News U Can Use

A Supply Chain/Strategic Sourcing learning community devoted to ideas you can use in your work or daily life.

Getting By With A Little Help From My Friends

Posted by lowellyarusso on June 3, 2010

A recent article (Chicago Tribune May 18) mentioned that the Obama Administration is moving toward establishing an $800 million “slush fund” to help GM close 14 plants across the U.S.  The article brought to mind Ron Sanderson’s blog re: “Is Lobbying a Form of Strategic Sourcing?” Ron argued that lobbying can be a much more successful approach to reducing cost (or protecting income) than any special project or Strategic Sourcing process.  GM’s “little” slush fund raises some highly instructive (and potentially useful for the Supply Chain) issues in light of those earlier blogs.

First, it reinforces my earlier argument  that government ownership of key players in any industry is a major new factor in the supply chain (“Does It Matter if a 600 lb. Gorilla is Chinese or American”), and a significant  development in free markets across the U.S. and the Eurozone.  Whether it’s positive or negative will depend on how your company is positioned vis-a-vis the Gorilla.  Obvi., if you are GM you’re thinking it’s not such a bad thing!

But what if you are Ford?  You proudly worked harder and smarter than your competitors, avoided bankruptcy and a government bailout, and are rewarded by being put $800 million in the hole vs. GM.  How?  When Ford announced (in 2006) the tough choice of closing 14 plants, the cost had to be covered by its shareholders.  For GM, here’s a major cost of recovery that will be borne by the friendliest of all shareholders, the Federal Government.  Not only is there no “shareholder revolt” over reduced dividends, this shareholder is ponying up a huge sum of money to help the company out.  Nice deal.  GM, you can thank me and the rest of us honest American taxpayers later.

Second, if Ron was right, then we should expect more and more interventions like this on the part of the Federal Government as companies and industries begin to recognize that lobbying may, indeed, be a sourcing strategy. If this is a good bet for GM, why wouldn’t it be a good bet for any company?  And, it already happens far more than we typically realize.  As an example, legislation passed in 2007 will require the phase-out of incandescent light bulbs starting in 2012.  And who was one of the main forces behind that legislation?  GE!  Why would GE want to legislate one if its products out of existence?  Would it surprise anyone that GE quickly (almost as if they had counted on passage of the legislation) took a number of steps to capitalize on the ban.  Admitting that GE expected to make a lot of money from environmentalism, management shifted the focus from the (mostly American made) incandescent bulbs to the Made In China CFLs that carry with them a much higher profit.  While this may not seem significant, consider that, today, there are about 4 billion light bulbs sold annually in the U.S.  If GE gets a 10% profit on each type of bulb and the price goes from about 70 cents a bulb to over $2.00 a bulb, that amounts to $5 million + in additional profit.  And, unlike an oil company that can only point to the rising cost of crude to justify a price increase on its product, GE can piously point to a government mandated, environmentally friendly (?[1]) mandate.  Again, GE can thank America’s voters for that little bottom line windfall.

One final point if you are still wondering if these are isolated cases.  Consider the financial services arena.  The Federal government, over the past couple of years, has pumped something north of $1 trillion into bailouts and takeovers of, for example, AIG, Citibank, Lehmann Bros., etc.  With the passage of the Health Care measures, the federal government has again returned its efforts to “strengthen the regulation of the financial industry.”  It should come as no surprise to learn that industry has been heavily “investing” in lobbying efforts to the tune of over a half billion dollars in a, so far, mostly successful effort to mold that legislation (Warren Buffett said, “Do this and my profits go down” and Congress quickly dropped “this” from the agenda).

Try to follow me: The logical flow here is that the government is, in effect, subsidizing the “investment” and lobbying contributions that big financial companies like CitiGroup and Bank of America are making in order to shape and mitigate any fallout from increased government oversight of their activities.  Once again, thank the American taxpayers on the way to the next economic meltdown!

And here’s the real point.  As I suggested earlier, this is a trend that you overlook at your peril.  Active government involvement in the economy and targeted industries is going to increase.  On the one hand, how do you prepare for that tilting of what may already have been a less than level playing field?  How many ways can Congress come up with to send a little “seed money” to companies that have the right connections?  How will that impact your suppliers, you and your customers?  On the other hand, are there opportunities for you and your supply chain partners to take advantage of these trends?  How about a “slush fund” to help avoid moving a manufacturing plant offshore or to reverse a previous off-shoring decision?  The time has never been better for taking a creative approach to finding help from a friend or an Uncle.

What are your thoughts?  Is this an aberration or a trend?  Why is it happening now?  How might you be impacted if it really is a trend?  What can you do about it?  I’d like to see what you think.

[1] A key material in CFLs is mercury.  There’s enough of the stuff in those CFLs to worry a lot of people.  As reported on NPR, “General Electric …admits that the little bit of mercury in each bulbs could become a real problem if sales balloon as expected.

“’Given what we anticipate to be the significant increase in the use of these products, we are now beginning to look at, and shortly we’ll be discussing with legislators, possibly a national solution here,’ says Earl Jones, a senior counsel for General Electric.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: