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Category Archives: Automobile Industry

Though it may make sense in some countries, I’m not in favor of the state providing for health. But having lived with the mess of the US private medical insurance I do believe that this is one service that the state should provide, and Australia is a good example.

It is unfortunate that in the US, this last year the state has had to bail out some capitalist. This does not reflect very well on some parts of private enterprise.

My opinion is that done properly, there is no substitute for the power of competition. For example, looking at electric cars, competition allows us to know that GM Volt’s 40 miles per charge is a dud, because we know that another management team, Tesla, has achieved 244 miles per charge.

Without competition there is this opacity of internal business management. We really have no idea what is going on in a company, and can only infer that maybe management is good, bad or ugly. It is an information asymmetry.

Competition reduces the risk of this information asymmetry and enables us, without much effort on our part, to quickly figure out which is the better management team. In this case it is obvious that it is Tesla without a doubt. So I would not pay top dollar for the GM management team.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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I read both WSJ and NY Times. One leans right and the other left. Unfortunately, many times the rantings (both legitimate and not) make it difficult to wade through the discussions.

I think an important aspect of corporate governance is mission. When corporations lose sight of their mission and focus solely on profitability as their only yardstick then anything goes.

For example if AIG had stuck to insurance as their mission, their means of delivering profits, and therefore wealth, AIG would be a very strong company today.

Another example is GM (I’m inferring a lot from the news articles and I might be wrong but time will tell).

At some point in their history GM prided itself for its differentiation strategy. It knew of every nook and cranny of the auto market, but today by way of profitability, GM is essentially an SUV/truck company.

GM lost sight of its need, its mission, to satisfy the transportation needs of the American public, and set its sights on profits at any expense. In a sense we can say that GM allowed SUV/trucks to subsidize the other segments of its business.

Worse still, its development of the electric car (in my opinion) is something to appease stakeholders. GM’s electric car, the Volt, is not a serious contender for the consumer market as it does only 40 miles on a charge.  The average American drives 33 miles per day. (So you know why 40 miles per charge!) Note these are averages, so a Volt owner is going to be severely restricted ie don’t sell your first car. The need to keep your first car is going to reduce the potential market even further.

Compare this with the Tesla at 244 miles per charge. So the Volt is a dud.

The same can be said of the banking industry, sub-prime is a dud. And probably securitization as we have know it.

Once you control a juggernaut, making profits by itself is easy, just don’t reinvest in your future and you will look good for a while. In brand management this is called ‘milking’.

Corporate governance needs to deal with two issues, (1) staying focused i.e. missions, and (2) seek a balance or to temper “profits today” with “a future tomorrow”.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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In his article Why Governments Can’t Run a Business Gordon raises many good issues, but Mr. Gordon here is a reminder and rebuttal to each of your points:

1. Governments are run by politicians, not businessmen.
Quite obviously I do not know how you would define businessmen. Remember, Worldcom, Enron, Arthur Andersen, Merrill Lynch, Morgan Stanley, AIG…

2. Politicians need headlines.
Using the examples above I can understand why businessmen don’t like headlines.

3. Governments use other people’s money.
How do banks get their funds?

4. Government does not tolerate competition.
Have you forgotten Standard Oil?

5. Government enterprises are almost always monopolies and thus do not face competition at all.
Oh wow, if cutting cost is alien to the culture of all bureaucracies, then private medical insurance must be free by now, right?

6. Successful corperations are run by benevelont despots.
Sorry, I forgot GM had over-looked 50 years of losing market share.

7. Government is regulated by government.
Have you forgotten what happened to Wall St in 2008 with minimal regulation?

 

My point is, blaming the other side either overtly or covertly, is not going to help America.

Benjamin T Solomon
Managing Principal
QuantumRisk LLC

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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 A kind friend forwarded this video on Umair Haque’s views.  

Umair Haque at BRITE ’09 conference from BRITE Conference on Vimeo.

How apt. Makes one think if all that profit taking was worth the final wealth destruction? No. There needs to be a more mindful approach to maximizing profits.

That is creating wealth for the good of the larger community rather than maximising profits so that A looks better than B. I thought this was resolved decades ago, when game theory showed us that many times the long term good for the larger community was better than the short term good of the individual. Anyone remember game theory?

Well Umair Haque brought this discussion from a very much better perspective, that there were real positive economic outcomes aligned to the moral good. (We used to use the term ‘strategies’!) That there are 5 key principles:

1. Stewardship
2. Trusteeship
3. Guardianship
4. Leadership
5. Partnership

All of which we know but don’t do because these 5 priciples are not as macho as maximising profits. Wow, looking back into the 70s, this is how Toyota beat the Big 3 auto companies to quality and profitability.

40 years later Toyota does not have to do anything – just sit back and watch GM and Chrysler disappear on their own accord. This auto failure must have been Toyota’s cheapest defeat of a competitor. I wonder what GM’s and Chrysler’s Board was thinking. Wasn’t 50 years of losing market share something to be worried about?

In the same vein, didn’t Wall St realize that there was only so much credit enhancement they could sell/buy? Didn’t Wall St realize that chasing the deal was not the same are managing their own companies?

Essentially, we have let 30-day profitability concerns over-ride 10-year strategic planning.

QuantumRisk LLC has a very sophisticated proprietary business strategy model that allows its clients to figure out competitors’ strategic options (from public data) before deciding on its own strategy. But this kind of strategic modeling advantage is of little value to companies that value 30-day profitability.

Benjamin T Solomon
Managing Principal
http://www.QuantumRisk.com/

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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Forbes’ article, General Motors Crash Warning, pointed out that the auditors, Deloitte & Touche, had “substantial doubt” that the automaker can stay in business.

First a disclosure: I own a GM SUV but do not own any GM shares. I know that my GM dealer/servicer, Burt GMC, does an excellent job; and I used to work for GMAC.

The real problem with the GM management is that GM has been losing market share for the last 50 years and has not done anything to stop this loss.

This is a very poor reflection of the management culture at GM. I have seen this type of behavior at other manufacturing companies, that many times when bright, highly skilled managers come together as a team at the senior level they do strange irrational things.

My first assessment is that GM will continue asking for more bailout funds and the government will have to Give More.

I would recommend that GM be split into several companies and that would give breathing room for new management cultures to take root.

Yes, I can hear the ‘experts’ saying that GM requires scale economies to compete. This is false.

First, Toyota started out as a tiny company that has now surpassed GM. The other Japanese automakers, Honda, Nissan & Subaru all came out of tiny or previously non-existent companies while GM was ‘king’.

Second, inspite of GM’s existing scale economies it has continued to lose market share for the last fifty years.

My second assessment is that GM’s management culture put a premium on profits at the expense of cashflow. An onerous profit focus leads to gaming the system, profits today at the expense of future losses. 

If GM was cashflow-focused first, and only then profit-focused, this would have lead to management objectives that included market share growth, and real business strategies.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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