Saturday, June 28, 2008

Of Stars, Cows, Dogs and ???

"GE's announcement a week ago that it would accept offers for its appliance business marked the death-knell of yet another US manufacturing business. ... For the last 30 years, Wall Street's insouciant attitude appears to have made sense. US manufacturing has slowly declined, as operations have moved to lower-wage centers in the Third World. However the US economy as a whole has continued to thrive, as financial services doubled its share of Gross Domestic Product and grew to provide 40% of the earnings of the Standard & Poors 500 share index. ... The collapse of the financial services bubble has however called into question three of the Wall Street's most cherished beliefs about manufacturing. ... Wall Street believes that financial services and other services can take the place of manufacturing. ... [I]t believes that manufacturing tangible goods is an intrinsically low-skill and uninteresting operation, so the US would do much better to specialize in 'symbol manipulation.' ... [I]t believes that the decline of US manufacturing was and is inevitable. ... Management decision-making like most human activities is a slave to fashion: whichever guru has captured the attention of business academics and the bsuiness press at any given time is likely to have an inordinate influence on management decisions. ... In the 1970s, the new and very fashionable Boston Consulting Group introduced the 'strategy matrix' under which businesses were divided into stars, cows, dogs and question marks, according to their growth prospects and profitability. ... There were several problems with this mechanistic, clever-clever approach to business management. One was that the businesses' typology could not be indentified accurately. ... When examined dispassionately in the light of posterity, it appears that far too many of these 'cow' businesses were manufacturing operations which were milked for cash flow that was diverted into the service sector, particularly in finance. ... [GE], however, from 1981 to 2001 run by ultra-fashionable 'Neutron Jack' Welch, epitomized the failings of the era. It underinvested in many of its manufacturing businesses, entered into a blizzard of divestitures designed to boost its short term earnings, played games with its pension accruals and built a gigantic financial services empire of low quality businesses in which it could never be a leader. It also ruthlessly eliminated its middle maangement and overpaid its top managment, winners in the corporate political game. GE was a much admired operation in Welch's later years; it is less so now, and if the bloated financial services business returns to a historically normal size may finally be seen to have been a disasater. ... The sad story of GE Appliances is a paradigm of what has gone wrong in the US economy since 1980. No, manufacturing did not need to leave the [US]: US manufacturing was killed by a multitude of foolish short-term-profit motivated decisions by inept and overpaid US management. ... Finally, the US cannot survive through financial services and tech startups alone; it needs to reinvest in manufacturing or it will find itself unable to support an advanced-economy living standard for the mass of its people", my emphasis, Martin Hutchinson (MH) at, 16 June 2008.

I agree with MH. GE became a hodgepodge of second rate businesses. Particularly in financial services. GE even leased airplanes to commerical airlines, in 2003 having a $27 billion portfolio of airplane leases! Can you believe it? Airlines usually lose money and GE bought planes for a money-losing industry. When I was in MBA school, Boston Consulting Group (BCG), was a "tres chic" employer. I thought BCG peddled nonsense. Neutron Jack's empire was in part built on scapegoats like Joe Jett, see my 10 August and 12 September 2007 and 12 April 2008 posts. It is written, "Man does not live on bread alone", Matthew 4:4 (NIV). Similarly, the US population cannot survive if all it does is shuffle paper. Someone must: mine and produce agricultural and manufactured goods. Eventually the Chinese will demand real goods for US paper. Then what? Real goods trade against real goods. Money is a medium in which they are priced. I haven't admired GE since 1986 when it bought Kidder Peabody. GE has struck me as being a conglomerate run by a bunch of overpaid accountants.

1 comment:

Anonymous said...

Dear Skeptic

I have been preaching this problem for a long time. A society must be productive, and to be productive you need to produce.

Long term, we need fewer MBAs. I would assert zero. What you need are people with a passion for the business and an core understanding who can overcome all the BS needed to be a success.

MBAs are a short circuit around the successful, and bleed the hearts and minds of the productive to capture rents. I despise the MBAs like Welch who rob the wages of the nuclear plant engineer, mechanic in the plants, and factory supervisors.

Two other culprits in this melange have been Volcker, who through his planned destruction of a wage based currency strength to currency strength based on financial dominance; and the other has been the unions who unlike German unions, need to work in concert with their employers and not in contention.

Look at what has happened in the last few years to GE. All small electronics to Japan. Both GE and Westinghouse have given up their nuclear divisions to Japan just as nuclear takes off. Now GE wants to get rid of appliances just as transport costs are going through the roof.

I view first and foremost that we need a currency based on wages, and gold or silver do that. The supply of both is limited by what man can scratch out of the ground. Second we need to manage the exports through tariffs. Every country in the world should be able to increase tariffs if they have a negative balance of trade. Once they go positive, they need to stop increases until their foreign debts are squared.

Oh yes, in addition, US firms are overburdened by lawyering, and insurance requirements. Legal insurance requirements are anathema. All insurance should be optional, including health insurance and social security.