The Whole Story

I was reading a story off of the Seattle Times website the other day and reflecting that sometimes even a really well-written article doesn’t actually tell you everything – or even the most important thing – about the event being covered. Sometimes it’s a matter of the reporter, the editor, or whoever runs the website not getting the facts straight; sometimes it’s rushed reporting or technical problems, and sometimes the people involved don’t really know what they’re doing; and sometimes it’s just that the people behind the story reported the facts accurately, completely and correctly – and missed the one key point that changes the entire nature of the article. It’s another reason to question everything you read, and look at every situation from as many different perspectives as you can…

The story itself seems simple enough, and relatively upbeat for a change. Last Thursday Boeing announced that they had received what will be the largest order in the company’s history; a request from Indonesia’s Lion Air for 230 of their 737 aircraft, including 29 of the new, extended-range version expected for delivery in 2017. This announcement comes on the heels of an order from Emirates Airlines for 50 of the new 777 aircraft, which was the largest order to date in terms of dollars ($18.1 billion USD). Lion Air also has options to order 150 additional aircraft, and over the summer American Airlines announced plans to purchase 200 additional Boeing aircraft of various types (potentially even bigger than either of these deals). One would expect a euphoric reaction from Boeing’s stockholders on this sort of news; however, this might not be the case…

Hidden at the bottom of the page is the notice that Boeing’s stock closed down 25 cents on Thursday, despite the glad tidings these huge orders represent. This could be of no consequence, of course; you’d have to check on the recent trends on the stock price to tell for sure. If you did, you might note that the current price is right about average for the past year (that is, about midway between the lowest and highest prices in the previous 12 months), or that the stock price has improved a bit since October but has not changed significantly over the past week. The actual value of a stock depends on a broad range of historical and accounting factors, and you will need some fairly complex equations to work out what it should be, but the key point here is that none of the people who make their money by speculating on how a company will perform (and whether its stock will increase in value) are reacting in the way you would expect them to react to the news that the company has just received its largest order ever and is now expecting an even larger one…

Now, I don’t pretend to have any expertise in the analysis of stock prices or probable future values; that’s a specialist function, and on my best days I’m just a generalist with a talent for spotting trouble. But then that’s the point – I don’t know what is going on here, I just know that something is missing from this picture. It might be nothing, or it might be the key to figuring out what an entire manufacturing sector is going to do for years or decades to come. But you’re not going to find out what it means without a great deal of additional research and analysis – and you won’t even realize that something else might be going on if you just take the original story at face value…

With the rise of computerized intelligence gathering and analysis software, and expert systems that can extract the one key piece of information you want from a database containing millions (or billions) of entries, it’s easy to forget that the machines are only as good as the people running them. I’m not saying that there is any hidden meaning in this simple story about large product orders being placed with Boeing, let alone that there might be some sinister warning concealed within the text. But just as you should never believe everything you read, you should also never assume that a given article is giving you the complete truth or the whole story…

North of the Border

I was badly disappointed a few years back when GM discontinued the Saturn line of cars and shut down the plant in Spring Hill, Tennessee. I’d been following the progress of the Saturn division from the beginning, and it’s probably fair to say that I wanted it to succeed as much as anyone who wasn’t a major stockholder did. Saturn was General Motors’ attempt to apply all of the advanced management techniques that the competition had been using to gain various advantages over them for years to their own production lines. If successful, Saturn would have proven that an American company could not only adapt to new conditions and new strategies, but could actually compete with newer and more technologically advanced organizations on their own terms. Unfortunately, it didn’t…

Now, I’m not going to re-open the arguments for and against closing down product lines that are not turning a profit; we’ve covered that concept in this space often enough, and the simple fact is that while closing down the Saturn line was unfortunate for the people who worked there, and for the communities where they lived and all of the businesses that either supplied the line or were supported by the employees, it isn’t reasonable to expect GM to continue operating the plant at a loss. Even with the best will in the world, the company would only be able to keep going for a limited time before they went under, taking out all of their remaining factories and bankrupting their employees as well as their investors. Even if General Motors was some kind of idealistic crusade (and it’s not; it’s a business) there would be no point in harming millions of people in order to help a few thousand – especially if those few thousand would still experience the same results in the end…

