Whoa! Lots of comments from yesterday’s newsletter column (“U.S. Auto Must Fail To Survive”—subscribe to a preview account to access the entire article). We had more in agreement than opposition, but the opposition points deserve a response, many of them are well-founded.

The problem with unions

First off, I am not universally anti-union. I started my career thinking I’d be in labor relations, even getting a masters degree in the subject. Unions, especially if you go back to the early days, may well have saved capitalism from itself by allowing people without access to capital to make a decent living. The problem is that unions are, by their very nature, political bodies. They are about votes and membership numbers; as a result, they resist change, especially when it involves replacing human labor with machinery, even when the economics are overwhelming. The UAW just took it all too far. Too much power, too much politics, too many jobs—the jobs bank for instance? Most people in the rest of the country think this is an insane idea. More outrageous is the lack of foresight the UAW demonstrated by continuing to fight with management over a shrinking pie when everyone could see the writing on the wall. Caterpillar had to fight through this problem 20 years ago and is now doing fine. Even Johnson Controls, which directly serves Detroit, has managed to find a new way to thrive. Why can’t the rest of Detroit do the same?

One other thought, a comment chided me for bringing up the baseball bat story saying one bad apple doesn’t spoil the whole bunch. True, but I still have seared in my memory the “swinging for the fences” comment one witness made about the incident. The reason I included this story is the symbolic power of the image: fighting to protect jobs is the wrong way to think about it. No one has a right to a job. In the long run you keep your job by being worth more than what you are paid. If the UAW had focused on that and helped its members stay ahead of the changing global supply chain instead of “protecting jobs” we might not be having this conversation now.

Management’s failures

Second is management. Some comments said to give management a break, that they’re doing their best. They may be doing their best but it’s not very good. I drive a Ford Explorer and a Jeep Cherokee, both are great cars. Drivers in the US need pickups and SUVs for work and carpools much more than drivers in Europe or Asia. But we also need small cars for solo commuting and city driving. That’s why Toyota is the world’s largest automaker now: it makes BOTH successfully. And last January, the Prius passed the Explorer in sales.

I know SUVs and trucks made a ton of money for a long time, but this oil price problem was no surprise. All OPEC has to do is cut production and our prices go back up fast. Why couldn’t have management prepared better for this? Oh by the way, the scoundrels on Wall Street who copped all those millions while teeing up the current disaster deserve even worse than the auto execs. There is plenty of blame to go around.

The British Leyland Lesson

Third, the government subsidy issue. Yes, I buy that Europeans subsidize their industries more than we do, and that this can give some an unfair advantage, but the problem with subsidies is that companies never seem to be able to break the habit once they get going.

The best parallel is probably British Leyland, which failed despite a $16B bailout from the British government. The company still went under, it just took longer. Look into that case and you see why the union deserves a lot of the blame. The similarities with Detroit are scary.

As GM Goes, So Goes the Nation

Last, and most interesting, were points made about the overall economic impact. One commentator said the jobs multiplier for auto is 10 versus two for banking. I know that the complete supply chain goes way back and that the risk to the economy is real. But still, GM, Ford, and Chrysler are not the whole industry and their operations certainly could continue under bankruptcy—difficult, yes, but will it sink the US economy? I doubt it.

Also, on the banking question, many seem to feel that since we bailed out Wall Street its only fair to do so for Detroit. No one feels sorry for the bankers it’s just that the multiplier effect from banks is a lot less a matter of direct jobs than of liquidity and, therefore, overall economic activity. There will be plenty of industries and companies that want a bailout as we struggle through this mess. The question is whether $25B does more good in Detroit than somewhere else.

Keep the comments coming. We’d love to hear your responses.

We’re getting back on track with our Chain Reaction newsletter and blog postings. And the economic news is giving us a lot to talk about from all sectors. In the new newsletter, hitting your inboxes this morning (subscribe here), we discuss the auto industry’s request for a $25B handout and how the Senate decision to pass was the right move. Bailing out the US auto industry won’t solve what ails Detroit. Forget about whether the misguided management or atavistic autoworkers union deserves it, the problem is that it won’t help the United States get better. Read the full story here.

I’ve written a lot lately about the dangers of inflation and received a lot of feedback. Our CFO Bob Blakeley and I regularly talk about the issue as well as the greater economy. This morning he sent me this news item about a steep fall in consumer prices:

NEWS ALERT
from The Wall Street Journal

Nov. 19, 2008

U.S. consumer prices took the biggest plunge in 61 years during October,
pulled down by a sinking economy that evidence suggests is sending
inflation into retreat. The consumer price index dropped 1.0% on a
seasonally adjusted basis compared with the previous month. The core
CPI, which excludes food and energy, fell by 0.1% in October, the
largest decline since December 1982.

Home construction took its fourth tumble in a row during October,
falling 4.5% to a seasonally adjusted 791,000 annual rate, after falling
a revised 3.0% in September.

(more of the story available here)

Bob asked what I thought this might mean to my inflation predictions, also confessing he’d take my double-digit inflation prophecy if it meant consumers were spending and confidence was higher.

I agree on the later part and but don’t think we’ve seen the end of inflation. As I told him, for now, inflation is in check, but it’s because we are in free fall. You watch, there will be no way to avoid inflation when we print $1T new dollars without commensurately increasing output. I’m also betting our low oil prices are temporary and that oil will settle around $100 a barrel once OPEC cuts production back and inventories burn down. 

There is a way to avoid inflation however: massive unemployment, a factor that’s sadly possible.

Bob agreed about the unemployment. He predicts it will creep up toward 10% by mid-year instead of the more optimistic predictions of 8% by the end of 2009. I buy that, but I don’t think even that is enough to avoid double-digit inflation. Global unemployment rates in the 20% range would do it and I think that’s possible. 

On the oil front, Bob pointed out that OPEC, against conventional wisdom, met this week and is not going to be cutting production to raise prices in the near term. It doesn’t make sense from a purely profit point of view, but I think OPEC has better economists than we give it credit for. The OPEC nations can’t handle a depression any more than we can but they could trigger it with $150 oil. They will ease for now, keep us addicted, and squeeze when we begin to get better. 

What do you think? How bad will it get before it gets better? Is massive unemployment or double-digit inflation the better option?

We always have an eye on the companies in our Supply Chain Top 25. AMR Research’s C.J. Wehlage offers this look at Samsung:

Samsung illustrates how effective supply chain management can be in growing the business, even in tough economic times. Ranked No. 9 in AMR Research’s 2008 Supply Chain Top 25, Samsung moved to the No. 1 position in the US mobile handset market during 3Q08. In a period in which US consumer spending is volatile, Samsung’s supply chain helped grow its shipments by 6.2%.

Samsung’s supply chain leadership is evident in the following:

• Its ability to effectively collaborate with all four of the big operators, with attractive bundling of offerings and leading product designs to position its products with the broadest customer base possible.
• The company’s outstanding use of sales and operations planning (S&OP) and forecasting allowed its supply chain to set aggressive pre-stocking inventory targets in advance of the holiday season, helping to lift volumes.

The results are impressive. Samsung now owns 22.4% of the market and is No. 1 in the world’s largest handset market, due in most part to the supply chain leadership.

For more on Samsung and the Supply Chain Top 25, see the following:

• The AMR Research Supply Chain Top 25 for 2008
• The AMR Research Top 25: A Cash-to-Cash Lens
• Is This Finally the Year for Enterprise Mobility?

We hear a lot of talk about how Clean Tech is poised to be the next big thing. The International Energy Agency predicts a market size of more than $45T dollars to halve greenhouse gasses by 2050, a market opportunity that would dwarf the value delivered from the dot-com boom. To put this in context today, the Bank of England placed a $2.8T price tag on the cost of the credit crisis to global markets to date, up from a Goldman-Sachs estimate of $1.2T in March, but still only around 5% of the value of the clean tech economy. So will there be a Clean Tech Google or Amazon? To find out, Steven Stokes and Bill Polk examine the market potentional in “Clean Tech: Waiting for the Netscape Moment.” We’re offering a peak at this piece with a free preview account logon. You can sign up here.

Past bull markets have seen the AMR Research Supply Chain Top 25 beat the indices by a pretty fair margin, but we have never really seen how it fairs in a slumping market. The collapse September 29 certainly qualifies as a slump so we did the math. As always, we take a simple average share price change from the date of publication. No special weightings or other corrections.

The result? Follow the jump to see.

Since May 29, 2008, we’ve seen the following results:

• Top 25, down 13.6%
• DJIA, down 18.0%
• S&P 500, down 20.9%

We know this is hugely unscientific and that the absence of financials in the group works in our favor, and that Anheuser Busch’s acquisition helps as well, but the fact remains, the companies in the AMR Research Top 25 represent a better bet than the broader market. Maybe it is precisely because of the simplicity of our method that this keeps happening.

How do we do it: 60% of the score is based on inventory turns, return on assets, and revenue growth, while 40% is based on an expert poll of peers (122 companies around the world) and our own analysts (29 supply chain specialists). The standard of excellence we vote on in the poll is our definition of demand-driven performance in the global supply chain.

