Some thoughts for the new chapter 14.
1) blaming the unions
2) a story about Desi and Lucy
3) defending the unions
4) how GM bought peace
5) cost shifting consequences
6) the business cycle and unions
7) unwinding unsustainable promises...
8) without chicanery (can the unions themselves do it)
9) evolving roles, union survival.
Showing posts with label General Motors. Show all posts
Showing posts with label General Motors. Show all posts
15 July 2011
30 April 2011
Public and Private Pensions
A passage from what will become chapter 14.
Let's talk about pensions. In the simple dictionary sense, a pension is a fixed amount paid by an employer to a retiree or a former employee's survivors in consideration of past services.
A pension plan is a fund established with an eye to subsequent such payments.
Pension plans are often divided into two general types, "defined benefits" and "defined contribution". The labels are self explanatory. But just to be very clear ... in a defined contribution plan, the sponsor/employer on the one hand and the employee on the other will make specified contractual contributions to the fund over the period of employment. The benefits are not defined, and so they will be determined by non-contractual factors, notably, how successfully those contributions are invested over the period before the fund has to make payments to the retiree/beneficiary.
In a defined benefit plan, on the other hand, the employer/sponsor becomes the guarantor of the contracted-for benefits, regardless of how well the fund does.
The golden age of defined-benefits plan was also the era of U.S. hegemony and self-confidence. It was the post-World War II era -- Bretton Woods tied the dollar to gold and tied every other currency in the world to the dollar, which seemed only right, given U.S. strength and centrality. Nobody ever expected that the major US corporations, those that hired the much maligned men in the gray flannel suits, would not always be around, or would not always be good for the money they were promising in decades to come.
In Detroit, the golden age of defined contributions was the time of Alfred Sloan and Walter Reuther, the heads of General Motors and the United Auto Workers respectively at the time of the "Treaty of Detroit" in 1950. GM was coming off a very profitable year (1949 was a record maker for it) and felt sufficiently flush to declare a stockholder dividend of $190 million when it decided to ensure itself against labor unrest by paying half of employees' hospital and medical insurance, and offering a pension of $125 a month. As measured by the value of the U.S. dollar at the time of the 2008 crisis, that would be the equivalent of $1,040 a month.
In his 1963 memoir Sloan would congratulate himself on introducing "an element of reason, and of predictability" into GM's labor relations.
But of course, it was an element of "predictability" only because continued prosperity for General Motors was deemed predictable. Further, the precedent once established, buying peace in this way became a habit, because at each negotiation cycle thereafter the issue would be one of embellishing the benefits offered in the existing system.
Both sides of such a negotiation could benefit by billing the future, by creating an ever more expensive defined benefits plan to be financed however-it-would-be and paid at a future date. The corporate bosses avoided strikes, keeping their shareholders happy. It was easier to promise benefits in subsequent decades than it would have been to make here-and-now salary concessions. For the same reasons, the Labor bosses were happy. They had a win with each round, and could brag to their rank-and-file about how tough they were.
Under the heading of public pensions, there is this.
Let's talk about pensions. In the simple dictionary sense, a pension is a fixed amount paid by an employer to a retiree or a former employee's survivors in consideration of past services.
A pension plan is a fund established with an eye to subsequent such payments.
Pension plans are often divided into two general types, "defined benefits" and "defined contribution". The labels are self explanatory. But just to be very clear ... in a defined contribution plan, the sponsor/employer on the one hand and the employee on the other will make specified contractual contributions to the fund over the period of employment. The benefits are not defined, and so they will be determined by non-contractual factors, notably, how successfully those contributions are invested over the period before the fund has to make payments to the retiree/beneficiary.
In a defined benefit plan, on the other hand, the employer/sponsor becomes the guarantor of the contracted-for benefits, regardless of how well the fund does.
The golden age of defined-benefits plan was also the era of U.S. hegemony and self-confidence. It was the post-World War II era -- Bretton Woods tied the dollar to gold and tied every other currency in the world to the dollar, which seemed only right, given U.S. strength and centrality. Nobody ever expected that the major US corporations, those that hired the much maligned men in the gray flannel suits, would not always be around, or would not always be good for the money they were promising in decades to come.
In Detroit, the golden age of defined contributions was the time of Alfred Sloan and Walter Reuther, the heads of General Motors and the United Auto Workers respectively at the time of the "Treaty of Detroit" in 1950. GM was coming off a very profitable year (1949 was a record maker for it) and felt sufficiently flush to declare a stockholder dividend of $190 million when it decided to ensure itself against labor unrest by paying half of employees' hospital and medical insurance, and offering a pension of $125 a month. As measured by the value of the U.S. dollar at the time of the 2008 crisis, that would be the equivalent of $1,040 a month.
In his 1963 memoir Sloan would congratulate himself on introducing "an element of reason, and of predictability" into GM's labor relations.
But of course, it was an element of "predictability" only because continued prosperity for General Motors was deemed predictable. Further, the precedent once established, buying peace in this way became a habit, because at each negotiation cycle thereafter the issue would be one of embellishing the benefits offered in the existing system.
Both sides of such a negotiation could benefit by billing the future, by creating an ever more expensive defined benefits plan to be financed however-it-would-be and paid at a future date. The corporate bosses avoided strikes, keeping their shareholders happy. It was easier to promise benefits in subsequent decades than it would have been to make here-and-now salary concessions. For the same reasons, the Labor bosses were happy. They had a win with each round, and could brag to their rank-and-file about how tough they were.
Under the heading of public pensions, there is this.
23 July 2010
Subprime lending for car loans
The wire services yesterday carried a story about General Motors and how it is "getting into the subprime lending business."
That's a story worth telling chiefly because "subprime" is such a scary word. And "subprime" is a scary word because the subprime housing bubble of 2004-07 was a factor in the credit crunch and then the general financial crisis of 2007-08.
But it need not be too scary. Take a deep breath, everybody.
All "subprime" means by definition is "more risky than prime." Some loans have to be subprime! They cannot all be prime, just as it is strictly impossible for all the children in Lake Woebegone or elsewhere to be above average.
The problem with the last subprime housing bubble and its disastrous collapse was that the inflationary credit policy of the Fed enabled the lending to go much further than it could have gone had there been a responsible monetary policy in place. That is the nature of central banking. 'Tis ever been thus.
So let's direct our anger at the right place in such a situation.
Anyway: GM is acquiring AmeriCredit Inc., a Fort Worth-based company that has already been working with it on subprime auto loans, which are now 4% of GM's sales.
Frankly, I find nothing alarming in that. Predictably, politicians have started their posturing. THAT annoys me. But that our political system is "subprime" is by now obvious to the least discerning.
That's a story worth telling chiefly because "subprime" is such a scary word. And "subprime" is a scary word because the subprime housing bubble of 2004-07 was a factor in the credit crunch and then the general financial crisis of 2007-08.
But it need not be too scary. Take a deep breath, everybody.
All "subprime" means by definition is "more risky than prime." Some loans have to be subprime! They cannot all be prime, just as it is strictly impossible for all the children in Lake Woebegone or elsewhere to be above average.
The problem with the last subprime housing bubble and its disastrous collapse was that the inflationary credit policy of the Fed enabled the lending to go much further than it could have gone had there been a responsible monetary policy in place. That is the nature of central banking. 'Tis ever been thus.
So let's direct our anger at the right place in such a situation.
Anyway: GM is acquiring AmeriCredit Inc., a Fort Worth-based company that has already been working with it on subprime auto loans, which are now 4% of GM's sales.
Frankly, I find nothing alarming in that. Predictably, politicians have started their posturing. THAT annoys me. But that our political system is "subprime" is by now obvious to the least discerning.
03 September 2009
Cerberus: Woof
I'm thinking about Cerberus this morning, which is what I was also doing back in April when I wrote in an entry to this blog that Cerberus had gotten into the auto industry in a big way apparently "banking on a decoupling of auto companies with finance companies."
It didn't work all that well for them, although such decoupling as there has been, has made it less a disaster than it might have been.
Lots of people are thinking about Cerberus these days given a recent article in the Wall Street Journal, August 29, p. A!. “Investors in hedge funds run by Cerberus Capital management LP, whose audacious multi-million dollar bet on the U.S. auto industry went bust, are bolting for the door, clinching one of the highest-profile falls from grace of a superstar in the investment world.”
In that article, the WSJ said redemption demands had amounted to $5.5 billion, or 71% of assets. [A Sept. 3 correction indicates that the proper amount is $4.77 billion, or 70%. The original figure “incorrectly included additional assets belonging to Cerberus employees."]
Here are a couple of links to stories from happier days for the big multi-headed dog:
One from Paul Kedrosky, and one from TED.
