Lean and Mean and Miniscule: The Downsizing of America

The recent “surprise earnings” that have led to this recent market rally may have surprised most, but not all. Some of us knew that this round of earnings would be good because of several factors.                                                                                                                                               The first is the fact that the financials, which are responsible for starting this whole rally, made money by trading during a three month run-up while using a crap load of free capital given to them by you (taxpayers). This is a topic for another blog entry to be sure.
The second factor is Wall Street’s ability to get investors to believe in the significance of these “earnings estimates” instead of looking for real earnings growth. Instead of real, positive increases in earnings, all you have to do is to do better than the analysts expect you to…..even if you still do badly! And the worst part is that the people who are doing the estimating have a vested, financial interest in the company beating the estimates. Talk about a conflict of interest!
But the real factor that gets me is how most, if not all of the companies in the US increased their earnings per share (EPS), not their revenues! They did this by cutting back expenses including labor and ultimately increasing earnings by decreasing their size. I hear so many analysts talking about these companies getting “lean and mean” and how good it will be for the future of the company…..what a laugh! American companies are downsizing to generate better earnings results but they may potentially be damaging their ability to compete on the global level. Eventually, this will have to be bad. Currently, we can begin to see the error in this concept by looking at the US automotive industry and the US banking industry.
The demise and downsizing of GM and Chrysler and the weakening of Ford have allowed foreign car makers to gain significant chunks of market share not only in the US but globally as well. Plant closings and massive layoffs have shrunk our car makers. This is creating a competitive disadvantage for the US car makers. Meanwhile, the banks have had to sell off assets to meet capital requirements and pay down losses in the credit markets. US banks are nowhere to be seen in the ranks of the top ten banks in the world!  When it comes to competing in the global financial markets, size matters!
My father once told me that in basketball, a good big man will always beat a great little man. The saying goes that you can’t teach size. And size (asset base) matters a great deal in this game too….the game of global business. Bigger is often better when in competition. Economies of scale really pay benefits to the companies big enough to exploit that scale. By diminishing the size of our companies here in the US, we lose the advantage of economies of scale and thereby hurt our pricing ability which is already hampered by US law as compared with other countries.
Lean and mean is one thing…..miniscule is another. The US could wind up having trouble competing globally with the big boys in the future because we may no longer be a “big boy” ourselves!



1 Response to “Lean and Mean and Miniscule: The Downsizing of America”

  1. 1 Dave Neely July 21, 2009 at 7:59 pm

    I feel global competitiveness is critical for American companies. With the aging of the “baby boom” generation, domestic spending in most areas is on the decline and will continue that trend for some time to come. The peak spending years occur in the mid to late forties. Us “boomers” have kicked the kids out the door, our overall expenses have decreased and we have realized we must put more aside if we will be able to retire as planned. The generation following the “boomers” is smaller and has not reached their peak spending years. That is one reason the stimulus package has yet to make much of a difference. The overall population has less ability, less need and less willingness to spend. American companies will have to look overseas just to maintain previous sales levels.
    Ron mentioned the auto industry. As folks age, they may buy more expensive cars, however they tend to not purchase new vehicles nearly as often. Carting my kids and their friends all over the place put a lot more miles and wear on my car than, basically, commuting to work and back racks up miles these days. I plan for my current vehicle to last a good number of years and the next, even longer. American auto makers must gain in market share overseas to survive.
    That brings up the following questions: Can Government Motors, formally know as General Motors, survive? Has the government ever been successful running any type of enterprise that actually produced something useful and still been cost effective (profitable) ?

    Dave neely

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