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  • This is Why We Can’t Make Nice Things

    Posted by David Foster on December 30th, 2016 (All posts by )

    A positive review of General Electric stock points out that the company is less exposed to the oil market than it was prior to the Baker Hughes spinoff…and then goes on to say:

    Gone too is the iconic firm’s appliances business, which was sold to Chinese firm Haier. This is really a progression of the economic cycle. While folks like President-elect Donald Trump and financial provocateur Peter Schiff lament that Americans just don’t make stuff anymore, at a certain point, advanced economies should outsource physical work to less-advanced countries. It’s not so much a matter of ability as it is financial efficiency.

    Does this writer believe that GE should also divest the jet engine business, the power generation business, and the transportation (locomotive) business?  All of these businesses make physical things, and make substantial amounts of those physical things in the US.

    The idea that manufacturing is devoid of intellectual content and hence unworthy of advanced economies is fallacious and has done serious harm–see my post Faux Manufacturing Nostalgia.  Happily, this attitude has turned around substantially since I wrote the linked post..to the point that manufacturing is being practically over-romanticized…but islands of the “who needs it?” view still exist.

    GE’s reasoning for divesting Appliance seems to have been centered on a desire to focus the company on business-to-business markets rather than consumer markets and, and also, I think, on a perception that there was not sufficient room in the appliance world for product differentiation and a technology edge.  “Technology edge,” rightly understood, includes the complexity/difficulty of manufacturing something, not just the intellectual property embedded in the product itself.  It certainly did not reflect any conclusion that manufacturing is inherently a low-value function.

    It would be silly to argue that a computer programmer in a bank is a “knowledge worker” and a programmer in manufacturing is not.  It would be equally silly to argue that a bank branch manager is inherently performing a more highly-skilled job than a shift supervisor in a factory, or that a first-level customer service rep for Amazon is performing a more advanced kind of work than an assembly line worker, or that an operations research expert doing inventory studies for a manufacturing firm is less of a knowledge worker than his equivalent doing inventory studies for Target.  But this is implicitly the argument that many of the ‘we don’t need manufacturing here’ crew have been making.

    This dismissive attitude toward a vast and complex industry which supports millions of people represents one more example of the constellation of attitudes against which many people rebelled when choosing to vote for Donald Trump.

     

    7 Responses to “This is Why We Can’t Make Nice Things”

    1. ed in texas Says:

      According to investment writers, the only really useful job is that of investment banker. Everything else is below the line. (A similar attitude can frequently be seen among lawyers and accountants, respectively.)

    2. Abelard Lindsey Says:

      The idiot analyst actually believes that the cloud service represents a more value added disruptive technology than the 3-D printing/additive manufacturing that GE is investing in. No wonder these people are clueless.

    3. Grurray Says:

      ” For example, GE stock will no longer carry the massive exposure to the crude oil markets they once did. By combining its fossil fuel operations with Baker Hughes Incorporated (NYSE:BHI) and spinning it off as its own publicly traded entity, GE has better control of an unreliable asset. Although major oil indices are steadily recovering, prices are still well off from its highs of 2014. Additionally, there’s no telling when the next crisis may occur.”

      Somehow companies in the energy sector or dependent on energy markets used to be able to make things. Despite some bad years, seasonal fluctuations, cyclical sales, etc. they were still able to turn a profit and keep their workers employed. Those days seem in the distant past. We lost something along the way that made us resilient.

    4. David Foster Says:

      I’m not sure the analyst is correct that ‘reducing exposure to the crude oil markets’ is a motivator for the deal anyhow. GE will own 62.5% of the consolidated entity and is also putting in cash to pay the special dividend for B-H shareholders.

      http://www.forbes.com/sites/antoinegara/2016/10/31/freed-from-finance-ges-jeff-immelt-flexes-deal-muscle-with-baker-hughes-tie-up/#5960133a2c14

      Seems to have more to do with creating a single-source supplier providing a broad range of capabilities for the industry.

    5. Mike K Says:

      The crappy WiFi system in this hotel ate my comment.

      Jack Welch built GE on manufacturing. Jeffery Immelt built what he did on crony capitalism and politics.

      Manufacturing is still pertinent.

    6. LetsPlay Says:

      One overlooked factor is the drive to divest businesses that make hardware (manufacturing) is the need to provide investors with a smooth rate of return. Cyclical products and markets are too difficult for managements to deal with. In essence, they are lazy and taking the easy way to concoct a “cycle-less” business model.

      Deliver profits 24x7x365. Globally. Investing in infrastructure, marketing, branding, etc. to grow markets worldwide is time consuming, costly and the competition America has fostered through it’s investment of making others better off (not imperialism, but free), makes the job that much more difficult. Local companies are better suited to protecting their local markets. That key factor plus advances in lower cost transportation, communications, and access to material resources makes manufacturing questionable in their minds.

      There is a certain logic to sending manufacturing to “lower cost” destinations, however, it is short sighted and driven predominantly by the need to deliver the quarterly results. You give up a lot of your independence when you depend on a global economy and when not everyone plays by the rules, your exposure increases.

    7. Jonathan Says:

      One overlooked factor is the drive to divest businesses that make hardware (manufacturing) is the need to provide investors with a smooth rate of return.

      The preference by investors for smooth rates of return is a classic decisionmaking bias and lies behind many investing misjudgments. Generally, to get a high ROR you need to accept some volatility of returns. You can diversify your investments among uncorrelated asset classes but there will still be volatility of returns. Many people can’t stomach the swings, and either look for sure things that have low ROR, or seek investments that achieve apparently stable high ROR but really are a mix of long, nonvolatile, moderately profitable periods, and occasional extreme losses that get rationalized away. This will probably always be the way things are because human nature doesn’t change. The alternatives are to 1) accept low rates of return in exchange for safety (money in the bank), 2) learn to learn to live with volatile returns, 3) learn to exploit outlier volatility (trend traders, option buyers), or 4) learn to profit from other people’s weaknesses by selling them investments that are too good to be true (Madoff) or educating them (Taleb).