Friday, December 19, 2008

David Carlisle’s 2009 Crystal Ball

We will return to service retention in January – it is an answer to a problem. With all this bad news all around us, I thought I’d eek out the cheer out there. I had dinner with Hyundai’s Frank Ferrara last week and he seemed to be buying into a 10-11MM unit vehicle N.A. industry forecast for 2009. Frank is a glass half full kind of guy and challenged my last few industry forecasts. Frank is very bright and understands this industry at a molecular level. I test ideas with Frank. I go to Mark Thibault to borrow his brain – Mark was a policy wonk at a Washington think tank before GM. Mark understands politics and economic fundamentals better than anyone I have ever known. Pete Bennett at Nissan is my arch Republican genius (maybe beyond our simple definition of genius) friend who keeps me honest with the facts, and tolerates my non-Republicanism. My mentor for the past 20 years has been Honda’s Dick Colliver. Talking with Dick about what’s going on is like hooking a supercharger up to your brain. In the Superbowl of selling cars and trucks, he is the MVP. When I need to get inspired about how fast we can change, I go to GM’s Charlie Hyndman, VW’s Eric Carlson (one of the industry’s truly class acts) , or Navistar’s Joe Kory.

So, I listen, talk, and become influenced by some of the real good people in this industry. I also have a dark side.

I must confess that I am a news junkie. All day long I get bombarded with email news flashes from the WSJ, NY Times, CNN, Detroit News, Automotive News, Dealers Edge, and more. I read the Times at lunch, and watch 2 hours of news every night. I read the phony newsletters emailed from software companies, consulting firms, and integrators urging us not to lose sight of customer satisfaction, service sales, and, oh, well, yeah, software in this economic downturn (sort of like reading Exxon Mobil white papers on global warming). It is very interesting to watch/read the news on something that you know something about. Guys and gals who look good in a suit, can speak with real sentences, and have some relevant qualifications are interviewed by too-perfect looking broadcasters (who all speak like they came from Buffalo) and are urged to say something profound. Or, they write it all down in a column in the newspaper. Here’s what I have noticed. Many or most of these people are fairly ignorant – they simply do not understand what’s going on. Dave Leonhardt, Tom Friedman, folks like this. I am not going to rant and rave about these guys. However, it is important to acknowledge a fundamental understanding of what the “news” represents. Much of it is not fit to print – “news” seems to be dominated by outrageous ignorant opinion. This being the case, we should not put too much stock into what floats to the top every day in the world of news. We need to rely more on our own intelligence and sense of logic.

So, what’s going to happen in 2009? Let’s start with where we are right now – we are trapped at the front end of a Keynesian Paradox of Thrift. People, urged by the media and all those experts out there, are cutting back on spending. This thrift virus is spreading throughout the global economy and companies are making less stuff and, therefore, laying off workers. These laid-off workers are clamping down on their spending, and acting as a visible example in their local communities of what can happen to every Joe/Josephine The-Plumber out there. It is a lot about fear, lack of confidence, and uncertainty.

What else do we know? Regardless of politics, we know that Barack Obama is a pretty bright person; he is well informed, welcomes diverse opinions, and can figure things out. He figured out how to beat both Bill and Hillary’s bid for the nomination. The trillion dollar question is what will Barack do? Simple. He will be just like the guy who won the election – he will be logical, bright, and decisive. It is important to note that the problems in front of us are not insurmountable.

Let me give you some cheer. The Empire State Building was built in 11 months – we can do things fast here. In 2007, while Madoff was deep into cooking the books, while we all knew that sub-prime loans were a disaster, while the real estate market was braking hard, the automobile industry still sold 16,154,450 cars and trucks. On May 2nd of this year the Dow closed at 13,058. While all this witches’ brew was cooking, a tad over one year ago, on October 9th 2007 the Dow closed at its highest point ever, 14,165. Logic tells me that, to sustain a modest recovery, we don’t have to finish fixing all of our problems that were festering behind the scenes in 2007 and earlier this year. We can recover once we heal the most gruesome wounds of confidence.

Let’s take stock what’s most wrong with the current economy as it heads into the Obama triage:

  1. Unprecedented mortgage defaults caused by massive volumes of subprime loans.

  2. Gutted real estate values caused by an oversupply of homes and mortgage defaults, as well as a lack of more fundamental demand. This has effectively nuked home equity loans as means for financing a vehicle.