And let's hear it for a guy who just likes an excuse to put up a cool picture of the mythical beast.
It didn't work all that well for them, although such decoupling as there has been, has made it less a disaster than it might have been.
Lots of people are thinking about Cerberus these days given a recent article in the Wall Street Journal, August 29, p. A!. “Investors in hedge funds run by Cerberus Capital management LP, whose audacious multi-million dollar bet on the U.S. auto industry went bust, are bolting for the door, clinching one of the highest-profile falls from grace of a superstar in the investment world.”
In that article, the WSJ said redemption demands had amounted to $5.5 billion, or 71% of assets. [A Sept. 3 correction indicates that the proper amount is $4.77 billion, or 70%. The original figure “incorrectly included additional assets belonging to Cerberus employees."]
Here are a couple of links to stories from happier days for the big multi-headed dog:
One from Paul Kedrosky, and one from TED.
And let's hear it for a guy who just likes an excuse to put up a cool picture of the mythical beast.
11 September 2008
Delphi liquidation
In early August, General Motors agreed to yet another infusion of capital into bankrupt auto parts manufacturer Delphi. Specifically, it said that it would increase the size of an expected loan from $650 million to the $950 million now seen as the minimum in liquidity for any newly viable Delphi.
The background to all this, aptly described in a recent book on America's pension crises by Roger Lowenstein, takes us at least as far into the hinterlands of memory as 1950.
That was the year of a crucial settlement between GM and the United Auto Workers union under Walter Reuther. GM felt flush at that time. It had earned record profits in 1949 and had just declared a stockholder dividend of $190 million. Only labor unrest could disturb its serenity, and it decided to buy off the union by picking up half of the tab for the members' hospital and medical insurance, and offering a pension of $125 a month—the equivalent of $1,040 a month in 2008 dollars.
Fortune hailed this as "the Treaty of Detroit." In his 1963 memoir, Alfred Sloan, who was GM's chairman at the time of this "treaty," patted himself on the back over introducing "an element of reason, and of predictability" into GM's labor relations.
But it was easy to fudge the issue of adequate funding for those promises. This became easier in subsequent contract talks, when the issue wasn't creating a pension system but embellishing the benefits offered in the existing system.
Forward now quickly to 1999. It was in that year that GM spun Delphi off into (nominal) independence. It was also the year that an analyst at Goldman Sachs analyzed the significance that pension numbers had come to hold for the parent. The analyst, Gary Lapidus, concluded that 90% of GM's value was committed to its retirees.
"For various reasons," Mr. Lowenstein wrote, "Delphi was even less prepared the handle the legacy burden than General Motors. Its pension plan, $1.7 billion in the red at the time of the spin-off, had been falling deeper in the hole ever since. Delphi was a strange creation—a newborn conceived with the hardened arteries of an old man."
The spinoff and the continuing mutual dependence of Delphi and GM meant that the same losses, required by pension and health benefit obligations, that otherwise would have accumulated within a single corporate entity were now split between two. Mr. Lowenstein cited estimates that Delphi has been producing spark plugs for $2.05 each. The same plugs can be purchased in China for $1.05. By contract, GM buys them from Delphi for $1.70. Each party to the supply contract is suffering a loss. GM is paying 65 cents more than it otherwise would, and its supplier is losing 35 for the privilege of making the sale.
GM's management seems increasingly to be coming around to the conclusion that the federal government should take health care costs off its hands through a nationalized insurance system. In a 10Q quarterly report filed with the Securities and Exchange Commission in May 2006, the company said that it "will support public policies at the federal and state level that will enable all Americans to have health insurance."
All this provides background for a story that appeared in the Wall Street Journal on August 29. Despite even the latest agreement by GM to up its ante, there may bot be any feasible re-organization plan for Delphi on the horizon. It might be necessary for the court to liquidate Delphi, and in the process to return its physical assets, the plants, to the parent company.
The pension obligations already vested would presumably go back to GM's balance sheet as well. As Batman said (back when "Batman" was a corny television show, not an increasingly dark movie franchise): "Sometimes you just can't get rid of a bomb."
The background to all this, aptly described in a recent book on America's pension crises by Roger Lowenstein, takes us at least as far into the hinterlands of memory as 1950.
