What Ford Can Teach Chinese Companies About Managing Their New Normal

Author

Bryce Hoffman, Contributor

July 29, 2015

There has been a lot of talk lately about China’s “new normal,” and nowhere more so than in China itself.

I saw — and heard — that firsthand during the two weeks I spent in Shanghai earlier this month, working with executives from western multinationals and some of the largest Chinese corporations.

The phrase is on everybody’s lips, and the anxiety it invokes is as thick as the Shanghai smog, particularly as the Chinese stock market is finally beginning to reflect the changes in the macro economy. With the Chinese composites in freefall, that concern is understandable. But it need not translate into despair.

My advice to Chinese business leaders was to use this new normal as a catalyst to change their companies for the better.

A number of American corporations did just that during the Great Recession, particularly in the hard-hit manufacturing sector. And many of them are far stronger today as a result of the sweeping changes they made against the backdrop of that economic crisis.

Take Ford Motor Co., for example.

Though Ford, along with General Motors and Chrysler, had already wrested major concession from the United Auto Workers in 2007, the Dearborn automaker was able to get the union back to the negotiating table at the beginning of 2009, barely a year after the last contract was ratified.

Reopening contracts had been unheard of in Detroit, and many labor experts doubted it could be done, even with the specter of bankruptcy hanging over the Detroit Three.

But Ford proved them wrong.

It not only persuaded the union to reopen the contract, but also went on to negotiate a package of new concessions that saved the company approximately $500 million a year and effectively closed Ford’s long-standing labor cost gap with its foreign competitors. In addition, the UAW agreed to allow Ford to cover half its outstanding retiree healthcare obligations with stock instead of cash, giving the automaker an extra $3.7 billion.

Ford used that money — and the leverage provided the economic crisis and the collapse of its crosstown rivals — to buy back its debt.

In March of 2009, as union members were voting to ratify the concessions their leaders had agreed to, Ford began wresting equally important concessions from its bondholders. By April, the company had convinced them to retire almost $10 billion in debt for $2.4 billion in cash and 468 million newly issued shares of stock.

Wall Street was stunned by the take rate.

Ford emerged from the Great Recession as a far stronger company than it had been before the housing bubble burst and Lehman collapsed. It went on to post record profits, despite being the only American automaker not to take a government bailout.

That’s the sort of magic that’s possible when you use economic crises to your advantage.

Chinese companies can — and should — take a page from Ford’s playbook and use this new normal to become more efficient, more productive and more sustainably profitable.

When labor was cheap and the Chinese economy was boiling at double-digit growth rates, it was easy to expand without giving much thought to efficiency or productivity. Now that the Chinese economy is coming back down to Earth, Chinese companies cannot afford to ignore the rules of business any more than they can defy the laws of gravity.

Some manufacturers already have begun the painful process of downsizing. But to really take advantage of the new normal, Chinese companies need to do more than just jettison workers. They need to rethink the way they do business and take a hard look at their balance sheets.

www.brycehoffman.com

This article was written by Bryce Hoffman from Forbes and was legally licensed through the NewsCred publisher network.


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