I was at an executive event last night where the moderator asked the audience "will this current U.S. economic downturn last 12-18 months, or more like 36 months and possibly longer?" By show of hands, clearly 90% expected a short downturn. When he asked why, the prevailing opinion was "because these things just don’t last much longer, and the press always makes things sound worse than they are." When he pursued the audience for more depth, for specifics about where the new jobs would be, where the new revenues would come from no one offered anything beyond a weaker dollar surely helping exports – which he admitted still dramatically trailed imports.
This audience had not really asked itself just what could go wrong. If we want to position our businesses for success, it’s best we ask ourselves "What if…"
Many of the airline gurus, those who have long supported industry consolidation and hub-and-spoke systems, are now saying that higher jet fuel will cause at least one major airline to disappear. That’s right, not the same old "go bankrupt, but keep operating" syndrome that we’ve seen at Continental, United, etc. over the years. They are saying one day one of these huge airlines will say "we’re out of cash – investors have lost confidence and will no longer give us money in exchange for future promises to pay – we’ve not met expectations too often – so tomorrow we are grounding our entire fleet – we’re laying off all of our pilots, flight attendents, gate agents and mechanics – tens of thousands of employees will need to file for unemployment – all of our gates will revert back to the airports – we’re done."
Now, you may think this scenario sounds improbable. But, what if……. What will happen? Airplane tickets will triple in price. As many as 200 smaller cities in the USA will lose all flight service. Airports short of payments will be unable to make municipal bond payments. What will be the impact on your business? Are you prepared, or if this happens will you "wing it"? Could you suddenly lose contact with your customers? Your vendors? How will your revenues be affected?
Or, let’s consider the auto industry. When I was young I remember when GM had almost 50% market share in the United States. Now, it has 21%. We are so used to the slow loss of share, the perpetual bad news from GM, the last 25 years of hearing how GM is struggling with its cost and providing rebates or no interest financing to sell cars, that we’ve quit listening. But yesterday, as its market value declined back to what the company was worth 25 years ago, the GM spokesperson responded to questions about the future by saying "We continue to believe we have adequate liquidity for 2008." (read article with quote here.) Get that ringing piece of confidence – they have enough cash to survive for another 6 months! That’s the best they can say?
We are so used to hearing the bad news, we keep thinking that’s the norm. But in reality, GM for the last 25 years has been selling assets to keep the car company alive. They sold EDS, Hughes, their parts business (Delphi), and their financing arm (GMAC). They’ve sold assets – like a person selling first a lung, then a kidney – to get the cash to feed the poor returns from selling cars. Now, they are running out of assets. And they are running out of cash.
Today we read that Ford, which had a combined loss of $15.6 billion in 2006 and 2007 will not turn a yearly profit in 2008 or 2009. It’s dealer lots are flooded with trucks the dealers can’t sell at profitable prices. So the leaders have turned to 91 year old Kirk Kerkorian for specialized financing such as a preferred equity to keep the company afloat. Don’t be too encouraged, Mr. Kerkorian made a run to take over GM in 2006 but was out of the deal with a fast profit for himself – and no benefit to investors or employees – in 2007. This is all about a fast buck for Kerkorian and a Hail Mary attempt to keep Ford alive by its Chairman and CEO (read article here.)
What if sometime in the next 18 months we read "Due to a collapse in investor confidence, GM (or Ford) unfortunately must announce it is filing bankruptcy today. Lacking sufficient cash, we will be idling 80% of our plants and workforce effective Friday. Our dealers should expect a reduction in output of 90%, and possibly no new car models for the next 4 years as we look for a way to reorganize the company into a much smaller but more competitive entity." What will this do to your business? As 50,000 employees go on unemployment, as unfunded pensions are exposed and the retirees see themselves fall back exclusively on Social Security, as suppliers begin declaring bankruptcy like dominos, what will happen to your business? To your customers?
We all tend to look at the future as an extension of the past. We expect things to be pretty much the same – sort of plus or minus 5%. But what if that’s not what happens?
For decades the U.S. Federal reserve held as 90% of its assets U.S. government bonds. While bailing out banks the last 6 months that percentage has declined to less than 60% – meaning that the "full faith and credit of the United States" as printed on the currency is now 40% backed by mortgage instruments or bank instruments tied to mortgages that are considerably more speculative than a U.S. bond. If you think the banking system can’t fail – like it did in the 1930s – just keep that little fact in mind. What if the dominos don’t stop falling at the banks, and the Fed can’t stop the bleeding, and the currency speculators are right and we lose our national liquidity? Could we lose the ability to borrow money for our busineses – like happened in the 1930s? What if…..
Are you considering all the possiblities? Are you preparing for the bad, as well as the good? What scenario are you planning for? The one that looks like the past, or one that might be different?