That was the year of a crucial settlement between GM and the United Auto Workers union under Walter Reuther. GM felt flush at that time. It had earned record profits in 1949 and had just declared a stockholder dividend of $190 million. Only labor unrest could disturb its serenity, and it decided to buy off the union by picking up half of the tab for the members' hospital and medical insurance, and offering a pension of $125 a month—the equivalent of $1,040 a month in 2008 dollars.
Fortune hailed this as "the Treaty of Detroit." In his 1963 memoir, Alfred Sloan, who was GM's chairman at the time of this "treaty," patted himself on the back over introducing "an element of reason, and of predictability" into GM's labor relations.
But it was easy to fudge the issue of adequate funding for those promises. This became easier in subsequent contract talks, when the issue wasn't creating a pension system but embellishing the benefits offered in the existing system.
Forward now quickly to 1999. It was in that year that GM spun Delphi off into (nominal) independence. It was also the year that an analyst at Goldman Sachs analyzed the significance that pension numbers had come to hold for the parent. The analyst, Gary Lapidus, concluded that 90% of GM's value was committed to its retirees.
"For various reasons," Mr. Lowenstein wrote, "Delphi was even less prepared the handle the legacy burden than General Motors. Its pension plan, $1.7 billion in the red at the time of the spin-off, had been falling deeper in the hole ever since. Delphi was a strange creation—a newborn conceived with the hardened arteries of an old man."
The spinoff and the continuing mutual dependence of Delphi and GM meant that the same losses, required by pension and health benefit obligations, that otherwise would have accumulated within a single corporate entity were now split between two. Mr. Lowenstein cited estimates that Delphi has been producing spark plugs for $2.05 each. The same plugs can be purchased in China for $1.05. By contract, GM buys them from Delphi for $1.70. Each party to the supply contract is suffering a loss. GM is paying 65 cents more than it otherwise would, and its supplier is losing 35 for the privilege of making the sale.
GM's management seems increasingly to be coming around to the conclusion that the federal government should take health care costs off its hands through a nationalized insurance system. In a 10Q quarterly report filed with the Securities and Exchange Commission in May 2006, the company said that it "will support public policies at the federal and state level that will enable all Americans to have health insurance."
All this provides background for a story that appeared in the Wall Street Journal on August 29. Despite even the latest agreement by GM to up its ante, there may bot be any feasible re-organization plan for Delphi on the horizon. It might be necessary for the court to liquidate Delphi, and in the process to return its physical assets, the plants, to the parent company.
The pension obligations already vested would presumably go back to GM's balance sheet as well. As Batman said (back when "Batman" was a corny television show, not an increasingly dark movie franchise): "Sometimes you just can't get rid of a bomb."
05 October 2007
Jerry Flint
Jerry Flint is a columnist for Forbes, who wrote a wonderful piece there this week called, simply: Quackery.
His subject, General Motors, a company with a long history of "resorting to gimmicks to resolve labor issues or just to get out of a sticky spot."
He gives two cases in point: one from the company's recent past, the other from its VERY recent past (one might say, from its specious present).
1) A few years back, GM decided that it was paying too much money to those of its workers who, in its Delphi subsidiary, made various auto parts: its power trains, its HVAC, etc.
It 'solved' this problem by spinning off the subsidiary -- making Delphi a theoretically separate company. But to avoid trouble with the union for this bit of domestic outsourcing, it had to give Delphi various guarantees. The guarantees have undermined the reason for the spin off, and as Flinto says GM has since given billions to those same workers. The whole notion of a spinoff was a gimmick, a bit of quackery.
2) The present. Late last month, GM settled with the auto workers union after a brief strike. The stickiest issue was health care for retirees.
The solution was the creation of a health care trust, funded by the auto companies but managed by the union. I've discussed this before, and expressed some of the same skepticism that Flinto expresses here, although he is more forceful on the subject than I was: http://cfaille.blogspot.com/2007/09/after-brief-strike.html
Says Flint, "It doesn't reduce any costs. The health care bill would remain the same" and although that eliminates the medical liability from the balance sheet, "What difference will that make if GM fails to make sexier cars?"
Precious little, surely.
His subject, General Motors, a company with a long history of "resorting to gimmicks to resolve labor issues or just to get out of a sticky spot."
He gives two cases in point: one from the company's recent past, the other from its VERY recent past (one might say, from its specious present).
1) A few years back, GM decided that it was paying too much money to those of its workers who, in its Delphi subsidiary, made various auto parts: its power trains, its HVAC, etc.
