BUSINESS IS VERY SIMPLE. If the money you collect from your customers exceeds the money you spend delivering the product and service, it works. If the money from customers falls below the costs you are in trouble. Borrowing to pay the losses cannot solve the problem. It makes it worse, as you have to pay the interest as well. You end up losing more jobs, as BL proved in the 1970s.
Good Boards of Directors saw this downturn coming months ago and told their CEOs to cut costs to get ready for it. Good CEOs did so. Bad Boards looked firmly in the rear mirror, accepted the authorities view, and did not ask their CEOs to take evasive action. Bad CEOs failed to alert their Boards, and carried on spending as if there was no recession. They deserve to lose their jobs.
Companies in automotive manufacture have one major cost – bought in materials and components. When you hit a downturn it is vital to cut back strongly on the amount of raw material and component you are buying. You need to cut back by more than the anticipated drop in your sales, as you need less stock to maintain lower production. In this downturn there is the added bonus that the price of the raw materials has collapsed at the same time as you need less of them, so if your buying department is any good there will be a huge decrease in the cash cost of your supplies.
The cost of labour is much smaller than the cost of parts and materials. Nonetheless you will need to take some action to curb it. The first thing to do is to stop all recruiting. Next, you ask all temps and short term contract labour to leave. Third, you offer voluntary redundancy packages to those who might wish to go. If you still need to cut costs more because your sales have collapsed, then you need to discuss with the workforce whether they would prefer to all go onto shorter time to keep the jobs, or whether they want to sustain the incomes of the many at the price of a compulsory redundancy programme for a minority. No sensible person likes doing all this, but one thing keeps you going when you have to do it – the knowledge that if you do not shed some jobs you could end up presiding over the loss of all the jobs if the business goes bust.
You may need bank bridging finance if you were slow to make the adjustments, but that can be no substitute for controlling the losses. You cannot ask future customers to pay more for the product to pay for the subsidy you gave to current customers. They will not be prepared to do that. State loans can be an excuse to put off the necessary adjustment. They are also a massive diversion of top management time from tackling the reality that costs have to be slashed to survive in dreadful conditions like the present.