Tuesday, March 31, 2009

Why Wagoner?

by Tom Bozzo

1. Well, duh.

2. In the NYT, William J. Holstein's case for Wagoner should be read as damnation by faint praise. Promoting efficiency and quality improvements is laudable enough, but hardly the sort of vision thing that merits a U.S. CEO salary. Bob Lutz's product-development record is mixed in part due to Lutz's contempt for greenery and faulty assumptions that SUV demands were not price-sensitive, and in more significant part because GM's management was full of pound-foolishness as important product developments (e.g. marketable compact cars) were underfunded when the company more-or-less had money. The company can easily go bankrupt building bulletproof Buick Lucernes. And, troublingly, GM has persisted in future-mortgaging despite the availability of government aid.

3. Nevertheless, my question is, why not the more obvious choice of Chrysler's Robert Nardelli? If GM management has been years late and billions short, Chrysler's Cerberus-hired management has shown no public signs of elementary competence. Where GM's product plans are questionable (Cadillac station wagon?), Chrysler's are an intergalactic void unless you're very optimistic about its ability to bring its electric showcars into production or eagerly anticipating Americanized Fiats. As a major net beneficiary of the housing bubble and poster-child for CEO excesses, Nardelli is perfectly cast for the scapegoat role, not least because he's substantively more deserving of sh*t-canning as Wagoner.

The concern of course is that someone(s) on the Obama team think Nardelli is more deserving of forbearance than Wagoner because of his private equity bosses. I'm not saying that's true, but if it were, then I'd want to play poker against whomever can't see that Cerberus Capital Management has been exploding myths of the power of patient private capital and by most indications wants out.

(Cross-posted at Angry Bear, where in the comments Bruce Webb makes the very reasonable point that firing Nardelli would be needless piling-on. Indeed, a reasonable reading of the current situation [subject to revision in 30 days] is that a Chrysler failure has been determined not to pose 'systemic risk' and thus Chrysler LLC is toast if the Fiat deal falls through.)


Monday, March 30, 2009

Flight to Quality

by Tom Bozzo

For a bit of an antidote to Bad News Fatigue, the Guardian has a pretty good article (via The Brothers Brick) on the turnaround of the LEGO Group, which a few years ago was on the brink of bankruptcy and/or absorption into one of the toy megacorporations but now is enjoying double-digit sales growth even in basket-case markets. [1] It's a bit long on ancient company history, but the short version is that under their ex-McKinsey CEO, the company opted largely to stick to its knitting [2], divest various non-core assets [3], and also outsource a good chunk of their production — mostly to Eastern Europe — to cut costs. The über-nerd version from a couple years back, in the supply-chain management magazine Strategy + Business, is here. An interesting additional detail omitted in the former and post-dating the latter is that the company is re-insourcing the outsourced production, though not necessarily returning it to Denmark.

I wouldn't be mentioning this if there weren't some lessons for the current Troubles herein.

For Ed Montgomery (congrats on the quite possibly thankless new job and Go Maryland College of Behavioral and Social Sciences!), there's a reminder that companies can run themselves out of business by efficiently producing products that cannot be sold for a compensatory price. LEGO's element production and set-packaging operations were famously efficient and automated in the crisis period. As the S+B article explains in detail, the rest of the operation was a disaster. If anything, reducing Danish labor costs was a sideshow for, if not a distraction from, the rest of the restructuring. Which is to say, there's only so much to take out of the hides of the UAW.

A saving grace for the LEGO Group was that its failures mainly were behind-the-scenes; the things that were losing them DKr by the billions largely weren't erosive of their products' reputations, so:
Part of this recession-busting feat, Nipper concedes, is down to the fact that in times of trouble, consumers - in this case, parents - turn to "the well-known, the safe, the durable. Lego may not be the cheapest toy, but parents know it has stood the test of time, it will last years, provide hours of quality play, represent good value for their hard-earned money."
Ceding reputations for "representing good value" in favor of "having the most cash on the hood" is an obvious failing of Detroit's legacy management, in hand with reactionary product planning.

For observers of the Danish model of relatively open markets plus a strong social safety net, there's a warning that it's not necessarily an automatic producer of contentment under all economic conditions. From the Guardian:
"This town isn't just about Lego any more, you know," observes a woman who asked to be called just Birgita, perching her youngest son on the back of her bicycle outside the supermarket. "It hasn't been for a long time. We're proud of Lego, certainly, but there are lots of other companies, lots of other jobs here now. The good thing was that all that happened when the rest of the economy was still in quite good shape. Heaven knows what it would have been like today, with half the world collapsing."
This account is anecdote, sure, but the apparent success of the Danish model isn't its production of armies of the happily unemployed. On the contrary, by both EU and US standards, Denmark has exceptionally high employment and low unemployment rates. At some level, there's no substitute for full employment, and the Invisible Hand does not promise to provide that.


[1] This has very little to do with my recent birthday; official estimates are that there are about 250,000 serious adult fans out there.

[2] I.e., selling cool sets to build from the little plastic bricks.

[3] E.g., the LEGOLAND theme parks, which you know aren't a Company operation in part because an employee of the Schaumburg, Illinois indoor facility was using the colloquialism "Legos" to refer to "LEGO bricks" or "LEGO elements" in orienting a new employee; such talk is supposed to be forbudt for trademark protection reasons.

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And We're Back

by Tom Bozzo

Amazingly enough, a couple people have told me that they miss the old Marginal Utility at least a little bit, and I haven't found the econopocalypse very conducive to econoblogging at Angry Bear. So for those of you who may still check in once in a while (or whose RSS readers do so), thanks for sticking with this site and rest assured that pictures of the kids and commentary on the Lego universe and elsewhere is forthcoming.


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