It 'solved' this problem by spinning off the subsidiary -- making Delphi a theoretically separate company. But to avoid trouble with the union for this bit of domestic outsourcing, it had to give Delphi various guarantees. The guarantees have undermined the reason for the spin off, and as Flinto says GM has since given billions to those same workers. The whole notion of a spinoff was a gimmick, a bit of quackery.
2) The present. Late last month, GM settled with the auto workers union after a brief strike. The stickiest issue was health care for retirees.
The solution was the creation of a health care trust, funded by the auto companies but managed by the union. I've discussed this before, and expressed some of the same skepticism that Flinto expresses here, although he is more forceful on the subject than I was: http://cfaille.blogspot.com/2007/09/after-brief-strike.html
Says Flint, "It doesn't reduce any costs. The health care bill would remain the same" and although that eliminates the medical liability from the balance sheet, "What difference will that make if GM fails to make sexier cars?"
Precious little, surely.
28 September 2007
After a brief strike
The United Auto Workers and General Motors reached an agreement Wednesday. The two day strike served like the prospect of a hanging, to focus the attention of both parties.
The gist of the agreement is this: GM wants to get out of the pension-fund management business. The UAW is willing to take over that role, given various agreements designed to smooth the transition.
The parties will create a trust, to be known as the Voluntary Employees' Beneficiary Association, or VEBA, that is expected to shift more than $50 billion worth of retiree health care obligations to the union.
From the point of view of a retiree, or a GM worker who might become a retiree at some point in the next few years, does this move in the provenance of the pension money make the stream of contracted-for payments more secure, less secure, or is it a wash? I'm not sure. It seems to me that the simply shift of the fund responsibility from one administering organization to another matters little. What matters is (a) the money coming in, (b) the money going out, and (c) the skill of the managers who handle it in the meantime.
I doubt much wil change with (c). The UAW will hire the same sort of folks to run VEBA who've beenhandling this money until now - it might even hire literally the same people to a great degree. Nor will (b) change short term. The commitments and demographics are what they are. So everything depends on (a). Will the new GM/UAW deal allow for the infusion of new cash into VEBA?
It seems to me that this is the idea, although the provisions for that infusion are rather indirect.
Wall Street loves the idea. Because it has visions of VEBA's money managers knocking at the doors of the brokerages, shouting, "puh-leeze help us make money. Puh-leez." It also has visions of Ford and newly-re-Americanized Chrysler joining the VEBA money pool too.
Come on in, the water's fine.
The gist of the agreement is this: GM wants to get out of the pension-fund management business. The UAW is willing to take over that role, given various agreements designed to smooth the transition.
The parties will create a trust, to be known as the Voluntary Employees' Beneficiary Association, or VEBA, that is expected to shift more than $50 billion worth of retiree health care obligations to the union.
From the point of view of a retiree, or a GM worker who might become a retiree at some point in the next few years, does this move in the provenance of the pension money make the stream of contracted-for payments more secure, less secure, or is it a wash? I'm not sure. It seems to me that the simply shift of the fund responsibility from one administering organization to another matters little. What matters is (a) the money coming in, (b) the money going out, and (c) the skill of the managers who handle it in the meantime.
I doubt much wil change with (c). The UAW will hire the same sort of folks to run VEBA who've beenhandling this money until now - it might even hire literally the same people to a great degree. Nor will (b) change short term. The commitments and demographics are what they are. So everything depends on (a). Will the new GM/UAW deal allow for the infusion of new cash into VEBA?
It seems to me that this is the idea, although the provisions for that infusion are rather indirect.
Wall Street loves the idea. Because it has visions of VEBA's money managers knocking at the doors of the brokerages, shouting, "puh-leeze help us make money. Puh-leez." It also has visions of Ford and newly-re-Americanized Chrysler joining the VEBA money pool too.
Come on in, the water's fine.
17 August 2007
Auto Parts, and the Whole Auto, Too
Don't lets all panic. People paying too much attention to biz news lately may feel a bit frazzled, but that means this is a time to look for signs of hope.
There may be such signs, even in the fractured North American auto industry. Here are three:
1. The auto parts company, Dana Corp., which filed for bankruptcy in March 2006, says it plans to exit bankruptcy by the end of this year.
That isn't just an optimistic rosy-tinted sayso, either. Dana's reorganization plan has been picking up some support. The company's bondholders formally approved it earlier this week.