So the company shut down the Saturn division, moved as many of its people as it could to other facilities, and began cutting costs wherever it could, including some highly unpopular ideas, such as using the NAFTA provisions to shift production of some parts to Mexico. It has been a bad time for a lot of folks in that industry, and not a good one for a lot of companies and their suppliers. So I was very pleased to stumble across a story in the New York Times business section about GM planning to re-open the Spring Hill facility. Part of it is just that the company is going to re-tool the factory to produce two new midsize designs, which will keep them from having to disrupt any of their current assembly lines and save on delay costs and similar issues, and part of it is that the new union contract allows for multiple tiers of employees, making it more economical to employ Americans in Tennessee than Mexicans in Mexico…

How all of this will work out – or whether it will work out at all – remains to be seen. The past year has seen some remarkable improvement from GM, and if they use the Spring Hill facility to produce vehicles with some of the new technologies they’ve been talking about (especially clean diesel, biomass diesel, plug-in electric hybrids, or hydrogen fuel cell technology) this could be the beginning of a new revolution in the industry; the 21^st Century equivalent of the rise of the original General Motors corporation. But if they can’t learn from the events of the past two decades, I’m very much afraid that they will be destined to repeat that same history at least one more time…

Try This the Other Way…

I pulled a story off of the news aggregation sites this week that I think the authors – and probably whoever green-lighted the story in the first place – are looking at backwards. On the face of it, this is an amusing little story about a store in Elma, New York, which purports to sell only products made in America – they call it the “Made in America Store” – which can be seen as mocking people who take the “Buy American” campaign to extremes, mocking trade protectionists in general, or mocking the current state of American commerce (the story carries virtually no electronics and is built into an abandoned Ford dealership, for example) depending on which one you find amusing. However, it struck me that there is at least one, and more likely a whole series, of serious topics being raised by this operation, and that somebody really ought to look into them…

Consider, for example, the primary issue this store addresses: what product categories are still made in the US, and how many of them are competitive against foreign options in either price or quality, let alone both? If there are American industries that are actually superior to the competition in either category it’s probably worth asking why; if there are any that are superior in both measures (and not just because they receive government subsidies or trade protection) it would be interesting to find out if those advantages can be transplanted into other manufacturing sectors. By the same token, if those products are not superior in quality or price (or both) but are simply being featured in the store because of their American origin, it would be interesting to see if the products (or the companies that produce them) can be improved to equal or exceed foreign standards – or if the fact that they are American-made will translate to sales sufficient to keep the manufacturers in business…

Even more interesting, in my opinion, would be the reverse question: which products (and product categories) are no longer made in America, and is there any way we can restore those industries? In some cases it may not be possible to resurrect those industries, and in others it might not even be desirable to do so, but a simple comparison between this company’s inventory and ordering databases and those of a typical general merchandise retailer (like a Wal-Mart or a Meijer) would tell you which American manufacturing sectors are effectively extinct. Meanwhile, a price point comparison would tell you how much of a markup people would be willing to accept in order to purchase American-made consumer products in a wide range of categories in which country of origin isn’t normally a selling point…

Now, I realize that a lot of these points are the sort of abstract operational analysis that could only be of interest to management students and policy wonks; most of the appeal of the Made in America store is just random patriotism and the sort of jingoistic rhetoric that appeals to people during an economic crisis that can be (at least in part) attributed to international market conditions. But if you go to check out the original story on the NPR site , just keep in mind that sometimes the answers to how to change an entire manufacturing sector aren’t found in some industry insider’s secret information, or at the bottom of a huge governmental think-tank study. Sometimes they’re a tourist attraction on the highway near Elma, New York…

The Trouble with Outsourcing

I was reading Michael Hiltzik’s column in the Los Angeles Times business section the other day, and nodding along with his contention that the problem with outsourcing – having various parts of your product or service built/performed by lower-cost workers or subcontractors overseas – is that people keep treating it like a moral issue, when it occurred to me that this is a lot like saying that the problem with the Pacific is that it is wet, or that the problem with the Sun is that it’s a huge ball of radioactive fire. Hiltzik contends that it is obviously immoral to abandon “loyal” American workers and attempt to gain cost savings by having the work done elsewhere in the world; I contend that like most matters of morality, the question isn’t quite as black and white as he’s making it out to be. Moreover, I have to say that the key points he’s making would apply to ANY subcontractor relationship, foreign or domestic – and any company that behaves in the fashion described would be in for just as much trouble…

If you don’t have access to the Times where you live (or don’t want to bother tracking down the article in their archives) you can pick it up here if you’d like. The original article contends that argues over the morality of outsourcing are obscuring the fact that it is frequently difficult, time-consuming and expensive to outsource parts of a major manufacturing process. In the case of Boeing, the company being profiled, the least profitable and most problematic part of building an airplane is the final assembly process – and that was the one part Boeing had elected to keep in-house. Mistakes, problems, compatibility and tolerance mistakes made overseas would all have to be corrected by Boeing at their own cost during final assembly, and if a subcontractor fails them or refuses to correct the manufacturing mistakes, the company has no choice but to take back that part of the process and make the requisite parts themselves – incurring still further costs and delays. This is why the 787 Dreamliner project is so far behind schedule and so far over budget, for example. But while these conclusions are obviously correct, I’m not sure they completely address the issue…

As previously noted, there is no point in mice deciding that cats should wear bells if the cats are of another opinion. Similarly, there is no point in remaining loyal to your home-town workforce if you then go out of business, bankrupting your stockholders and destroying the careers of all of your personnel (not just the ones affected by the outsourcing) because your labor costs make it impossible to produce an equivalent product at a competitive price. If Mr. Hiltzik is right (and he generally is), the problem with the Dreamliner project isn’t just that Boeing outsourced the primary components of the aircraft, but that they did so in a strategically foolish and contractually idiotic fashion. Outsourcing parts of this product line may have lowered the company’s profits, destroyed their production schedule, and tarnished their reputation, but all of those things would have happened if they’d outsourced those jobs to South Carolina, San Antonio or Sacramento, just as surely as sending them overseas did…

Now, I don’t want to downplay the moral aspects of outsourcing. But the fact is that while the 787 has more parts and components that are made overseas than any other Boeing product, a full 30% of the aircraft, that’s still a lower percentage than the amounts of most ostensibly American-made cars, for example. Whether we like it or not, international business and off-shore manufacturing are here to stay, and the real question is becoming whether we can keep the company in business, provide good jobs for at least some of our workforce, and generate enough return on investment to keep our ownership from withdrawing their capital support for the company under these conditions. Sending jobs overseas may be morally wrong, but destroying our company so that we can remain morally pure is not a better choice. The problem in this case is that Boeing appears to be doing both at once…

Cylinder Deactivation

One of the new technologies that’s come up in the current debate over fuel economy, Cylinder Deactivation isn’t really going to change much about the way passenger cars are built. It’s not a shift away from fossil fuels, or toward renewable energy sources, or even to a new kind of machinery, really; at best it’s a stopgap until ethanol, solar or fuel cell technology becomes economically viable. But it’s an ingenious short-term innovation that may have larger implications in the future, and that makes it worth a closer look.

Basically, the idea is that in a V6 or V8 engine, you don’t actually need all of the cylinders working when the vehicle is cruising down the highway or rolling down a hill. So you can equip the engine to detect these lower demand conditions and shut down some of the cylinders, leaving enough to provide power to maintain the forward rate of speed. Then, when the driver needs to accelerate or otherwise needs more power, the engine can reactivate the cylinders and restore full power. Here’s an AP News story, by way of Yahoo News, about how this all works. A similar technology is available that will actually shut off the engine while you are waiting for a light to change, and start it up again when you need to move.