  3. Extremely tight credit mostly caused by post-bailout risk-related constipation in the banking industry. This has made it very difficult for dealers to get wholesale credit and for customers to get vehicle loans.

  4. Gutted 401K plans, personal investments, and retirement savings caused by this bear market. Investment savings are down by 40% and the willingness to tap into these shrinking funds to make a large purchase is very weak.

  5. Every day somebody in the news says something more outrageous about the economy not yet bottoming out and that we might slip into another depression.

Everything italicized above (2-5) is part of Keynes’ Paradox of Thrift. The real number of what’s most wrong right now might not be 5; it might be 20. Regardless, 80% of whatever numbers we come up with in a debate will still be Paradox of Thrift issues. As we look in the triage line, what won’t Obama do? He won’t buy out the defaulted mortgages made to people who could not afford to own a home in the first place. These people will continue to be unable to afford a home and, post-default, they will actually have more money to spend than before. So, these sort of defaults help break us out of the Keynesian Paradox. He already said he will not be balancing the budget, at least in his first term. Besides, the current deflation and strengthening of the dollar bumps this issue out several years. He will not worry about rampant deflation because it is actually helping things out right now. He will not worry about GDP because the recession is global and negative GDP growth is a reality for most of the major global economies. He will worry about credit in a macro sense (wholesale credit) and at a more micro sense – rising credit card debt has now become larger than disposable income. Credit card debt is a huge problem that is feeding the Paradox, but is too big to fix during one term in office.

At the heart of the problem is the Dow Jones Industrial Average. It has become more of an emotional index that is linked to most issues in the Paradox of Thrift. It is reasonable to assume that the harbinger of economic recovery will be the Dow at 10,000. This represents a 20% gain from recent performance. Americans, bless them, have short memories. In November we all reset our personal wealth to portfolio values reflected by a Dow at 8,500. We cut back and stopped spending because, amongst all the other bad things, we were poor. When the Dow gets to 10,000 we will all be richer again and we will look back at the 1500 point ride and convince ourselves that the recession is definitely in recovery. The press will confirm this with merry stories from more of their ignorant sources that we will think are pretty smart.

Barack is a very smart person. He will figure this out and focus on the FDR-esque underpinnings of the Dow. It is a lot about fear, lack of confidence, and uncertainty. Fear, uncertainty, and doubt is usually pushed upon us by people who have a reason to make us doubtful about something (like Obama), but the fear, uncertainty, and doubt that pervades the news today is of our own making.

So, here’s my forecast for 2009:
  • Production cuts will make the first half of 2009 a self-fulfilling prophesy – this will hugely help with lowering dealer inventories, cutting incentives, and aligning supply with demand.

  • Inside of 4 months we will see spending increase on maintenance parts as people feel better about investing in their current vehicles. This is the I’m-tired-of-all-the-bad-news-and-want-to-get-on-with-life paradox.

  • We will see the Dow go back over 10,000 inside of 6 months, and it will be stable because the news services will have harvested just about all the bad news out there that is imaginable.

  • With this, spending will increase and vehicle sales will increase as well. I think we will see a 12-13MM unit 2009, not the 10-11MM unit year that others are predicting.

  • The new-home market will somewhat come back in the 4th quarter, but not at the entry-level – it will be more from pent-up demand at the higher customer income levels. More importantly, Obama’s public works stimulus program should have some positive impact on jobs (2nd quarter) and construction equipment sales in the 3rd quarter of 2009. Construction equipment exports will get some boost in 2009 by the ever weakening dollar.

  • Food price deflation and low crop prices will be an issue for Ag in 2009, but it will create 2010 opportunities.

  • Goods will start moving, new regulations will start regulating, and Heavy Truck will start to rebound in the 4th Quarter of 2009.
So, in a nutshell, I’m feeling better about 2009 than many of you. Thank you all, and all please have a wonderful and safe holiday season. Come back in January and help restart the Paradox of Confidence.

Wednesday, December 10, 2008

Carefully Moving Into Troubled Water – Part II – Growth By Checking-the-Box

Growing revenue should be easy – the less you know about service-parts the better for this, your sense of confidence, and self esteem. On page 48 of our firm’s Handbook for the Recently Hired, we have the first of five “Laws of Surprises.” “Surprise Law #1: If our client’s organization was capable of making all the blunders that we uncover during a superficial analysis, it would have been bankrupt years ago.” This law is all about thinking and not taking things at face value.

