Tuesday, January 24, 2006

Profits Up; Workforce Cut

Ford announced a major corporate overhaul in which they will cut up to 30,000 jobs and close 14 plants. This comes on the heels of GM's announcement that they will cut 30,000 jobs and close 11 facilities. The net result is that the US auto industry is poised to lose 60,000 jobs and 25 manufacturing plants in an effort to further increase the profits of these two automakers. (USA Today: Ford will cut 25,000 to 30,000 jobs, close 14 plants).

Even in a year marred by soaring gas prices, Ford reported a net income of $2 Billion, $1.04 per share, for 2005. It's the third consecutive year of profitability for the car manufacturer, so it's not like the company is hurting financially.

What is hurting, however, is the cost of manufacturing in the US as opposed to overseas. Ford's operations were all extremely profitable in South America, Asia Pacific, and Europe, however the North American division offset much of this profitability with significant losses. Hence the reason for the significant plant closings here in the US.

This is the problem we face as we continue down this path of globalizing the US economy. Trade deals such as NAFTA and CAFTA may help our foreign policy and they may help corporate bottom line, but they cripple the American worker. Now we see the auto industry facing the same type crisis that devastated the steel industry a couple of decades ago.

The auto industry, and more specifically the towns that are built entirely around that industry, can ill afford the loss of 60,000 jobs. 25 plant closures effectively means 25 towns plunged into an economic depression. Unfortunately, corporations such as Ford or GM care little for the workers and their families that are now faced with unemployment. They care nothing for the towns that will fade into memory as these large plants close.

Economically, we are our own worst enemy. Profitability is no longer enough. Rather, ever increasing short-term profitability, and an ever increasing rate of short-term growth is the current trend in the corporate world. Corporations are no longer in it for the long haul. Instead, the primary focus of the corporate world is this quarter's fiscal reporting season. Long-term planning doesn't extend much beyond the next quarter.

How did the market respond to the loss of 30,000 jobs at Ford? Their stock surged 8% on the news. Shareholders love a good layoff, again for the same short-sighted view of profitability. The fact that there are now 30,000 families that no longer have any buying power, that there are now 14 Ford factories scattered around the country that will soon be closed, doesn't factor into this short-sightedness. That it severely and negatively impacts the economy, at least on a local level, has little bearing so long as Ford's bottom-line improves.

This is the growing problem in corporate America. We are faced with an increasing number of baby boomer CEOs that are obsessed with instant gratification. Providing a steady long term stream of profitability that will last a generation is no longer the goal. Their attention span isn't that long. Rather, the goal of most CEOs today is to make sure this year's fiscal numbers look great since that is what drives their own bonus structure. Next year is somebody else's problem.

When we look at the challenges facing the US economy, it is not the price of oil that will be our downfall. It is not the war in Iraq, it is not instability in the Middle East. The greatest challenge facing our economy is the surging wave of corporate consolidation, acquisition, and merger. Each one puts more Americans out of work. Each one, while good for the temporary bottom line, is a long-term disaster. Each one further weakens the overall economy.

Ours is a consumer based economy. What corporate America has yet to realize is that someone who is out of work is no longer a consumer. Put enough people out of work and the economy crumbles. Ford and GM have just taken major steps in that direction.

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2 comments :

Alan Fraser said...

One hundred million dollar impact to Batavia, just outside of Cincinnati, through closing of the transmission plant there.

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