. Rather than embrace these ideals American car companies even used cheap capital drawn from its labor in an attempt to diversify away from that very labor which provided the ability to diversity in the first place. Auto companies tried making or selling tanks, missiles, IT consulting, cable TV, home financing and half a dozen other schemes. All of these endeavors contributed to a self-fulfilling erosion in the auto industry's core business to the point where its neglect created an environment where companies could no longer pay labor for its capital creation. So labor's value dropped. All the while we are told labor's value dropped because the market demanded it. That it was an issue of paying lower wages for those who did not have the necessary skills. Oh, you mean the skills that led to the erosion of GM or the overall economy? That erosion contributed to an environment where labor had a smaller ability to impact economic growth and a self-reinforcing reliance on more and more capital to impact economic growth in its place. Or, as we have noted repeatedly, capital trumping labor. This is a major contributor to why GM became a company reliant on capital for profits - its GMAC and its financial operations. And, why it effectively defaulted on its benefits obligations. And, why it now is in a position of having a negative book value. All the while auto industry executives made billions. Is it any wonder American car companies haven't been able to beat Toyota and Honda? They just don't get it. (You might consider extending this perspective to a larger picture.)
Remember this quote from one of the industrial economy posts?
"We are justly proud of the high wage rates which prevail throughout our country and jealous of any interference with them by the products of the cheaper labor of other countries. To maintain this condition, to strengthen our control of home markets and, above all, to broaden our opportunities in foreign markets where we must compete with the products of other industrial nations, we should welcome and encourage every influence tending to increase the efficiency of our productive processes"
---Henry Towne, President of the American Society of Mechanical Engineers, 1911
When have you heard this lately? At GM or Chrysler? Do you know the basis for much of the Toyota way? It was the Ford way. Much of Toyota's system was originally learned from Ford. Then they made it better. And, now nearly a century after being a pioneer Ford is introducing the Toyota way into Ford. Effectively, Ford is re-introducing much of the Ford way back into Ford. Isn't life a great irony? Have we learned nothing re business management in one hundred years? In fact, we have come full circle. Ford wandered from what made it successful. And, now Ford is back to embracing ideals of nearly a century ago. It is relearning how to run its business using century old ideals. In between, we had a century littered with attempts to do everything under the sun except refining what it already knew.
What have we, as a society, learned about managing a high performance business? That is, other than much of the current fallacies, schemes and educational misinformation (often called a degree) embraced in the business world? There isn't a Toyota way or a Ford way. There is the only way. The only way is that labor trumps capital because only labor is able to create sustainable capital. Or put bluntly, creating wealth by pushing around paper in the financial economy while de-emphasizing the rest of the economy is complete bullshit - a commonly held economic fallacy reinforced by an educational system creating curriculum supporting these fallacies and by Wall Street elitists having a self-fulfilling impact on the economy as capital plays a larger and larger role in economic growth. And the most important point for this to happen is that "you" believed it. Well, society is about to learn that lesson. Again. The hard way. Just as Ford is relearning that very fact. Again. The hard way. One day all companies will become enlightened to this fact. And, so will our educational system. And so will our society. In the mean time, enjoy the relearning process. Your teacher for this course is the economy.
On a lighter note, it appears the Viper has broken the Nurburgring track record for a production car. (Where automakers go to test their mettle in high performance cars.) MotorTrend caught it all on video. If you are a car fan and have a set of headphones, it's amazing to watch a professional driver guide this monster through the track. Near the end of the video, the car is on a straight and must be clocking close to 200mph. If you wonder what the shake in the car is that develops from time to time, from the comments it appears to be the engine RPM limiter kicking in.
This is the Labor Day holiday weekend in the U.S. So, what could be more appropriate than a post on labor? And, in the spirit of many themes on this blog, let's make it a contrarian post. A different view than what is generally believed or taught in American society, business and its educational system.
The Detroit News, the best source for North American auto news, has a story that Chrysler would like to spin off its premium Viper car into a separate company. How much is it worth? I'm not being facetious but probably just about zero. It's a single car line that sells between 700-1,000 units annually, it's basically hand built so tangible assets would be minimal, brands defining excess are losing momentum, capital is restricted and it's a Dodge. ie, There is no elite brand appeal like Jaguar or Aston Martin. On that note, Cerberus most likely bought Chrysler because of the high profit pickup truck and brand equity of the Jeep business. What's that worth now? Not a lot given the deflating economy. How many people want to spend $40,000 for a Jeep? Not only that but how many people want to buy a $40,000 Jeep that gets 15 miles per gallon? So, what's left? The car business. And, how much is that worth? Well, they are void of high efficiency or compact cars so I'd say not a lot. Is there anything with any intrinsic value at Chrysler? I dunno. Do you want an empty auto factory in Michigan or Ohio? Well, you'll find companies or cities willing to give you one of those for free. Is Cerberus management worth anything? Not really. That is, unless they can design, market and manufacture automobiles.
The reality is none of the American auto makers have a positive book value. Think of this. We've had this generally accepted economic concept of a growing reliance on a financial economy or capital trumping labor for the last thirty or forty years and what did we get for it? A banking system in ruin and a collapsing Wall Street. As the topic pertains to this post, we got a completely bankrupt automobile industry. Of course, how many times have we said the most important source of capital is human capital. It is indeed labor. I'm not talking about unions or a socialist movement for anyone who becomes emotionally unglued when they find out another worker makes more than they do. An economy that favors capital over labor has created a self-reinforcing resentment on some level. So, now it is an often accepted position that the world is better off if everyone makes $5 a hour. That is, as long as it isn't me. Blaming unions, as has become extremely popular, is a non sequitur. It's a generational belief system that isn't based in truth. But, what I am talking about re labor is the value derived from economic work. Human capital. Not any political association of the term as would be construed by socialism or communism.
I'll tell you the only tangible asset at Chrysler that is worth anything. It's employees. The only value left at Chrysler is the cumulative abilities of its North American work force. Isn't it ironic that after spending three decades of treating employees like a bad habit, ie, doing whatever they can to rid themselves of a million employees, the only value left in the North American auto business is its employees. Because when everything is tallied up, the company is basically worthless. The only substantial value left in Chrysler is that its employees have a proven record of being in this situation before, and if given the money and time to do so, they can once again turn the company around. They can once again create tangible value within the company.
Compare this to Toyota. Toyota has temporarily shut down a fair amount of its manufacturing in the U.S. but they have not fired a single worker. While an extended downturn may result in a different outcome, Toyota is using this time to invest in its local business and to invest in its employees. Part of that very investment is the clear message that Toyota is committed to its work force. And, because Toyota is a conservative company where CEOs don't take $500 million retirement packages or blow untold corporate savings at exactly the wrong time as we highlighted in the PwC CEO post, they can afford to do so. Toyota's operating cash flow has averaged about $27 billion per year over the last three years while GM's has averaged about minus $10 billion. A difference of about $100 billion.
When was the last time your company invested in its most important source of capital -YOU- with significant training or re-training? Toyota is a profoundly different culture in today's disposable world. It is that culture which allows Toyota and Honda to continually beat GM senseless. If GM didn't have loyal employees and suppliers, I'm not sure who would have kept buying their cars. It is that culture which has contributed significantly to Toyota's positive cash flow delta. Why? Because as we discussed in the manufacturing series of posts some time ago, best practices or lean organizational genius is reliant on employees being the linchpin of any such program. The employee is the crown jewel of the Toyota way. And the CEO is carefully chosen to ensure the Toyota culture remains that way. There is a great burden of honor laid in the lap of the Toyota CEO and I can guarantee you he is able to clearly verbalize it. Was your CEO selected with such a rigorous process of ensuring a corporate culture of empowerment and commitment to employees?
So, while the donkeys in Detroit have tried to manage around their employees or down to their employees for ages, Toyota and Honda manage a substantial part of their business from and by employees. Rather than embrace these ideals American car companies even used cheap capital drawn from its labor in an attempt to diversify away from that very labor which provided the ability to diversity in the first place. Auto companies tried making or selling tanks, missiles, IT consulting, cable TV, home financing and half a dozen other schemes. All of these endeavors contributed to a self-fulfilling erosion in the auto industry's core business to the point where its neglect created an environment where companies could no longer pay labor for its capital creation. So labor's value dropped. All the while we are told labor's value dropped because the market demanded it. That it was an issue of paying lower wages for those who did not have the necessary skills. Oh, you mean the skills that led to the erosion of GM or the overall economy? That erosion contributed to an environment where labor had a smaller ability to impact economic growth and a self-reinforcing reliance on more and more capital to impact economic growth in its place. Or, as we have noted repeatedly, capital trumping labor. This is a major contributor to why GM became a company reliant on capital for profits - its GMAC and its financial operations. And, why it effectively defaulted on its benefits obligations. And, why it now is in a position of having a negative book value. All the while auto industry executives made billions. Is it any wonder American car companies haven't been able to beat Toyota and Honda? They just don't get it. (You might consider extending this perspective to a larger picture.)
Remember this quote from one of the industrial economy posts?
"We are justly proud of the high wage rates which prevail throughout our country and jealous of any interference with them by the products of the cheaper labor of other countries. To maintain this condition, to strengthen our control of home markets and, above all, to broaden our opportunities in foreign markets where we must compete with the products of other industrial nations, we should welcome and encourage every influence tending to increase the efficiency of our productive processes"
---Henry Towne, President of the American Society of Mechanical Engineers, 1911
When have you heard this lately? At GM or Chrysler? Do you know the basis for much of the Toyota way? It was the Ford way. Much of Toyota's system was originally learned from Ford. Then they made it better. And, now nearly a century after being a pioneer Ford is introducing the Toyota way into Ford. Effectively, Ford is re-introducing much of the Ford way back into Ford. Isn't life a great irony? Have we learned nothing re business management in one hundred years? In fact, we have come full circle. Ford wandered from what made it successful. And, now Ford is back to embracing ideals of nearly a century ago. It is relearning how to run its business using century old ideals. In between, we had a century littered with attempts to do everything under the sun except refining what it already knew.
What have we, as a society, learned about managing a high performance business? That is, other than much of the current fallacies, schemes and educational misinformation (often called a degree) embraced in the business world? There isn't a Toyota way or a Ford way. There is the only way. The only way is that labor trumps capital because only labor is able to create sustainable capital. Or put bluntly, creating wealth by pushing around paper in the financial economy while de-emphasizing the rest of the economy is complete bullshit - a commonly held economic fallacy reinforced by an educational system creating curriculum supporting these fallacies and by Wall Street elitists having a self-fulfilling impact on the economy as capital plays a larger and larger role in economic growth. And the most important point for this to happen is that "you" believed it. Well, society is about to learn that lesson. Again. The hard way. Just as Ford is relearning that very fact. Again. The hard way. One day all companies will become enlightened to this fact. And, so will our educational system. And so will our society. In the mean time, enjoy the relearning process. Your teacher for this course is the economy.
On a lighter note, it appears the Viper has broken the Nurburgring track record for a production car. (Where automakers go to test their mettle in high performance cars.) MotorTrend caught it all on video. If you are a car fan and have a set of headphones, it's amazing to watch a professional driver guide this monster through the track. Near the end of the video, the car is on a straight and must be clocking close to 200mph. If you wonder what the shake in the car is that develops from time to time, from the comments it appears to be the engine RPM limiter kicking in.
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