Thursday, November 29, 2018

Why Lordstown Had to Close

Image result for lordstown

Long subject to labor strife, the outdated Lordstown plant was long overdue for closure.

"They'll never close this plant!   They have too much invested in it!" was the cry I would hear from GM employees at New Departure-Hyatt Bearings, in Bristol, Connecticut.   Connecticut, once the home of Yankee tinkerers and clockmakers, is today in serious trouble.  Manufacturing left long ago, and the insurance industry left not long after.   You can't support an entire State based on ESPN and bedroom communities near New York City.   Taxes are skyrocketing and more people are on some sort of assistance than not.  It is sad to see the nutmeg State fall so far.

Today, the New Departure plant on Chippen's hill - 22 acres under one roof - is mostly a warehouse for Chinese-made goods.  The writing was on the wall when I was there in 1979.   We were moving out the forge plant machines - huge things that took an entire rail car to move, sticking out ten feet on each side.   They were taken to the coast, loaded on ships, and sent to India.  Shortly before I left, we had an auction to sell off our German-made ball grinding equipment.   Little by little, the plant was parsed out, sold off, and shut down.

And it wasn't hard to see why.   The plant was losing tons of money for GM.   The division was acquired during the Sloan era of vertical integration.  GM would make cars and all the parts for the cars, except the gasoline and tires.   And in the 1930's maybe that was a good strategy.  You could control costs and the cost of parts.  Efficient management and scientific manufacturing principles meant efficiency.   But of course, the unions had other ideas.

And so did the Japanese.  The Japanese used a different system - Keiretsu - where captive suppliers would provide 100% of their output to the car company, which did little more than design the cars and assemble the components.   It was a far cheaper system and one that was more immune to cost increases.

During World War II, the government stepped in and asked GM and other automakers to make war materials.  This went far beyond Ford assembling B-24 Liberators or Cadillac making tanks.   Parts companies made various other war materials as well.  And New Departure made bearings.  Prior to the war, we relied on German-made bearings for aircraft instruments such as artificial horizons and the like.  Tiny bearings whose races were no bigger than a pencil lead, they required precision machining.   So, NDH got away from wheel bearings and into other bearings.  And after the war, they were also making bearings for agriculture, railroad cars, and jet engines - with automotive output being only a fraction of the overall production.

Problem was, they were losing money on most of these sales.   UAW wages were double the wages of metalworkers' unions at a non-GM bearing plant down the road from us - which in turn were easily double what prevailing wages were in non-union shops.  With this kind of cost basis, we simply couldn't compete, and went happily along, losing money on each sale, hoping that the greater GM organization would prop us up indefinitely.   At one point, we decided to stop making Stellite bearings for jet engines for the military, as we were hemorrhaging cash on each sale.  The DoD showed up and explained that we were the only company making these expensive bearings.  Whether they re-negotiated the price or simply went on losing money, I do not know.

The unions were a problem from a number of perspectives.  Granted, in the early days, the union movement was necessary, particularly in places like coal towns, where mine owners could work people literally to death, through illness or accident.  This was less of a problem in the auto factories, although the assembly line could be wearing.   Henry Ford, faced with high turnover in his factories, doubled wages and went to a 40-hour workweek, long before the unions got involved.   His paternalistic approach to his workers, however, backfired on him, as they wanted to maintain some modicum of independence.

By the 1950's, however, the unions were realizing that not only could they bargain for better wages and working conditions, they could hold companies hostage to their demands.   By the 1960's, wages were skyrocketing, and to preserve jobs (and thus preserve union dues income) they bargained for and got, restrictive work rules which insured that three people would be hired to do the job of one.  Management tried to rebel, but the crippling GM strike of 1970 sent a message to the industry - capitulate or else. And it was only one of a series of strikes in that era - including the longest strike in GM history - not-so-coincidentally at Lordstown.  Revenge is a dish best served cold, no?

Not only were restrictive work rules and high wages stifling productivity, outright sabotage, of both products and the assembly line, added to costs and smeared the reputation of the company.   Workers thought it was "funny" to put an empty coke bottle in the car door, so the new owner would be subject to annoying rattles.   People would put a wrench in the conveyor belt chain to cause the line to stop, so they could have a break.   Our plant was subject to a mysterious fire that cost the company tens of millions of dollars to repair.  I witnessed, firsthand, workers sabotaging products out of spite or sheer boredom.  There are a lot of crazy people in the world, and when people feel they can "get away" with things, they often resort to such petty vandalism.  This is why we can't have nice things.

