Sunday, November 27, 2005

Rustoleum for the "Rust Belt"

Major Mike

Hugh Hewitt poses an interesting question on his November 22nd post on whether American industry is dead. Specifically he links to an article about the American auto industry and its current struggles. Since I have recently returned to the American steel processing industry, specifically, investment castings, I feel I am in a reasonable spot to comment from.

First, the only American industries that are dying are those that are killing themselves. The major causal factors are unrestrained labor costs, no synergy between management and labor, lack of continuous process improvement, and undisciplined management.

Let’s take those in reverse order. It is the responsibility of management to guide companies in directions that build value for the shareholders, provide usable and imaginative products to consumers, and reward their human capital (workers) with security and a liveable wage. Instead we live in the age of the “diamond” parachute. An age where CEOs and VPs make obscene amounts of money, and the average worker and supervisor scrape out a living on overtime or the promise of a promotion. GM, Delta, Ford, Northwest, etc., etc., etc. are failing, principally because of poor, over-paid management.

It is the job of management to ensure their company remains relevant in the marketplace. GM and Ford, for example have been floundering since the first gas crunch in the early 70‘s. Those companies have yet to generate a consistent excitement about their product that many foreign manufacturers routinely generate. Yes, Ford has a hit with the new Mustang, and their F150s are the most popular full size truck in the market, but those niches represent a minute portion of the market, and soon, if they cannot generate excitement and loyalty around a wider range of products…they will go under…likely after GM.

A good example of growing excitement and a market for a product is the simple M&M. Twenty years ago M&Ms were a candy, today they are a home accessory. Holiday colors, custom ordered colors, and the addition of a covered almond product, are examples of how one manufacturer re-defined the market, and grew business through imagination and marketing. Look at the American auto industry…how much innovation and imagination has really occurred over the past 35 years…darn little.

This is a management failure. CEOs and VPs have to be innovators and marketers as well as MBAs. They have to have a vision for their companies and a desire to succeed, not just a golden parachute “in case it doesn’t work out.” Industry is being let down by management in many cases.

Look to GE for the model on process improvement. To those on the inside it is challenging and potentially brutal. They have an arduous evaluation system that pressures all to be innovative and to cut costs. Those that do, succeed, those that don’t generally have to move on. Now, I am not advocating the widespread use of this semi-Darwinian system for cost cutting and innovation, but if you’re content to sell the M&Ms of twenty years ago, you business will stagnate, and stagnation in the market place is the harbinger of collapse.

Process improvement and cost cutting are the responsibility of all those in the business…not just management. Workers generally become the process experts, as they are the ones performing the required tasks day in and day out. As the experts, they are a valuable resource of information about process and product improvements. This information must be cultivated and used by management. Additionally, the workers MUST have enough buy-in to the companies they work for to actively and enthusiastically participate in company programs and volunteer such information where formal programs don’t exist. Management has to be smart enough to have programs in place, and aggressive enough to leverage the useful information they get.

There are inefficiencies in all American businesses, those that drive costs out, see opportunity…those that don’t will perish in the global economy.

Management and labor synergy would seem to many of those in American industry as an impossibility. It is an impossibility when management is overpaid and where they have been caught pilfering the companies they were hired to manage, but it is not in companies where worker involvement, worker welfare, and company stability is valued. This synergy is ultimately based on labor/management trust. This trust must be built on fair compensation, proven trustworthiness, high productivity, and team success.

American industry has a history of the opposite behaviors. Low wages, safety issues, and brutal tactics by management in the early history of the labor movement have hampered the building of the kind of trust that it takes to build this synergy. “A house divided cannot stand.” A company divided cannot succeed. Successful companies need the efficiencies derived from a positive management/labor synergy to survive. Labor and management MUST be working towards the same aims in order for this positive synergy to exist.

Manager involvement, properly directed bonus incentives, safe working environments, and company/worker support of community based activities are ways to build this synergy and ensure company success.

Compensation packages are probably the number one killer of American businesses. Certainly CEOs are well over-paid, but worker wages have far outstripped productivity gain in most of our struggling industries. Total UAW compensation commitments are significant, and unless those costs are offset by an equal gain in productivity, the model breaks. When the model becomes skewed because labor costs are not matched by productivity offsets, the company begins its slow spiral to its eventual demise.

Companies cannot operate on ever-decreasing margins or losses. Lower margins and financial losses have to be offset with productivity increases and lower overall fixed costs. If this relationship cannot remain somewhat in balance, over and extended period, the business and/or industry is doomed.

Workers must recognize that labor costs are generally the greatest fixed cost in most industries, and that high wages require high productivity and value added to the product. High wages are not a reward for seniority or attendance, but a reflection of a skill set and the ability to translate that skill set into profit via productivity and lower costs.

Health care, dental, vision, daycare, holidays, all must be paid for, not from lower profits, but with efficiencies, teamwork and productivity increases. Simple formula. In the struggling American enterprises, portions of this equation are out of whack. During boom times, management is held over the barrel for higher, unsustainable wages, that cannot be rolled back during lean times…an unsustainable model. The auto industry, steel industry, airline industry, all have defective or broken labor models that will not sustain their companies out into the future.

The answer is not universal healthcare, which is just another form of government subsidy or personal entitlement, it is a combination of all of the factors listed above. Business must run as teams, not as diametrical entities each seeking only to sustain their short term existence. The divisiveness that exists within many of our struggling industries is the cause of their imminent demise, not the cost of health care.

As a last comment to the author HH references, and his comments about college attendance rates in the “rust belt,” this is a parental problem. Although I grew up in a working class neighborhood outside of Detroit, college was always on the horizon. My parents constantly harped on the importance of college, and in the end, all four of us attended college…two of us attending private schools. The lack of college attendance has less to do with living in the rust belt and more to do with working class parents not emphasizing the point to their kids.

You want your kids to go to college, show them how to get there…even if you yourself did not attend…it is called parenting.

E. J. Dionne sneaks in another pitch for universal health care as a solution to the decline of the UAW and the loss of manufacturing jobs in America. This bristles me in a number of ways.

First, using universal health care to keep union jobs is just another form of corporate and indiviudal welfare. If those workers want health care they need to earn it through productivity...see above. If there is a bail out for this inertia, then there is no incentive to trim costs, innovate, and increase productivity. The unions, with their restrictive practices and contracts, make it nearly impossible for GM to do anything BUT eliminate jobs in order to reduce costs. A government subsidy here would just be subsidizing poorly negotiated and manged contracts that dis-incentivize initiative and do little to spur productivity...sound like the Soviet economy at all?

Secondly, no person is entitled to their job for life. Change is inevitable in capitalism. Those that change, survive, those that lament about the good ole days go bankrupt. The UAW is not such an American icon that we could not live without it. Just like the black and white TV, some things outlive their utility and appeal. The only thing that US manufacturers are entitled to is the marketplace...relevance, cost, and utility determine whether there is a market, not the government.

Third, universal health care is is the ticket to mediocre health care...see Europe and Canada. The medical market needs to be incentivized via competition, the same as all truly free markets. This competition breeds innovation and inproves quality. Without competition, Walter Ruether would have us driving Model Ts in favor of a strong union membership. Regardless of what the liberal socialists think...competition in the health care field is good for all.

Lastly, the clamor for universal health care is just a shell game that hides another form of income re-distribution...those of us who work hard would pay for those who don't...sorry, but that is not why I come to work. Most Americans can find jobs that have good benfits, but they have to look. If E.J. Dionne gives them universal health care...where is the incentive to look? Again...see socialism in the dictionary.

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