The effect of these systems really isn’t all that impressive – the cylinder deactivation systems introduced by Honda for some of the 2005 and 2006 models show an improvement in gas mileage by about 4 or 5 miles to the gallon – about 12% to about 20%, depending on the vehicle. It certainly doesn’t compare to the dramatic increase in mileage offered by hybrid power systems, let alone fuel cell engines. But what makes this technology so interesting is that it should, at least in theory, be applicable to any type of engine, in any vehicle design, without the adoption of new fuel technologies, creation of new fuel production facilities, modification of gas stations or disposal problems involving huge banks of lead batteries. It isn’t even particularly expensive, especially when compared with hybrid systems (which can add $3,000 or more to the price tag, plus a dealer premium fee because the hybrid vehicles are so popular).

The other reason these are interesting is that they represent a perfect example of the business concept called Incremental Increase, or Incremental Improvement. The basic idea is that while making a single change in your business that increases your profits by 10% would be good, making five changes that each add 2% to your profits is just as good, and making five changes that each add 3% to your profits would be much better. In this case, perhaps the same cylinder deactivation technology could be used to produce cars that use 20% less E85 ethanol fuel, or the same concept could be used to extend the efficiency of electric motors or hybrid power systems. But even if the only thing that happens is that all of the larger vehicles sold from this point forward use 20% less fuel to travel the same distance, that’s still better than nothing.

And while that’s going on, maybe we can work on the next incremental increase…

Made Where, Exactly?

By now you’ve probably heard about all of the toy recalls going on over the past few weeks – mostly about lead paint used on toys made in China, although there have also been toys recalled for choking hazards (small pieces that can fall off or be gnawed off and then swallowed by a toddler), sharp points or edges, and other problems. This has driven a lot of people who had never given the first thought to the subject of outsourcing to start thinking about it. I can’t help wondering if this is going to be like waking up one morning and finding a six-ton elephant living under your bed. You’d think people would notice before this…

According to the article on USA Today Online, something on the order of 80% of all toys sold in the United States are made in China, and another 10% or so are made in other parts of Asia and Europe, leaving only 10% that are actually made in the US – and the majority of those are the so-called “nostalgia” toys like the Slinky and wooden blocks, and so on. This will make things rather difficult for all of those alarmed parents who are swearing to only purchase toys made in the USA for Christmas this year. Especially since all of the really “cool” toys (e.g. the ones with effective marketing) are made in China, and the kids are unlikely to warm to “nostalgia” toys instead.

Even worse, there’s some debate as to how much of the problem is in the manufacturing, and how much is simply in the design. The affected toy companies swear that they specified safe, non-toxic, non-leaded paint, while the Chinese manufacturing people say they were just following the specifications given to them by the toy companies. And you can’t blame the rest of the problems on the manufacturing plants; they aren’t the ones who designed toys with small, easy-to-gnaw-off-and-swallow parts in the first place. The Consumer Product Safety Commission website tracks all of the recalls, but it notes that about 10% of all of the toy recalls are on toys made in the USA, or in other words, a number proportional to the percentage of toys on the market that were made here in the first place.

At the heart of the problem is the debate over outsourcing, or more accurately, the remarkable ability of people to stick their heads in the metaphoric sand and ignore the debate over outsourcing, at least until it affects their jobs, home lives, or something they were going to purchase. One of the side effects of a global economy is that it’s not always possible to purchase the products you want and still buy goods made in your country of origin. There was a minor blip in the news last year when it was discovered that Ford Mustangs actually had fewer American-made parts in them than Honda Civics made in the Honda Plant in Ohio, but that drew very little attention, except from those people who wanted to buy a Mustang…

The bottom line is that the American dominance of the world’s manufacturing sector, if it ever existed to begin with, has gone now, and will not be returning. If you want to buy goods such as a television set, a home computer, a cellular telephone, or an automobile, any of these things will almost certainly contain parts that have been outsourced to some overseas manufacturer, and some of them will not be available from US factories at all. You could simply swear off all of these, and all of the other goods made overseas, and live on antiques and products made in the USA if you want to, but I wouldn’t expect the kids to be all that happy with your decision come Christmas morning…