Last week we looked at some of the findings from our recent OEM Aftersales Business Pulse survey – 15 OEMs participated (one OEM’s responses were incomplete.) Our Business Pulse survey asked about 100 questions that should allow us to connect the dots between unit sales metrics and growth processes & initiatives. One survey section unearthed the numbers for sales and unit growth, and several others sections inventoried each OEM’s processes and initiatives. Theory would say that OEMs who checked-the-boxes for having the most initiatives should, also, exhibit the most growth. No such luck. What’s going on?

In 1992, when we pulled together the first gathering of the North American Service Parts Conference (NASPC), most companies felt pretty good about how they’d chin up to their peers. Confidence was in abundance; some attended simply out of arrogant curiosity. A few executives came because their planners fooled them. The first conference was all about the effective use of labor and processes to achieve measurable and comparable labor efficiencies. The conference was held on the West Coast and focused on facility visits the first day and roundtable discussions the second day. Toyota led off with the facility visits and made everybody else (except their folks) feel uncomfortable. Toyota’s numbers were the best of the group, their labor force seemed proud and happy, and their processes made complete sense. We moved on from Toyota. The next facility we went to was surrounded by razor wire and looked like a cave for growing mushrooms. The numbers were horrible. The third facility was not air conditioned and consisted of two floors, with 80% of the work performed on the second floor inferno. Their numbers looked like someone made a mistake and dropped a zero. Before that day, the razor wire and inferno process managers had all mentally checked-the-boxes and were pretty sure they were near best-in-class. Growth Law #1: To achieve growth don’t check-the-boxes on things you do without examining the efficacy of your efforts.

So, why does the growth chart look like a scatter plot? First off, if you are a company with any amount of market maturity, you seek to grow in areas where you have the lowest market share. Auto guys pass over collision sales, and look to M&R and accessories. Powertrain is too painful to wrestle with. CE & Ag don’t have much of any collision business to fret over, but they do have implements and M&R parts. Truck has the most complex set of growth problems to solve, pretty much since they deal with brilliant buyers. Regardless, it makes sense that everybody goes after lost share for the lion’s share of unit growth.

Let’s just focus on accessories (and next week service retention) because we pretty much know why share here is so low. So, why don’t customers buy accessories from dealers? There are lots of reasons, but the second most important one is that the salesperson, in the showroom, does not offer them for sale. Kids would now say, “Duh?” OK, now how would we characterize OEM strategies for selling accessories? Heavy duty programs focused on the supply chain that gets accessories to the parts manager, who typically is not involved in the sale to the end-customer. It’s all about turf and comfortable ground to play on. Coupled with these heavy duty programs are light duty (and very expensive) check-the-box activities to be accomplished by the field organization, trainers, or the dealers on their home turf. Think of razor wire and infernos.

Here’s our favorite. When customers were asked what most influenced them to buy accessories from the dealer, the top influencer was sales literature/brochures (top choices ranked by what they ended up spending). However, we must caution you, few dealers used any of these. Customer ranked the most useful dealer sales tool as being a simple price sheet. Here’s what we found when we connected some dots: for one of the OEMs, the accessory brochure was still not available 10 months after the new model year, and for all but Scion, price sheets were entirely within the dealer’s domain. How often do aftersales executives check-the-boxes for simple stuff like this? Growth Law #2: To achieve growth, don’t be complacent about process efficacy outside traditional aftersales turf.

By the way, beyond this simple stuff (think razor wire and infernos), too often we rely on traditional methods of change that other parts of our organizations have effectively destroyed. Carlisle & Company does a lot of work with dealer trainers for strategic program implementation. Some clients really hate their dealer trainers because the trainers lack skill, listening skills, innovation, and flexibility. Some think that the last creative dealer training program was probably done in the ‘50s for Hudson. So, they complain to us and we get hired for oversight of dealer training program management. What really happened here? In the 1990s, OEM purchasing organizations figured out how to negotiate multi-million dollar training contracts that cut costs to the bone and saved millions of dollars. This had an unintended consequence: what they did was cut out the required investment for thought, learning, and innovation. Many surviving training companies simply re-packaged old stuff (that never really worked all that well) with new fonts for new problems. Training their contract trainer staff in an entirely new curriculum was negotiated away. If this is news to you, you might be checking-the-box. Growth Law #3: To achieve growth, focus on your commonsense business processes - they may have unintended consequences.

