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Business 101 April 16, 2010

Posted by ev0rev in Uncategorized.

This post is a bit late probably, but I wanted to comment on something that happened over this past year that truly had me shaking my head in wonder.  To put events into context, we had just gone through all the debates/wrangling and finally passing the TARP legislation.  We were still reeling from the AIG/Fannie Mae & Freddy Mac bailouts.  To top matters off, the government was considering a bailout of GM/Ford and Chrysler.

I live in an area where the measure under consideration was strongly supported.  I spoke with quite a few people who felt that this bailout was far more justified than any of the other measures that had been taken previously.  But when I looked at the events that lead  to U.S. auto manufacturers, several key points stood out.

A) Management had made poor decisions with respect to anticipating/meeting customer needs.

B) Labor unions had negotiated an extremely generous contract, especially with regard to benefits and retirement packages, that was simply no longer sustainable when sales plummeted as a result of A).  To make matters worse, they were reluctant to renegotiate said contracts and chose to exact what measure of compensation they could for the benefit of their members often disregarding the effect on the company as a whole over the long term.

C) In an effort to spur employment/industry in their respective states, governors had signed favorable deals with foreign manufacturers to assemble automobiles domestically (Tennessee, South Carolina, Alabama, Texas and Mississippi).

These points came together to create a catastrophe for U.S. auto manufacturers.  They were creating a product that fewer people wanted (Humvees when gas was at $4/gallon), with higher labor/production costs while the competition was being invited in with incentives.  Is there any wonder that domestic auto manufacturers were looking for some kind of break?

But it’s worth taking a step back and looking at the bigger picture in this case.  Businesses exist to service a need.  It’s that simple.  Those who succeed manage to service that need for less money or provide a greater degree of service than their competition.  Sure, businesses exist to make money.  Ultimately that is indeed the goal.  Yet it does so by doing what?  That’s right…servicing a need.  Name a business or industry and look at how it remains profitable.  It does something better or for less cost to the consumer than the competition.

So when I hear about how the downfall of GM/Ford/Chrysler would result in cataclysm, my response is that while in the short term that may be true the long term result would be a healthier industry.  Why?  Because the NEED still exists.  Just because GM… or Ford…or Chrysler is no longer in a position to service that need does not mean the need itself goes away.  It simply means that the vacuum created by their failure will be filled by someone else who recognizes the need and the ability to make a profit by fulfilling it.  For example, if Chrysler failed… could GM or Ford not seize an opportunity by purchasing manufacturing plants at bargain prices while negotiating a better labor contract with many of the recently laid off Chrysler employees?  Or maybe it would be Toyota, Kia, Honda, Volkswagen who did exactly that… but the result would be the same.  Someone will have stepped in to fill the need.  We wouldn’t stop driving automobiles because the “Big 3” went under.  We’d simply find another source and they would readily meet the need.

In truth, I feel that way about a good number of institutions that we are providing assistance to.  I’m told that we “needed” to bail out AIG and Fannie Mae/Freddy Mac… the strain on our economy would simply have been too great otherwise.  I suppose that’s possible.  Far more intelligent people have looked at the matter and come to that conclusion… but from where I stand, I say let them fail.  Someone will step in to provide whatever service or goods they provided.  It might even be that they would do so in a far more fiscally responsible fashion.



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