2. Ford Motor Company has set a new land speed record. Its Ford Fusion Hydrogen 999 reached 207.28 miles per hour on the Bonneville Salt Flats. The reports I've seen aren't clear about the date, but it appears to be something of a breakthrough for the fuel cell technology involved.
http://www.autocar.co.uk/News/NewsArticle/Ford-Concepts/227307/
3. GM, too, is making a "green push" and seems ready to show off the results at the upcoming auto show in Frankfurt, Germany.
http://www.autobloggreen.com/2007/08/16/frankfurt-preview-lots-of-debuts-and-a-green-push-for-gm/
So ... think good thoughts!
There may be such signs, even in the fractured North American auto industry. Here are three:
1. The auto parts company, Dana Corp., which filed for bankruptcy in March 2006, says it plans to exit bankruptcy by the end of this year.
That isn't just an optimistic rosy-tinted sayso, either. Dana's reorganization plan has been picking up some support. The company's bondholders formally approved it earlier this week.
2. Ford Motor Company has set a new land speed record. Its Ford Fusion Hydrogen 999 reached 207.28 miles per hour on the Bonneville Salt Flats. The reports I've seen aren't clear about the date, but it appears to be something of a breakthrough for the fuel cell technology involved.
http://www.autocar.co.uk/News/NewsArticle/Ford-Concepts/227307/
3. GM, too, is making a "green push" and seems ready to show off the results at the upcoming auto show in Frankfurt, Germany.
http://www.autobloggreen.com/2007/08/16/frankfurt-preview-lots-of-debuts-and-a-green-push-for-gm/
So ... think good thoughts!
29 June 2007
GM Decides What is "Core"
Yesterday, General Motors announced that it's selling Allison Transmissions to a pair of private-equity firms, for about $5.6 billion.
GM's stock price rose for the day, and one can take that as a "yes" vote in the ongoing referendum about corporate policies on Wall Street.
Still,it raises a puzzle. The spinners are portraying this as a case of a company selling off a "non-core" asset to raise some cash so it can better fix what ails its core.
But since when is the manufacture of transmissions non-core? What is the core? The assembly of automotive parts into a whole and their marketing and sale, presumably.
Isn't there something to be said for the view, though, that if the same company makes the transmissions, and then makes the cars, installing its own transmissions, there is an efficiency gain, because that company doesn't need to haggle with itself over transmission prices?
I suppose GM executives might well say, "yes, there is some gain in efficiency there, but the present discounted value of that gain is a good deal less than the $5.6 billion pricetag we've put on it." Maybe. The language of "core" versus "non-core" doesn't illuminate that question, though.
An old story about eating one's seed corn comes to mind, rather.
Do janitors clean out the GM executives' offices at night? Is that service contracted out to a separate operation, or are those janitors employees of GM? If the service isn't contracted out, should it be? The question of the boundaries of a firm, what it makes sense to keep within the hierarchical structure, what it makes sense to outsource, and why, is a complicated one, raised in clear theoretical form by Ronald Coase as long ago as 1937, in a fascinating essay, one that stills stands up to scrutiny today.
GM's stock price rose for the day, and one can take that as a "yes" vote in the ongoing referendum about corporate policies on Wall Street.
Still,it raises a puzzle. The spinners are portraying this as a case of a company selling off a "non-core" asset to raise some cash so it can better fix what ails its core.
But since when is the manufacture of transmissions non-core? What is the core? The assembly of automotive parts into a whole and their marketing and sale, presumably.
Isn't there something to be said for the view, though, that if the same company makes the transmissions, and then makes the cars, installing its own transmissions, there is an efficiency gain, because that company doesn't need to haggle with itself over transmission prices?
I suppose GM executives might well say, "yes, there is some gain in efficiency there, but the present discounted value of that gain is a good deal less than the $5.6 billion pricetag we've put on it." Maybe. The language of "core" versus "non-core" doesn't illuminate that question, though.
An old story about eating one's seed corn comes to mind, rather.
Do janitors clean out the GM executives' offices at night? Is that service contracted out to a separate operation, or are those janitors employees of GM? If the service isn't contracted out, should it be? The question of the boundaries of a firm, what it makes sense to keep within the hierarchical structure, what it makes sense to outsource, and why, is a complicated one, raised in clear theoretical form by Ronald Coase as long ago as 1937, in a fascinating essay, one that stills stands up to scrutiny today.
