We are all told to be "glass half full" kinds of folks. We are surrounded by messages that things won’t be all that bad, and when bad they will get better ("the storm is always darkest just before the dawn"). Unfortunately, when market shifts happen it’s the optimistic ones who ignore the signals, don’t fully prepare for a changed market and thereby come under the greatest risk of failure.
Take for example General Motors (see chart to 50 year low valuations here). GM has been around so long it is inconceivable to most Americans – and probably all of GM management – that GM could fail. I mean, this was the world’s largest auto company, and still is one of the largest. By any historical measure, GM should be able to weather a downturn and survive. But when markets shift, history can become irrelevant. All that matters is competing in the shifted, altered future. And, is GM ready?
What’s so different about the future? Well, we all know gasoline is a whole lot more expensive. The result? Demand for driving in the USA is declining. That means autos will last longer so people will need to buy fewer autos less often. Beyond that simple fact, consider how many autos Americans own. (Following facts courtesy of David Rosenberg at Merrill Lynch and his market memo – see article here.) In most of the developed world the average family owns at most 1 car. But in the USA the average family owns 2.2 cars – more than twice the world average. There are 40% more licensed vehicles in the USA than there are licensed drivers!! So if Americans start driving less, and figure out they don’t need to replace all the cars currently licensed, you get an exponential negative affect on U.S. auto demand. And since GM is almost completely reliant on U.S. demand – where it competes with practically everyone else on the globe – what will happen to GM if American miles driven declines 10% – and if the total demand for new cars starts to decline (not increase) at say a meager 5% per year???? Or 15% per year? Now you can see how it is possible that either GM or Ford may not survive the next shakeout in auto manufacturing (read more on Merrill Lynch downgrade of GM here).
We’re seeing a market shift not just in preferences, but in the overall economy that affects the auto industry and every competitor. Who will survive? That’s hard to say. Expect lots of government interference as well as free-market competition to create a very unpleasant marketplace. But in the end, the most likely winning survivor will be a company that is not strictly focused on automobiles. A competitor that is involved in growing markets, like mass transit light rail cars or robotics or another alternative marketplace will be able to meet market needs while maintaining overall company growth. That competitor will be able to continue raising capital and maintain wherewithal much better than a single -market competitor like GM or Ford stuck in declining annual sales volume and negative returns.
After selling asset upon asset (remember the big sale of GMAC 2 years ago?) GM has run out of assets to sell for subsidizing its auto business. Now it needs to quickly raise $15B to $18B to survive this downturn (read more here). Would you give GM management your life savings? Those two companies will be slashing costs with layoffs, plant shutdowns, and brand closings (read latest GM speculation on Marketwatch here.) But they will always be behind the curve, cutting costs fast but not fast enough to make a profit. Always promising a profit at some future time (like now promising profits in 2010 – do you believe it will happen?).
While GM and Ford will increasingly be unable to raise new capital (and what is raised will be at extra-ordinarily high cost), and unable to develop new products, competitors with more diversified businesses will be able to better meet market needs. So we can expect better results from Toyota, Honda and Tata than from GM, Ford, Chrysler (or even most European manufacturers.)
Roger Smith tried to diversify GM in the early 1980s by buying EDS, then Hughes and then investing in an all new White Space company named Saturn. But GM management sold off those assets for profits in order to subsidize it’s Locked-in auto manufacturing – while forcing Saturn into the GM mold (just compare a Pontiac Solstice to a Saturn Sky and you’ll see just how unique Saturn now is) . How will they now raise desperately needed capital to design more fuel-efficient, high quality, attractive autos? Besides the government, with a vested interest in saving jobs to avoid an economic depression, who would invest in GM or Ford rather than Toyota, Honda or someone else with better return on assets?
The Red Cross used to teach first aid, in the days before paramedics were common and smaller towns depended upon volunteers to treat accidents and emergencies as first responders. The Red Cross training motto was "Hope for the best, Plan for the Worst." Being optimistic is a nice mentality. But competing long-term means preparing for market shifts by focusing on the future. Using scenarios that lay out options which may seem highly problematic given current operations or conditions. Competitors that wait for the market Challenges to emerge, to show themselves clearly, are already too late to be effective against those competitors who build plans based upon potential shifts. Leave optimism at home when planning, it breeds contempt for market shifts. Instead, bring along outsiders who are likely to help you see future scenarios that you might otherwise choose to ignore.
GM management has had 30 years to create a different kind of company. One less reliant on U.S. automobile sales – and more reactive to shifting market needs. But optimism allowed management to keep Defending & Extending what it always did. Optimism allowed the company to believe people would forever want the high-margin large light trucks/SUVs they were making. It would have been better to be more pessimistic – and prepared.