By the time I was a freshman at General Motors Institute (along with a young woman named Mary Barra), GM management had been effectively neutered as Knickers the cow.   Management decided that instead of running the company efficiently, they would merely hang onto their perks, such as they were, and hope to make it to retirement before the Titanic sank completely.   "Don't rock the boat" was the message of the day.  Don't piss off the union workers - who were viewed as fragile hand grenades ready to go off at a moment's notice.   Growing up with a schizophrenic mother, I felt right at home.

Our professors at GMI explained to us that every five minutes, a shiny new Chevy Caprice, complete with vinyl top and optional opera lights, came off the assembly line, making $5000 (the sales price) for GM.   If a strike lasts for a week, think of the lost income!   Do whatever you have to, to appease the workers.  Shine their shoes if you want - light their cigars!

Well, maybe it wasn't quite that bad, but it was bad.  And management took a page from the union, and decided to pad its ranks as well, and do as little work as necessary.   I spend an afternoon with two older gentlemen once, at NDH, adding up a column of numbers.  A task that was supposed to take five minutes was stretched out for hours.   I suspect they would have stretched it out until their retirement, if they could have.

Jeff Bezos gave an illuminating speech the other day.  He said that Amazon, now one of the world's largest companies, will cease to exist one day - as all companies eventually do.   And this will occur when employees lose focus on their customers and instead focus on their own perks.  Of course, this is easy to say when you are one of the richest men in the world and have good perks of your own.  But what he says is true - and troubling for investors - that all companies eventually fail.  And usually this failure occurs when people working for the company want to see how much they can extract from it, rather than working together toward a common goal.   Hourly, salary, shareholder, bondholder, owner, whatever - it makes no difference.  When people (including local municipalities) start to look at a company as a cash cow and their personal bank account - the company will eventually fail.   You can't run a company without customers.

This is not to say you have to work like Elon Musk - staying up 22 hours a day (no doubt with chemical assistance) trying to work through "manufacturing hell", but that people have to be productive and not work against the enterprise, but for it.

Lordstown assembly is a plant with a troubled history.  John DeLorean detailed the problems in his book, On a Clear Day, You Can See General Motors.  The plant was famous for being the site of Vega assembly, and was subject to work slowdowns, wildcat strikes, walkouts, and various forms of labor strife.  They even had a name for it - "Lordstown Syndrome".   The mostly young workforce (at the time) rebelled against plant management.   Over the years, not too much has changed, other than the products offered from that plant are finding a smaller and smaller audience.  If you want a small sedan today, you are looking at a Honda or a Toyota - perhaps a Nissan.   For the price, you end up with a better car and a better deal.  Sales of the Chevy Cruz - the successor to the Cobalt, which was the successor to the Cavalier, which was the successor to the Vega - are fading quickly, and GM is losing money on each one sold.

Like Ford and Chrysler, GM is shedding its car lines to concentrate on profitable trucks and SUVs.  This is what people want.   I just bought one myself, two days ago.  So, to blame GM for closing an unprofitable plant is just nonsense.

But why not switch over to making more popular SUVs?  Ford has done that, converting a plant from small car production to the new Bronco and Ranger.   And Wall Street has punished the stock price as a result.   While these products might be more in demand, and Ford might actually make a profit on them, the profit margins will be a lot slimmer as a result of making them in the US, and in particular, in the midwest, as opposed to making them in Mexico or importing them from Korea or India or China (as GM and Ford also do).  We can only hope the delayed introduction of these two new Ford  products doesn't coincide with a recession in 2020!

One of the workers at Lordstown made a telling comment.  "I have a teaching degree," she said, "but this pays so much better!"   In other words, this person gave up a career for fast and easy money in the assembly plant.   Union wages in an assembly plant are still far higher than in non-union jobs, or even union jobs (teaching) in the public sector!