13 April 2007
Two Lessons in Capitalism
This will be my first and last comment on the Don Imus matter.
Imus has lost his job over ill-advised words uttered in reaction to the women's basketball championship game. I was never a fan of his, but since he has always been rather easy to avoid, I can't say I have any aversion to him either and won't feed the frenzy by citing the phrase he used here.
The only value to the whole thing is as a quick lesson in capitalism as a self-policing system. Imus was apparently confident he could ride out the storm so long as he attracted large numbers of listeners/viewers (his program was initially a morning radio show, though in recent years its been simulcast by a television network). The viewers would attract advertisers, and advertisers would defend him to the network bosses as needed.
But advertisers don't only want the raw audience numbers. They want to know what a show is going to do to their brand. They want to know whether their association with your show is going to help them or hurt them in the eyes of potential customers.
For a very few days after the initial comment, Imus' network bosses stuck by him, suggesting that a two-week suspension would be sufficient. It was only when the show's sponsors started pulling out (not because numbers dropped -- but because of the idea of a brand) -- that the network brass changed their mind.
If I had any reason to believe that the FCC was behind Imus' fall, I'd be ticked off. But it appears that this was simply how freedom works. Imus had his run -- now somebody else will get that airtime in the everlasting whirl of "creative destruction." Let it whirl.
Second lesson: batteries. There's a story in today's Wall Street Journal about car batteries, hybrids, etc. Of course, there are plenty of engineering geniuses in the US, but there's been little incentive for them of late to concern themselves with pushing the frontiers of battery performance.
Two years ago, General Motors executives decided to look for a new battery that would power a new generation of gas/electric hybrids, letting them leapfrog Toyota. The search led them to Toyota's back yard, in both national and corporate terms. Several GM honchos had a meeting in Japan with their counterparts at Panasonic EV Energy Co., Ltd.
There was, they found, a limit to how much their hosts would tell them about how their new products work. Why? Well, because Panasonic is a subsidiary of ... Toyota. It isn't clear from the article whether the GM execs were aware of that corporate affiliation before they made the trip.
Anyway, now that US based car makers have got the message that this is an important subject, there ARE incentives for the development of a US-based leading-edge batteries industry.
Some of the homegrown experts work for this outfit: http://www.a123systems.com/html/home.html
Imus has lost his job over ill-advised words uttered in reaction to the women's basketball championship game. I was never a fan of his, but since he has always been rather easy to avoid, I can't say I have any aversion to him either and won't feed the frenzy by citing the phrase he used here.
The only value to the whole thing is as a quick lesson in capitalism as a self-policing system. Imus was apparently confident he could ride out the storm so long as he attracted large numbers of listeners/viewers (his program was initially a morning radio show, though in recent years its been simulcast by a television network). The viewers would attract advertisers, and advertisers would defend him to the network bosses as needed.
But advertisers don't only want the raw audience numbers. They want to know what a show is going to do to their brand. They want to know whether their association with your show is going to help them or hurt them in the eyes of potential customers.
For a very few days after the initial comment, Imus' network bosses stuck by him, suggesting that a two-week suspension would be sufficient. It was only when the show's sponsors started pulling out (not because numbers dropped -- but because of the idea of a brand) -- that the network brass changed their mind.
If I had any reason to believe that the FCC was behind Imus' fall, I'd be ticked off. But it appears that this was simply how freedom works. Imus had his run -- now somebody else will get that airtime in the everlasting whirl of "creative destruction." Let it whirl.
Second lesson: batteries. There's a story in today's Wall Street Journal about car batteries, hybrids, etc. Of course, there are plenty of engineering geniuses in the US, but there's been little incentive for them of late to concern themselves with pushing the frontiers of battery performance.
Two years ago, General Motors executives decided to look for a new battery that would power a new generation of gas/electric hybrids, letting them leapfrog Toyota. The search led them to Toyota's back yard, in both national and corporate terms. Several GM honchos had a meeting in Japan with their counterparts at Panasonic EV Energy Co., Ltd.
There was, they found, a limit to how much their hosts would tell them about how their new products work. Why? Well, because Panasonic is a subsidiary of ... Toyota. It isn't clear from the article whether the GM execs were aware of that corporate affiliation before they made the trip.
Anyway, now that US based car makers have got the message that this is an important subject, there ARE incentives for the development of a US-based leading-edge batteries industry.
Some of the homegrown experts work for this outfit: http://www.a123systems.com/html/home.html
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