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Management Side
Stop it already !

Week of 24 Nov 08

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I am talking about the proposed bailout of GM, Ford, Chrysler and anyone else who has their hand out. Sorry if I am a bit political and provincial this week and way off the topic of the worldwide pulp and paper industry, but when politics invades manufacturing businesses to the extent that all this bailout talk indicates, it is time to bite back.

It has been no secret that I have been, to put it mildly, uncomfortable with our own industry's efforts to tap government largess over the years, often in the name of research and development or saving obsolete mills. However, the auto industry is making us look like mere amateurs.

It is not out of envy or our own incompetence that I say stop. I say it for there are already time honored ways to handle poorly managed businesses: reorganization or liquidation bankruptcy. The bankruptcy system was designed to purge poor operations with the least disruption. This system works and should be employed with vigor to remove the deadweight of these obsolete companies from the macro economic scene. And, don't pay any attention to the scare mongers--they would have you believe these companies and their suppliers in their entirety will fail. Not true--the bankruptcy courts will sort out and reorganize the parts with promise. Yet the scare mongers are indeed out in force. Over this past weekend, if one watched the news shows, the number of jobs affected by the big three moved from an estimated 2 million to 5 million. Just yesterday, I heard a business analyst say 10 million. Obviously, everyone is just guessing--and totally ignoring how many jobs would move to domestic operations of Toyota, Honda, Nissan, BMW and Mercedes were they to fill the vacuum in demand created by the loss of the "Big Three."

What goes unsaid, of course, is that the companies to be saved are those whose workers are represented by the United Auto Workers Union. The other auto companies manufacturing in the United States are doing just fine. Sure, they are having a downturn, but they are not in the position where they are likely to go out of business. Their secret? They have good management.

Now, one could construe that I am anti-union. I am not anti-union, I am anti-inefficient union. I have mentioned a number of times over the years the fatal coal mining accident my grandfather experienced in 1930. I am certain the United Mine Workers Union, putting pressure on owners and the government (for safety regulations), have made sure that an accident as stupid as the one in which my own grandfather was killed is almost impossible today. This is right and good.

Middlemen (I don't know how to say this in a unisex way) anywhere do nothing but add costs without adding value. GM, Ford, and Chrysler have not managed their middlemen-the UAW and their dealers. Now, they, the poor management of these three companies, plus the president of the UAW, are running to their friends in Washington begging for help. The excuse is this: they are too big to fail.

Nonsense. What would happen if the much maligned Wal-mart showed up in Washington stating they were on hard times and too big to fail? They do have 2.1 million direct employees (and the best performing stock in the Dow Jones Industrial Average this year). They would probably get a bailout, IF they agreed to unionize their stores. Wal-mart is indeed too big to fail--rural America would be thrown into a depression for sure if Wal-mart went out of business tomorrow. Yet, I don't think we have to worry, for Wal-mart is very well managed. This past week they did say their overall results will be below earlier expectations, but that is because of currency exchange losses, not their basic business. Their success has been, to a large part, due to this: they have eliminated the middleman up and down the retail chain. It has been independently reported that when Wal-mart comes to a small town, it is like everyone in town received a 10% raise. That is effective management and value creation.

Let's look at governments' attempts to "help" other "industries" over the years. Take passenger train service in the United States. It has been on the dole since about 1970. Service has deteriorated to a point of utter ridiculousness while fares have soared above the costs of an airline flight. Who is going to take a 13 hour, if on time, train ride from Atlanta to Washington, D.C. at 1 1/2 to 2 times the price of a one-hour airline flight? Education is another example. Henry Ford, Andrew Carnegie, John D. Rockefeller, Thomas Edison, Albert Eistein, Woodrow Wilson and J.P. Morgan, the people who set the stage for the prosperity of the 20th Century, went to schools without any federal assistance. The only two people of their stature in our times, Warren Buffet and Bill Gates, also completed their pre-college educations without federal assistance. Now, we complain how poor schools are and think the solution is to pile on more aid.

Money comes with strings and I believe strongly in this principle: he who furnishes the money makes the rules. There is already USD 25 billion allocated to "help" the auto industry make more fuel efficient cars. Honda, Toyota and others seem to make fuel efficient cars without any help. If the goal is to keep GM afloat, I say subsidize the selling price of Corvettes to make them competitive with Toyota Scions. I'll bet they will fly out of the showroom and the sole Corvette plant in Bowling Green, Kentucky will have to expand many times over, bringing many jobs to Western Kentucky. More likely, we'll be able to look at other cars made with government help for our examples of cars designed by fiat: the Russian Lada (who would have thought someone could take a 1960's vintage Fiat and make it worse?) or the East German Trabant, the first car with body panels made of recycled materials. Isn't that exciting—how green! Most likely Trabant clones are in our future. The Trabant was possibly the worst car ever made--it could only sell in a society without free market choice.

Now despite all my venting above, an example appeared last week that is the argument of arguments for keeping politicians out of businesses. The Canadian law firm Siskinds, based in London, Ontario, filed a 40 page brief in the Ontario Superior Court in Kitchener last week, proposing a USD 550 million class action lawsuit against AIG under the Ontario Securities Act. If allowed to go forward, this suit on behalf of Canadian investors in AIG will have to be defended and, if lost, will require a payout. And whose money will be used for the defense and payout? The US taxpayers, of course, since we have taken on AIG as a basket case. Expect this to be one of many, many lawsuits in all of the messes with government entanglement that have been established this fall. It is the perfect tort case--who has deeper pockets than the US government?

We have had many pulp and paper facilities fail over the years. Their normal course of failure has sometimes been bankruptcy, a process that has been very healthy. Can you imagine if we would have hit the times we are facing today with the pulp and paper industry of 1995? It would be a complete disaster.

We must stop the handouts, for this reason if nothing else--to keep our great grandchildren from spitting on our graves. For we have already placed our children and grandchildren in debt to cover our foolish ways--must we reach yet another generation or two forward with our terrible legacy?

Safety is nothing to compromise in any business at any time. People become upset when there are rumors their business and livelihood are in jeopardy. As you see your relatives in the upcoming holiday season, those which perhaps work in the auto industry, admonish them to be safe on the job.

Be safe, and we will talk next week.

If you agree with the above, you just may wish to forward this week's column to your senators and representative. They can be found by clicking on "More" below.

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