In addition to all of that, Lordstown is an old plant at this point - over 40 years old.   It makes sense to shift production to newer plants, or to build anew, further South.   But likely GM won't build anew. Like most car companies - and the car industry worldwide - they have a horrendous amount of overcapacity.  It makes no sense to keep factories running with only one shift (as opposed to three) at a fraction of capacity to "save jobs."  Oshawa, Ontario, also slated to close, is running at 15% of capacity, compared to its glory years.   This makes no freaking economic sense.  Ford long ago closed its Crown Vic plant in Ontario.  GM is finally following suit.  And no, they no longer make Camaros in Quebec - that closed long ago.   The cost of doing business in Canada is just too high.

Expecting companies to make poor economic choices just to save a few hundred jobs or to appease a political blowhard President who wants to fulfill a campaign promise is just nonsense.   You can't run a company that way - GM tried, in the past, and went bankrupt as well.   Oh, and for the record, GM paid back all that bailout money, Mr. President.   You want them to pay it back twice?

Of course, the government did own GM stock, which it sold for a $10 billion loss.   Maybe they should have hung onto it?   Regardless of that past history, you can't expect the company to run as a charity - providing jobs in a swing state so that an unpopular President gets re-elected.  If we go down that road, GM could go bankrupt again - and then be bailed out one more time?   You have to expect management to make management decisions, and this includes closing under-performing plants making products no one wants.

A lot has changed at GM since I was there in 1979 - or since the bankruptcy of 2009.   A majority of its profits now come from China.  And those profits could evaporate overnight if trade tensions with China continue.  Already, foreign manufacturers have seen their sales plummet in the world's largest car market, if buying their brand is seen as "unpatriotic" by Chinese consumers.  GM needs to make money on its North American operations, if it is to remain profitable and robust for the long run.

And by profitable, that doesn't mean making a dollar more than you spent.   You have to make a profit that is larger than what investors can get with government bonds.  A profit that represents the risk involved for capital.  And profit is not a dirty word, despite what the new Democratic Socialists tell you.

Running a business or opening or closing a factory should not be a political decision.   Tell that to Mr. Bezos, who played city against city for tax breaks. Since the 1970's, even Republicans campaign on "creating jobs" and thus pander to companies with tax breaks and incentives for relocating to their jurisdiction.   But closing plants?   Where are the incentives to stay?   And if governments make it hard to close an unprofitable enterprise, where does that lead us?  To Communism?  Where governments dictate what products are to be made at what price?  Where factories churn out obsolete products for decades, even though no one wants them?

It is a relevant question, as GM sold off its European operations for that very reason. They tried to shutter or cut back on unprofitable factories in Germany and the UK, only to learn that they needed the permission of the local governments, the unions, and even the customers, before they closed the plants.   And guess who wasn't giving permission?   Peugeot bought GM's European operations - and is in the process of trying to do what GM failed to do - close or cut back on these profit-losing monsters.  It could be the end of Peugeot.

Worldwide, auto production capacity far exceeds actual demand.  And the auto industry is facing a slowdown in recent months, which portends a recession in the next year or so.  Demand, if anything, will slacken.   GM is right to trim its sails now, to prepare for the storm. Workers at Lordstown are not "entitled" to perpetual employment, anymore than the rest of us are (again, tell that to the "Democratic Socialists" - they think a job is a "right").  Obsolete factories selling obsolete products, with a history of labor strife - what's not to like?

And of course, the ultimate irony is that a Republican President - the party of industry and big business - is trying to tell a company what to do and what products to make.  This, after decrying the Obama administration for "picking winners" in the marketplace after the Solyndra fiasco.  But then again, this might turn out to be another situation like Carrier (another one of my alma maters) where the President blusters and bluffs, claims victory, and then everyone loses their jobs anyway.  So long as his followers think he won, that is all that matters for the Reality TeeVee President.

The silver lining is, of course, that there are jobs aplenty in this economy - in auto plants located further South.  This does mean you have to move away from blighted places like Flint, Michigan or Lordstown, Ohio.  It also means that at these new plants, you have to work harder and often for less money, instead of whining about what a rotten deal you got out of life and how your employer is an asshole.

But then again, no one put a gun to your head and said you had to work on an assembly line.  Maybe it is time to "fall back" on that teaching degree?