The future of manufacturing in the US – is it really a strategic requirement?

In the shadows of the recent activities to preserve and protect the US Automotive industry, specifically the government’s intervention in saving Chrysler and Government Motors (the new GM), the question regarding the criticality of US manufacturing is an interesting one.   First, let’s quickly review the harsh realities:

1. Economics: As global manufacturing capacity continues to increase as it has since last June, any effort to protect a manufacturing oriented industry is probably a wasted effort.  The fact that capacity continues to increase, prices will continue to fall.  With a decrease in prices, higher wage countries like the US, will have an increased difficulty in maintaining and protecting its manufacturing base.  Unless costs like wages, land, and overall operations are significantly reduced, the US manufacturing sector cannot be cost competitive especially in an era of significant capacity.

2. Evolution: According to the research of Walt Rostow there are five stages of economic development.  The fourth stage describes an economy that produces a wide range of goods and services and a diminished reliance on imports.  Transition to the fifth stage, the economy is focused on the mass consumption with durable industries flourish and the service sector becomes more prevalent.  I would argue that our economy has started to move past the stage where manufacturing is at the core of our economy.  Our economic cycle cannot sustain a manufacturing focus.

The Solution:  The key to the American ideal has always been our ability to innovate.  When we go to such great lengths to protect a truly global and very mature domestic industry with the capacity and the economies to produce vehicles cheaper elsewhere, we are losing sight of the real issue, our own reluctance to truly evolve.  This is exemplified by an educational system that is deficient in educating our future innovators and risk-takers, by our financial institutions which have fostered and embraced  a culture of immediate and unrealistic return on investment and a government which is focused on preserving aging institutions, like the US auto industry, at the expense of rewarding and funding technological innovations like high speed rail systems and alternative energy programs.

This reminds me of the campaign pledges made in the state of Michigan in the 2006 gubenatorial campaign where incumbent Governor Jennifer Granholm pledged to the workers that she would keep manufacturing jobs in Michigan.  It is what the workers wanted to hear.  It is not what they needed to be told.

There comes a stage in every economic cycle where the economy must evolve, or die.  Michigan is the bell weather of our reality.  Where is Michigan today?  With record unemployment and massive losses in housing equity it is in a state of economic disaster.  I am not saying that could happen to the entire US economy.  However, the myopic preservation of manufacturing jobs can be that detrimental to effective evolution in a struggling economy.

Protect US manufacturing at all costs?  I think not.

Invest and reward in those who innovate and take risks?  Money well spent.

As we watch the US automotive fiasco unfold before our very eyes, the consumer is faced with a new set of very interesting choices.  Do I buy from a foreign owned company?  Do I buy from a government owned company?  Or, do I support a struggling US based company trying to turn the business around without the benefits of a “controlled bankruptcy” and government funds?  Respectively the choices are Chrysler, GM and Ford.  While President Obama recently defended and supported the many benefits and necessities of the Chrysler and GM aid saying, “General Motors will reemerge from financial turmoil a ‘strong company’ and that permitting it and Chrysler LLC to collapse could have triggered an economic depression,”  I am just not there.  And even if that was the right decision, what about Ford?

Quite frankly, even though I am technically going to be an owner of the new GM (Government Motors), I feel that as consumers we must strive to find value in the Ford product line-up.  At least, we need to be looking to buy Ford first.  Why?  It is quite simple.  How Ford has worked itself through this economic disaster, without any type of bankruptcy or federal money, represents the foundation of our free enterprise, capitalist society.   As a result, their road is tougher and riskier.  According to Paul Ingrassia in a recent Wall Street Journal article, “while General Motors and Chrysler will emerge from the government restructuring wringer with significantly reduced debt, Ford will still likely be obliged to repay its lenders. This could put Ford at a competitive disadvantage — an unfortunate irony for the one Detroit car company that has gotten the decisions mostly right in the last few years.”  For that reason alone, we as consumers, need to take a long look at Ford.  If Ford does not offer the products you desire, that is Ford’s problem.  But, we need to give Ford a chance.  I think they have earned it.

Hard to ignore the statistics. Over 4.4 million job losses this recession, 742,200 in March, 651,ooo in February and no end in sight.   Put that figure next to the all the money tossed about lately–$173 billion floated to AIG, the $30 billion that GM has tapped in to, or the whopping $700 billion Troubled Assets Relief Program (TARP) or President Obama’s $787 billion stimulus package.   Contrasting the two sets of statistics makes me wonder what the hell is going on?

To anyone who reads this blog, please help me answer these questions:

1. Why are we throwing big money at bad debt while we are blindly and willingly allowing the American worker to lose their jobs at record pace?

2. Does anyone in our government realize that until people who actually purchase things has a job in order to buy stuff, we will not have an economic recovery?

The math is all off.  We are propping up corporations and protecting investors while the people who really do spend money and need their money to live are losing their incomes.   Here are my suggestions:

1. Investors do not deserve protection from bad investments.  It is called “risk” for a reason.  Sometimes when you take on “risk” the results are less than desirable.  We have created a welfare state for the investor class.  How ironic.

2. The government needs to provide more stimulus for the innovations of small business.  They are the real job creators.  Interesting to note that two hours after I posted a blog on this subject, President Obama added $16 billion to small businesses as stimulus.

3. If your business has been so poorly managed, for example GM losing $82 billion in four years, to the point where you need government aid.  Uncle Sam is here for you.  Three conditions: First, the entire Executive Team and the Board of Directors must be replaced; Second, all employment contracts are null and void–Mr. Executive, you get the severance package everyone else gets;  Third, we will help you decide who replaces these people.

I wonder if anyone would want a bailout then?

