Aubyn Hill
AS MUCH AS MANAGERS, employees and shareholders fear the thought of their beloved and salary- and dividend-providing company going under, the sad fact is that big companies (and small ones too) do die. In Jamaica, companies that were household names such as Nathan's and Times Store no longer exist; and in the 1990s banks such as Century National, Eagle Commercial and Workers Savings & Loans, among others, "kicked the bucket". Most recently, Dyoll Insurance all but died.
The hard truth is that many big companies, all around the world die on a regular basis. Switzerland, in the minds of most business, political and social leaders around the world, epitomises financial strength, economic prudence and political wisdom had an airline that used the venerable red cross as its insignia that became a world-wide recognised icon. On October 2 2001 dozens of Swissair aircraft stood grounded at Zurich Unique Airport. The simple truth was that their aircraft could not take off because of a desperate lack of cash flow. The airline had so little money that it was not able to pay for jet fuel. I must remind you that we are talking about an airline that flew the flag and the pride of the people of one of the richest countries in the world, Switzerland. We are not talking about a young airline in a developing country. We are talking about Swissair which for 70 years carried Switzerland's brand of goodwill - but the company disappeared in a matter of hours. Many persons were aware that Swissair was ill, maybe even very ill, but no one ever thought it could reach this level of gross humiliation.
COMPANY DEATH IN AMERICA
The American company graveyard is full of large companies which "couldn't die" or "shouldn't die". Pan American Airlines - the original world airline is dead. So is Eastern, which in its last days was run by a famous former astronaut; National Airlines is no more and a slew of banks - far too numerous to remember or name can also be found in America's company graveyard.
These days the unthinkable is being thought of in America and the whispers are becoming frequent and loud. Indeed the issue has moved from being whispered about to being openly discussed and it is frightful to many in America and around the world. The talk is that one of the most powerful companies that reaches and touches hundreds of countries around the world - General Motors - is facing the possibility of going bankrupt. According to FORTUNE magazine "in recent months both Moody's and Standard and Poor's have made increasingly grim statements, bald in their talk of bankruptcy and laden with doubts that GM can turn around its reeling North American auto operations, now reduced to an embarrassing market share of 26 per cent."
Any analysis of the source of GM's problems quickly identifies a combination of poor management, which was reflected in management losing touch with what the American consumer wanted, as well as allowing the company's cost structure to get out of hand. By missing the market trends management failed to secure the sales and revenues needed to carry such a sprawling cost infrastructure. But the analysis also points to the negative force of the powerful and often overreaching United Auto Workers union (UAW). Here are some of the symptoms of GM's major problems.
HEALTH COST
GM presently shoulders the health cost burden for employees, retirees and dependents totalling 1.1 million people - a figure bigger than the population of Detroit. It carries an unfunded liability of US$64 billion which adds about US$1,300 to the cost of every car and truck GM makes in the U.S. In 2005 the company spent about US$5.4 billion on health care for its workers. Almost 70 per cent of that was for retirees and their family members. It is clear that something is really wrong in that per cent figure. GM is negotiating with the powerful UAW to free itself from what FORTUNE calls "the nearly UN-American Jobs bank" in which laid-off union members get paid for not working. The Centre for Automotive Research estimates that there are about 5,200 employees in the Jobs bank at the end of 2005. The annual cost of each employee to GM is at least US$100,000 which works out to a US$520 million hit to GM's income statement every year. It is significant that GM has decided to sell down its stake in Suzuki to its former 2 per cent holding in order to get approximately US$2 billion in cash. Rick Wagoner, the chairman and CEO of GM has had to take a pay cut as have other senior executives. The troubled company slashed its dividends in half earlier this month and all these moves are being taken by the world's largest automaker as part of the response to its U$8.6 billion loss last year.
JAMAICAN MANAGEMENT TAKE HEED
The management of Delta, United and Northwest airlines - as well as others that are in Chapter 11 bankruptcy - will find any number of excuses as to why their companies are facing hard financial and operating times. Rick Wagoner of GM and Bill Ford of Ford Motor Company (both in varying degrees of difficulties) will have any number of explanations. Across the board, the real truth is, management took its eye off the ball. It allowed cost in the airline industry to balloon and refused to confront the pilot and the other unions when the industry was deregulated by Alfred Kahn in the 1970s.
Jamaican management has to be careful to move quickly when changes occur in the marketplace. One could argue that management at General Motors refused to take signals from the market when the Japanese started to build a super efficient outsourcing network to reduce their operating costs. Years ago GM should have sold many of its activities that are effective stand-alone businesses and use them as outsourced suppliers to the company. Instead, corporate history and machismo restrained them from taking this type of necessary action. There are companies in Jamaica that need to take a radical look at the businesses that they are in, and make some fairly drastic decisions to slim down and sell off businesses which they no longer can manage well - or probably did not manage well in the first place. Boards of directors must be fairly ruthless in keeping management's nose to the grindstone and constantly challenge them to listen to and respond to the marketplace.
Finally, we have some lessons to learn from Swissair, Pan American and even General Motors. Are we willing to divorce our national manhood from an airline that loses endless sums of money since it started and in all likelihood will continue to do so for the foreseeable future? Anytime a government, society, shareholders, managers, employees or their unions decide that a company cannot fail, that decision becomes a recipe for the company to loose enormous sums of money. When a company can no longer compete effectively in the marketplace, or when the divisions of a company can no longer compete successfully, those divisions have to be lopped off and sometimes the whole company has to die. Investors (be they governments or individuals) as well as managers, employees and unions must come to the realisation that when investment is put in a company there are normally three possible outcomes: profitable success, break even or loss and failure. It is better, especially in a globalised world, for a chronically failing company to die than for it to continue to bleed money from shareholders and taxpayers.
Aubyn Hill is the CEO of Corporate Strategies Ltd., a restructuring and financial advisory firm. Respond to: writerhill@gmail.com
