Thursday, November 13, 2008

Tell Detroit--No More!

Reality is setting in. I voted for Obama, yet his first foray into presidential politics found him asking President Bush to help bailout the automotive industry in Detroit. Well Mr. President-elect, you are now 0 for 1.

What happened to CHANGE?

This is the same type of thinking that has wielded the scepter in this country since the industrial revolution began: no matter how strong the evidence of market failure, we refuse to believe in anything but our own permanence. So once again the automotive industry has approached the federal government with its hand out, instead of changing their products or business model (They have rather chosen to spend fortunes on lobbyists). And let us not forget that in September of 2008, Congress already gave the industry a loan totaling $25 billion. But with $50 billion more, they can turn things around.

Not if they don’t CHANGE!

This is a market economy. The auto-industry will perish, whether they get a bailout or not, if they do not change their business model.

A solid business model is the bedrock of every successful investment. If we are to invest in an industry, we need to learn how to describe and evaluate a company’s business model, in order to distinguish the great companies from the losers. This is just simple business sense. We need to look at how the company makes money. It is equally clear; we need to understand that as industries change, companies can’t always stick to the same business model. Joan Magretta, former head of the Harvard Business Review, has said that when business models don’t work, it’s because they don’t make sense and the numbers just don’t add up to profits.

When you consider G.M.’s model, it becomes clear that they don’t make money selling cars and trucks. In fact their business is based on (more than 60%) earnings from finance payments. This is a business model that has failed the test. In 2003, Ford, Chrysler and G.M. (in order to compete against foreign markets) offered customers such deep discounts and interest-free financing that they sold vehicles for less than it cost to make them. This is as a model that squeezed all the profits out of their operations.

So now we have an industry adverse to change in an environment that is in the middle of a housing slump and credit crisis. There is a drop in demand and a change in the vehicles consumers are buying. Detroit has been making large trucks and sport utility vehicles, while the foreign markets (with working business plans) are making more fuel-efficient vehicles.

Detroit and our policy makers prefer continuity to discontinuity, evolution to revolution. What has become clear is that in discontinuous times, efforts to evolve at one’s own pace will spell doom. External thoughts and actions need to keep up with the pace of external change. Economics tells us that if you are not able to cope with external pressures that demand a revolutionary approach to structure- you need a new business model.

The automotive industry has convinced the federal government that our economy revolves around it. But what I want to know is—why? Target, AT&T, GE, IBM, McDonalds Citigroup, Kroger, Sears, and Wal-Mart, all employ larger number of workers than any of the Big Three auto makers. Since 1997, thirty one steel companies have gone bankrupt, putting at risk over 62,000 jobs. The economy didn’t tank then.

The precondition of successful transformation is to close the gap between the automotive industry management’s (and our own) perception of present reality and the truth. They don’t need a bailout. What they need is—

1. Look out for major shifts in the conditions governing the marketplace, and transform their business model to fit.

2. Let the customers and their needs determine the model.

3. Be prepared to cannibalize the present, in order to preserve the future.

So Mr. President-elect, please don’t just throw more money at the problem. Think—CHANGE. Fix the problem!

Monday, November 10, 2008

Stopped Traffic--What Would Charlie Do?

We all have our own particular annoyances when driving. Mine is what I refer to as the “Imaginary Slow Down Zone,” affectionately referred to as ISDZ’s. This happens on highways, when the traffic comes to a crawl. You slowly approach the area where everyone starts to speed up, and you look around for an accident or any other reason which could have caused the slow down, but there is nothing there. Cars just resume speed. This phenomenon happens quite frequently in Columbus, Ohio, so I was sure that this had to be an isolated thing.

Columbus has the worst drivers on the planet. Particularly so, if you can see a #3 decal displayed anywhere on the vehicle. This type of driver suffers from the disease called, “the NASCAR” syndrome. They weave in and out of lanes at high speed, as if headed for the checkered flag. Severe accidents are so common in Columbus that they have a section on the nightly local news broadcast, which is titled, “Car Crash Dejour.” Points are given based on death count (this is not quite true, but just wait for sweeps week).

Now I admit that there have been many times when I used to commute to work on I-270, when the slow down ended and I had to pass six or more mangled cars and at least two or more emergency helicopters parked on the medium revving up for take-off, so I don’t want to take this too lightly.

I used to think that we were so gun-shy in Columbus that the ISDZ’s were some sort of post-traumatic-stress thing. But my wife and I found ourselves in one, on I-77 in West Virginia recently. Not only did the traffic come to a crawl, but it actually came to a complete stop. I really thought that there had to have been a terrible accident ahead when the eighteen wheelers turned their lights off. Surely they knew the scoop and were getting ready for a considerable wait. It was dark (really, really dark). After I finally came to a sense of acceptance, the traffic started up. So I waited to see what in the world had caused this. As we approached the spot where all the cars started to gain speed there was nothing. I mean NOTHING!

So I decided that there has to an explanation for his irritating phenomenon. The next step was to ask: what would Charlie Epps do? For those of you who are not familiar with Charlie, he is the fictional character on the TV Show “Numbers.” He is a math genius who can figure the mathematical roots of any conceivable problem.

So here’s what I found out to my dilemma--

There actually is a mathematical model that shows that traffic jams, like ISDZ’s, are mostly caused by a single driver who brakes too much when faced with any number of unexpected events. The driver behind him will also slow down and then the next, until the road is totally blocked several miles back. The traffic jam moves backwards, creating a “backward traveling wave,” miles upstream from the initial braking, several minutes after it was triggered. So, in other words, when someone taps their brakes, the traffic may come to a stand-still several miles behind them. Now it is pointed out that it is the heavy braking, usually caused by a driver reacting to some idiot with the “NASCAR” syndrome who has cut them off, that can affect traffic flow for many miles.

Thanks to the work of Dr. Gabor Orosz of the Dynamical Systems & Control research institute of the School of Engineering, Computing and Mathematics at the University of Exeter, UK, I can now impress my colleagues, friends, and family with the answer to this mystery, the next time one of them complains about all the unexplained traffic slow downs on the highway.