This year the joke is on the American Worker struggling to keep their jobs and pay their bills.  It is too bad these people are being punished for the irresponsible behaviors of others.  It is worse, because our government “of the people” and “by the people” is ignoring “the people” that make our economic engine go!  Here’s hoping that next year we can all look at this and smile–I am concerned we won’t be laughing yet.

It is interesting that small business, that sector that has actually created real jobs in the past few years have received less than 1% of the stimulus package funds.  With all attention and big stimulus money given to the big companies as part of the economic stimulus, it is big business who have been shedding jobs not creating them.  While the small businesses that have created jobs are struggling to survive and cannot access a line of credit are left ignored at the feeding trough.

Lost in this stimulus package–real stimulus and real job creation.  Big companies cater to their investors first.  Investors are only looking for immediate improvements in profits.  There is no real opportunity for job creation until the investors and the analysts are satisfied that the earnings picture for them has improved.  There are no jobs on the horizon for big corporate America.  The stimulus for real job creation through these big companies will not occur for at least 12 months.  Need an indicator of this behavior, look at how ineffective TARP has been at pumping money into the economy.  It has been a miserable failure.  These banks are using the capital to stabilize their business not to stimulate loans.   The economic stimulus will have the same near term results.  Businesses will use this money to creatively shore up their balance sheets and generate sales without adding jobs.

Real job creation comes from job stimulation.  Small businesses are more adept at innovation, growth and change.  Pump a little money their way and they can and will create jobs.  But, a little money is certainly a great deal more than the measly 1% built into the package.  That is plain insulting.   Small business was obviously not something our Congressional leaders or President Obama even looked at as they were writing fat checks.  Once again our government has focused on wasting money on the big guys, with all the lobbyist influence and their short-sighted, investor driven behaviors.  While the true innovative and job creating machine, the small businesses in this country, are left out in the cold.

Wake up President Obama and Congress–Small business grows jobs!!  Send serious stimulus money to the small businesses in this country where it will have a real and immediate effect.

According to Wikipedia, accountability is “the acknowledgment and assumption of responsibility for actions, products, decisions, and policies”.  It’s way past appropriate to hear someone take accountability for the collapse of their company under their leadership in the midst of this mess.  Or, at least have a board hold one of these failed leaders to a higher level of accountability by showing someone out the door.  This blame the economy excuse simply does not resonate anymore.

I came across a quote attributed to Alex Rodriguez in an interview where, in admitting to steroid use, he justified it because he felt the need to live up to the expectation of a $250 million contract.  Really?  So it is the contract’s fault?  Sounds like we are supposed to understand a justification defense instead of an accountability statement.  I do not need to know why he used steroids.  I do not even care that he used the steroids.  It would have been more a demonstration of his accountability if he had said, I did something very wrong, very inappropriate, and something that was very contradictory for a responsible athlete.  That would have represented his accountability.

An example of accountability is found in the Saturday Wall Street Journal.   This article talks about how the marines took accountability for the crash of a jet in a San Diego neighborhood in December 2008.  The marines launched an investigation and openly, publicly criticized 12 marines responsible for their actions that would have helped avoid the crash that killed four people from one family.  Essentially these people’s military careers are over.  They were held accountable and the marines accepted accountability for this event.  End of story.

Not to confuse the economy with the real life and death tragedy of the San Diego crash; however, there are lives being affected every day in the midst of this economic meltdown and no none has yet to take accountability for their irresponsible, greedy, short sided policies and actions that facilitated this mess.  To quote Peggy Noonan in her article,  “nowhere did we see a board come out and say: ‘This is what happened, these are the decisions these particular people made, and this was the result. They are no longer a part of our organization.”  It is only appropriate that those who directed this mess be held accountable.  We are definitely missing some accountability here.  It is about time somebody was held accountable.

We hardly picked up any words of wisdom from White House adviser David Axelrod regarding the automotive industry on Meet the Press today.   In discussing the automotive companies, Axelrod says, “we’re going to need a major restructuring of these companies.  How that restructuring comes is something that has to be determined.  But it’s going to be something that’s going to require sacrifice not just from the autoworkers, but also from creditors, from shareholders and the executives who run the company, and everyone’s going to have to get together here to build companies that can compete in the future.”  Mostly correct, not entirely true, highly impossible.

What is really needed is a significant change in leadership.  Leadership is the only component that has not changed, to date:

First, there is nothing that suppliers can give as GM has already bled them to death with their target pricing tactics or taking the 30 days net discounts even though they are paying net 60, or more.  The suppliers are already stretched thin by GM’s purchasing strategies.

Second, while the legacy costs associated with the unions are a point of contention.  It is hard to criticize the unions for the recent concessions they have made that make them more competitive in real costs to non-union foreign based workers.  With the exception of the elimination of the jobs bank, there is not a lot left to give.

Finally, the recent retirement of Bob Lutz and the move of Tony Cervone to United Airlines, signals that the gravy train days of the executives at GM are obviously over.  It is about time.  But it is quite overdue.

Conclusion?  It is time the entire executive suite be given a layoff in much the same way layoffs are given to the common employee–no golden parachute, normal severance package, and nothing else.  As, President and CEO since 2000, Rick Wagoner has been the unproductive force behind GM’s losses in market share, stock price and profits.  Wagoner did not take any real or corrective action until he sensed that he could convince Congress to fork over taxpayer money to save his job and his company.  Then and now he seems to be real busy and real aggressive in proposing change.  For Wagoner, these actions are way too little and way too late in the game.  The best course of action for our government is to empty the executive suite and ask Jack Welch and Warren Buffet to build a team of experts to get GM in order.  In the meantime, get Rick Wagoner out of GM–he does not deserve a second chance.

What are your thoughts?  What do you feel about Rick Wagoner’s performance and whether he deserves to keep his job?