Small Business Blog from Atlantic Canada

I am "CA" Atreya (PMP, MBA), the author of this blog. I help businesses in Atlantic Canada achieve their BHAG successfully. You may subscribe to this blog using a feed reader (RSS).

Here’s a headline that grabbed my attention recently: “ArcelorMittal faces worker revolt on both sides of the Atlantic”.

“An estimated 1,000 workers, mostly from Belgium and France, had gathered to protest the steel maker’s decision to shut down several blast furnaces in Western Europe. Only nine of its 25 furnaces on the continent are operating due to reduce demand…In Canada, Daniel Roy wants the company to resume production of the site’s idled iron reduction plant and slab casting unit and is pushing Jean Charest’s Liberal government in Quebec and the federal government to get involved…”

Here is what rationality and business sense suggests:

1. Demand for steel is down. That means the company could manufacture more steel than it can sell.
2. If the company continues to manufacture at its capacity, it will increase its inventory of unsold goods; i.e. build up inventory. Where will the excess inventory go?
3. In order to maintain some level of cash flow, it will need to clear its inventory. In order to do this, it will have to drop prices to entice customers to buy more. They may have to drop prices lower than the cost it takes to produce them.
4. They could potentially get into a negative cash flow and ask for a “bailout” then to keep the jobs. (sounds familiar?)

Let’s put it another way: If working regular shifts produces more steel than the company can sell, it will try to curtail production to match its sales. Isn’t it the rational thing to do? If you were an entrepreneur and you produce more than you can sell, what’s that going to do to your business – your cash flow? Cutting down production means either reduced hours for all or layoffs for some.

So if we assume human beings are rational, how then, can they ask the business to maintain or increase production levels when demand is down substantially?

It all comes down to maintaining the way of life, isn’t it? No change! I kept thinking about the protester’s way of life. How did they manage their finances when times were good? I came up with a few scenarios:

Scenario 1

1. In better times I leveraged heavily to enjoy a good life. I bought into most of the wants in life. I refinanced my house as its value went up. Now the value of my mortgage is greater than the selling price of the house.
2. In order to support my lifestyle, all or most of my income used to go towards the monthly payments. Now that I have lower income (if hours are reduced) or no income (if laid off), how then will I continue to make those payments?
3. Now I constantly think at sustaining my way of life. Who do I blame for this mess? How do I take my anger out on them?

Scenario 2

1. In better times, I prudently leveraged. I put aside some of my income for the proverbial rainy day.
2. While I enjoyed a decent standard of living, I knew that I could not spend more than I earned. So I reigned in the wants.
3. Most of my debt is working for me – either helping me reduce my taxes or helping me earn income or both.
4. Now that I have lower income (if hours are reduced) or no income (if laid off), I can draw down on my “rainy day” funds. Alternately, if push came to shove I can liquidate my investments as a worst case scenario.
5. Now I constantly think at sustaining my way of life. Who do I blame for this mess? How do I take my anger out on them?

It’s a very simplistic model, But I think most people would fall under a combination of the above two scenarios. The degree, however, would vary.

From which of the above categories do you think the protester’s belonged? If they were indeed workers and not some hired thugs, I am thinking the former or some variation thereof. So here are some questions I would like to pose to those protesters:

1. A job – a career – has to be earned. It is not a right. So why do you think an organization should continue to provide you with the jobs?
2. If you were working in a small business and it retrenches, would you have similarly destroyed property in protest? So just because the business is big, why do you think you have the right to destroy property?
3. Where do you think the business is going to make money to provide for the salary for everyone in bad times?

I can almost hear, “If business is so bad, then why are CEO’s salaries not reduced? Why do they get to retain their million dollar bonuses?” to the above questions. One of my professors in business school used to say, “The price of an asset is what the buyer is willing to pay for and what the seller is willing to accept.” If the asset we are talking about is a job, then the buyer is the company and the seller is the individual. In this case the buyer and seller had negotiated a deal and they need to stick by it.

Don’t you see the double standards? A salary (and bonus) deal should be renegotiated downwards based on current economic times. But a former business intent of increasing capacity or opening new jobs cannot be renegotiated downwards based on current economic times. Workers and unions want businesses to honor an intent of expanding capacity (to provide new jobs supposedly) in bad times; they will protest and damage property. But they will not hear about leaving a CEO’s salary and bonus in place. They’ll probably protest to lower that too.

We are living in one of the most unsettling periods in human history. Businesses are being nationalized. William Gale, an economist at the Brookings Institute, along with Fed Chairman Ben Bernanke suggests that while the recession might end by the end of the year, sustainable recovery may take a while. Perhaps the greatest economic lesson we will learn is that we cannot spend our way out of a recession. People cannot spend what they do not have. And this goes for governments too. Speaking of people, when they find themselves on path to poverty losing everything they have worked for all their lives, I guess rationality goes out of the window.

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For the news article in question: http://www.financialpost.com/story.html?id=1588526


Other articles filed under Economics categories.