In the 1990s Detroit discovered “shareholder value,” which was the latest fetish of the financial crowd on Wall Street. Not that the Big Three weren't interested in their shareholders before. But with the stock market booming, it became a mantra that management zealously preached everywhere it went.
GM, Ford and Chrysler went after it with a vengeance. They right-sized, diversified, restructured, outsourced, merged, acquired, globalized and dove deep into the digital economy. Everything the Street told them to do, they did with a snappy salute.
Economic Value Added (EVA), and Return on Net Assets (RONA) became the new measuring sticks. Executives were now held accountable to cover the cost of capital on every assignment they undertook. They had to make sure their programs paid for the cost of borrowing any money they needed. And if they couldn't cover the cost of capital, they could kiss their bonus and next promotion goodbye.
But if they could, the rewards were phenomenal. Especially for the top officers, who could make the kind of money that would make rock stars green with envy. This is why Ford paid Alex Trotman $60 million when he retired as chairman, or how Chrysler's Chairman Bob Eaton earned $50 million simply by shaking hands with Daimler's Juergen Schrempp (though others tell me he earned far, far more than was publicly announced). It was all about boosting shareholder value, or so the theory went.
Yet, what sounded like brilliant strategy hasn't paid off. Quite the opposite. All this focus on shareholder value left the American auto industry hollow and weak in the core end of the business: making cars and trucks. It became so infatuated with keeping costs down that it starved its product lines of the powertrain technology and sumptuous interiors that have car buyers flocking to import brands. It squeezed its suppliers so hard for arbitrary price cuts that the supply base is in a financial crisis that is starting to hit the headlines. And it diverted those savings into “New Economy” ventures that didn't work. Not one of them.
The Big Three torched a lot of money in the process. And the end result is that their stock prices are in the gutter. General Motors' market capitalization now stands at a meager $27 billion. Ford is only a paltry $28 billion. DaimlerChrysler, which is more diversified with non-automotive businesses, stands at an unimpressive $41 billion. After spending a decade of doing everything that Wall Street wants, this is what it has come to: The asset value of these companies is greater than their market cap.
Let me put it in simpler English. If you add up the value of all their stock, it is worth less than the value of all their plants and equipment. This is the market's way of saying, “Your company has no value at all.” The sum of the pieces is worth less than the pieces themselves.
Meanwhile, look across either ocean. The Japanese and the Europeans don't slavishly kow-tow to a bunch of brokers who know a lot about numbers and nothing about cars. They do everything possible to enhance the value of their products, not the value of their stocks. And guess what? That's what the market wants. Toyota's market cap is roughly equal to the Big Three combined!
Historically, Wall Street never rewarded Detroit for anything it did, so why continue the charade? The Big Three need to unshackle themselves from these overbearing financial constraints and find a proper balance again.
How? Don't distract management with dizzying pay-offs that could make them fabulously rich. Instead, strongly re-link promotions and bonuses to vehicle quality, productivity and market share. No flash-in-the-pan stuff, either. Make sure the big rewards come at the end of a vehicle's life-cycle, not in the first year. Spend the money up front to ensure you have a world-class car, not something that's been hammered to fit into a bargain budget. And work with your suppliers to cut costs in a way that doesn't push them to the brink of insolvency.
This is a mature, capital-intense, cyclical industry. Always was, always will be. But automakers that can find the proper balance to produce profitable products can make a lot of money. They can report steady earnings and pay an attractive dividend. And those are the kinds of companies that investors always want to buy and hold.
John McElroy is editorial director of Blue Sky Productions and producer of “Autoline Detroit” for WTVS-Channel 56, Detroit.