Now, back to the scatter plot. We suspect that some OEMs are missing opportunities for growth while others are wasting resources on unproductive initiatives. Waste? To summarize, three things are getting in the way of growth for many OEMs: (1) they check-the-boxes on things they do to achieve growth but do not examine the efficacy of their efforts, (2) they are too complacent about process efficacy outside traditional aftersales turf, and (3) some of their commonsense business processes have unintended consequences. Razor wire and infernos.

There is a final, fourth law of growth. Honda is perhaps the most magnificant example of a company that is run by a simple guiding light. It is called the 3 Joys (http://world.honda.com/history/limitlessdreams/satisfaction/text/03.html): the joy of producing, the joy of selling, and the joy of buying. Growth Law #4: You can only get joy from something you do well. In a recession where efficiency and cash flow are king and queen, it might be productive to pare back to what you can do really well. You might save some money and improve your results.

Wednesday, December 3, 2008

Carefully Moving Into Troubled Water – Part I

Fifteen North American Heavy Equipment (HE) and Auto service-parts OEMs recently completed our 100-question business pulse survey. Pretty interesting. This blog will only touch on a fraction of the interesting stuff – we will be mining the survey for wisdom over the next several weeks. For the most part, everybody’s steering very carefully into this recession. Our Market Watch sales reports show that most of the auto sector is getting hit hard by the recession, and that HE had a pretty bad October (but, a fairly splendid 3rd Quarter). The media has kept us abreast of the primary reactions to this on salaried labor – the domestics have led the pack in doling out packages. But, what about all our other costs? We find three things at work: (1) IT budgets for 2009 are being slashed (as is headcount, capital expenditures, and benefits), (2) everybody is being careful with business processes that impact key customer satisfaction metrics (85% of the OEMs surveyed either increased or held tight on targeted fill, with 67% of HE increasing fill), and (3) many OEMs feel that they are doing the right things on key revenue growth pressure points … but are they?

Reductions to IT spending are interesting. This was once a sacred cow at most firms, but OEMs have recently discovered that these sort of investments can be delayed. Everybody is cutting, but by differing amounts. Eleven percent of the OEMs are only cutting their IT spend by 5 to 10%, whereas 22% are cutting more than half. Recession-weary HE companies are generally doing much better in 3Q sales than the auto sector, yet most are slashing IT costs by more than 50%. IT has proven to be the biggest area of controllable cost that is going under the magnifying glass.

Based on 16 years of NASPC participation, we have all learned the lesson on taking care of tomorrow’s customers. While a few are looking at reducing inventory that could negatively impact customer facing fill rates, most are holding steady. 86% of the industry has decided that ship-direct is not the answer for how to save money. Only 29% have reduced dealers on DDS and a mere 7% have reduced DDS delivery frequencies to remote dealers (long term effect on those dealers to be determined). In a normal recession, 3PLs typically would be seen as a quick solution for reducing costs: 57% of the industry ranges from neutral to very dissatisfied with their current 3PL (nobody was “very satisfied”). 33% are looking to decrease their reliance on third party logistics providers (vs. 8% looking to increase their reliance). The key for a 3PL to do well in this environment is to focus on the “Big-3”: (1) materially reduce top-of-mind supply chain costs, (2) make end-customers more satisfied, and (3) be a seamless partner with their OEM clients. This is impossibly simple. Overall, we do not see evidence of the OEMs degrading their supply chains – the best “tell” of this is that most of the industry has not reduced supervisor-to-hourly ratios.

Growth is curious (we will cover this in more detail next week). Sixty one percent of the OEMs have seen modest to significant unit sales reductions – both HE and Auto have winners and losers in unit sales growth. Auto has been harder hit by the recession. Yet, only 20% have a second line of parts. More than 50% of HE has a second line. Hmm. The key to selling more in a recession is to increase market share in the areas you are weakest. For Auto, this means service retention; for everybody this means selling more accessories and implements. Service retention for Auto is fairly miserable and only 40% say they have an executive in charge of this. HE typically has much better service retention; however, only 33% have an executive in charge of this area. Overall, when you look at the details, Auto says they are doing all the right things, but getting the wrong results. Conversely, for HE, they are getting the right results, but are not claiming to follow the game plan. Or, maybe Auto thinks they are doing most of the right stuff and, for whatever reason, it just ain’t so. Ditto for accessories.

The moral of the story is that the industry is protecting its most precious assets in this recession – the end customers. Cost cutting has been rational and non-life threatening, at least so far. Growth? Well, most OEMs think they have this one cracked …and, that the unit losses are due to something else.