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Globalization isn't what's killing GM
It's time for manufacturers to stop blaming global competition for lousy results. They should look at their own inability to drive innovation and growth.
By Jim Jubak
The number is shocking: "GM axe is to fall on 30,000," read the Financial Times banner headline.
But it's even more shocking to me that the chief executives who run some of our biggest manufacturing companies now seem to have only one solution to any corporate problem: Cut costs. These CEOs are cost-cutting the United States out of a middle class. They've forgotten how to compete and grow.
U.S. companies such as Google (GOOG, news, msgs) and Apple (AAPL, news, msgs) still know how to innovate. Technology giants such as Cisco Systems (CSCO, news, msgs) and Dell (DELL, news, msgs) still want to conquer the world. U.S. companies such as Nucor (NUE, news, msgs) and Starbucks (SBUX, news, msgs) can still revolutionize mature industries such as steel making and coffee dripping.
But too many of the biggest -- and once the best -- U.S. companies have abandoned growth.
I know that the conventional wisdom is to blame the problems at General Motors (GM, news, msgs) and Delphi (DPHIQ, news, msgs) and other U.S. manufacturers on globalization.
But I think globalization is just a comfortable excuse that lets management off the hook for its own failures of vision, strategy and execution.
Some managements seem genuinely afraid of trying to compete in a globalizing world. It's just too hard. Baloney. If Nucor can succeed against foreign competitors with cheap government-subsidized capital and cheaper labor, so can U.S. auto makers or U.S. airlines.
Related news and commentary on MSN Money
The globalization cop-out
And other managements seem happy to use the very real fears that the threats and turmoil of a globalizing world present to divert attention from their own failures and their own focuses on the short-term. These CEOs are only too eager to use the threat of globalization as an excuse to ram through short-term cost-cutting fixes. These fixes fatten CEO reputations and paychecks -- and temporarily make some investors happy -- but I think it's very clear they aren't a solution in the long run.
I think it's time to separate the real dangers of globalization from how it has become a red herring that lets corporate managers divert attention from their own failures and lack of creativity.
Knowing history can sometimes be a terrible thing. In the current case, for example, only if you don't know the history of previous GM job cuts can you have a shred of hope that this round will work. We already know enough from previous rounds at GM that cutting costs without growth does not work. All the evidence is that this huge dose of pain for GM workers won't fix the company's problems, and that GM will be back on the verge of bankruptcy again in two to five years.
On Nov. 21, General Motors said it would cut an additional 5,000 jobs in the United States and Canada -- bringing the announced total to 30,000 in the current round of job cuts -- and shut all or part of 12 North American plants to reduce the company's U.S. annual manufacturing capacity by some 1 million cars and trucks by 2008. GM, which lost $4.1 billion on its North American operations in the first nine months of 2005, estimates it will see eventual annual savings of $7 billion.
Splashy, no? CEO Rick Wagoner really seems to be attacking the company's problems, right?
Well, no. In the crisis before the current crisis struck, General Motors closed three factories over the last five years, reducing the company's North American manufacturing capacity by 1 million cars and trucks a year. Sound familiar?
And in the early 1990s, General Motors closed 21 factories and cut 70,000 jobs. Now that was a huge restructuring.
Shrinking companies, shrinking shares
So why didn't any of those earlier downsizing efforts work? Because GM has been losing market share in the U.S. car market. In 1983, GM owned 43% of the U.S. market in 1983. In the third quarter of 2003, the share had dropped by more than a third to just 26.4%. Result: GM's sales have dropped faster than it's been able to reduce production or cut costs. Cutting production doesn't lead to equivalent cuts in costs because of GM's huge payments for health and retirement benefits to retired workers. Each drop in production means that those costs get spread over fewer cars.
Economists and Wall Street analysts think GM will continue to lose market share. Global Insight, the big economic consulting firm, forecasts that GM's market share will be down to 23.5% in 2008. That should be just about enough to erase all the gains from the latest round of job, production and wage and benefit cuts -- if the company actually succeeds in achieving all its goals.
One of the great things about the globalization goblin -- at least if you're a CEO -- is that you can blame your loss of market share, or your red ink or your inability to execute a manufacturing or sales strategy on cutthroat competition from low-cost overseas labor.
That's certainly been an effective strategy at Delphi. I'm sure you've heard about how new CEO Robert S. "Steve" Miller plans to turn around the company with his straight-to-the-heart-of-the-matter focus on costs. "The days when unskilled manual labor can deliver a $65-per-hour wage are disappearing," he told The Wall Street Journal, "Globalization is a fact of life."
Miller's point is, I suppose, that in a world where Delphi can and does pay the workers at its Chinese plants roughly $2 an hour in wages and $1 an hour in medical and pension benefits, U.S. workers are fools to expect wages of $27 an hour and benefits of an additional $38 an hour. Miller's definition of a reasonable package for U.S. workers comes to $12.50 an hour in wages, according to the company's latest offer to its unionized workers. Benefits would bring the package up to the neighborhood of $25 to $27 an hour.
You've probably heard a lot less about the lawsuit by Delphi shareholders and the Securities and Exchange Commission lawsuit charging former directors -- not Miller -- auditors and bankers with boosting profits through phony sale and repurchase deals. Entering Chapter 11 bankruptcy gave Delphi automatic protection from this suit, although shareholders are asking the bankruptcy court to set aside the protection.
Despite such alleged shenanigans, Miller has made globalization and cost-cutting the focus of Delphi investors. Will Miller be able to get the cost cuts he needs to fix Delphi everyone on Wall Street wants to know?
Focusing on globalization and cost-cutting makes sure the issue at Delphi isn't, as it's not at General Motors, the competence of the managers who got the company into this mess in the first place. It's not the likelihood that short-term cost-cutting is just a short-term fix. (If GM keeps losing market share and cuts production, you think the fix will stick at Delphi, its former parts division?) And it's not on the lack of a long-term vision that would lead to long-term growth.
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