We concentrate on identifying those companies that demonstrate leadership in operational excellence and innovation excellence. At the risk of sounding too clichéd, we look for companies that have the best manufacturing and/or retailing “value chains”. The term is less hokey than you might think, especially if you read any of the great Michael Porter, who, by the way was among the first to really call out the blossoming scam in our financial sector.

Call it a flight-to-quality strategy if you like, but last year’s results handily bested the same indices on the upside. The simple fact is that this way of looking at companies focuses on fundamentals with an equal emphasis on profitability and growth potential. No fancy financial derivatives, just good stuff that people want.

In this week’s Chain Reaction Newsletter

This week’s newsletter takes a hard look at the Wall Street bailout Congress is (as of this writing) trying to hash out and what reverberations will be felt throughout the manufacturing and retail supply chains. The difficult truth is, we are stuck between a rock and a hard place.

We’re keeping an eye on China’s post-Olympic moves. As the cost advantages of manufacturing in China recede and the world economy shudders it still seems fair to ask whether an emotional letdown in the population at large could lead to trouble. To be fair it’s a huge country and troubles have to be pretty severe to make a difference to the global supply chain (as some insiders have argued) but it bears watching.

As the experts in supply chain and operations in manufacturing and retail, AMR Research has covered China extensively for clients and in this blog. Below is some of the recent research we’ve published, including our groundbreaking supply chain risk study:

• Supply Chain Risks, Part 1: Taking the Pulse of Global Supply Chain Risks and Mitigation Strategies
• Supply Chain Risks, Part 2: The China Outlook—Product Quality a Major Concern, But Benefits Still Outweigh the Risks
• Supply Chain Risks, Part 3: Balanced Geographic Presence Builds the Foundation for Global Supply Chains
• Asia on the Rise, Part 1: The Dynamics of an Emerging Market
• Asia on the Rise, Part 2: Risks and Dynamics of an Emerging Market
• Supply Chain Disruptions of Olympic Proportions: Are You Ready for Beijing Fallout?

Let us know if we can help your company and we welcome your comments here.

GM rolled out the production model of the Chevy Volt, this week.

First rule of blogging: Post regularly.

OK, we broke that rule, but we’re back, we promise. After a brief lazy august hiatus (even analysts need to go on vacation), we’re ready to blog. While on our break, the topic of “unified communication” has been raising its head a lot lately, here at AMR Research, but also among clients. It’s been around a long time, but it seems one way or another, we’re all going to have to deal with it soon.

On that topic, I recently had the chance to use Hewlett-Packard’s Halo and was completely blown away. When our Derek Prior wrote about it, we were still a year-plus away from the global oil freak out of 2008. With the new mindset about energy prices plus the urge to green our world and the horrible state of the airlines, Halo’s value proposition just keeps getting stronger. Cisco has a competitive product, TelePresence, which I have not had a chance to try, but bet is great also.

Net: Halo works just like the system Captain Kirk used to face down the Klingons.  It could easily be the most transformational business collaboration technology since the telephone.

The Wall Street Journal posted the following, last week,

The Federal Reserve, while debating what to do about interest rates, has declared trends in inflation to be uncertain. Well, for June at least they certainly weren’t good.

The Labor Department reported Wednesday that the consumer price index jumped 1.1% last month, marking the second-highest increase since 1982 and the highest since 2005. Excluding food and energy, it advanced 0.3%. On a year-over-year basis, prices rose 5%, while the “core” rate grew 2.4%, well above the Federal Reserve’s preferred range. The inflationary effect of rising oil prices is certainly no secret

Uncertain? We’ve been talking about it for months.

The consumer price index jumped 1.1%, in June. If that continues, multiply that by 12 months, and you have a 13.2% rise in inflation per year. But for the Fed’s numbers above, the “core” increase year over year of 0.3% includes months as far back as June 2007. But inflation is forward looking, not backward tracking. It’s driven by expectations. So, as the rate increases, the Fed’s backward looking number will grow, but will lag reality.

What needs to happen is to look at today and project forward the current rate: we see 13% but saw 5%, last year. Is this not a fairer way to bias the data forward? Look at it in the direction of our expectations rather than backward into memories?

Also, this “core” nonsense has to stop. My lightly informed understanding is that this is to facilitate adjusting things pegged to CPI like government pensions. Food and energy are volatile and, therefore, such administration is cumbersome … but how helpless are we here? Food and energy are the core of inflation, since we ask for pay on the basis of feeding and protecting our families.

What do you think? Am I missing something here? Shouldn’t inflation look where we’re going rather than where we’ve been? Please let us know your thoughts.