Each day raises fresh questions about why Wall Street's best and brightest failed to anticipate one of history's nastiest financial crises and the worst economic downturn in decades, even though ample warning signs were there for all to see.
Even Britain's Queen Elizabeth II was troubled enough to ask why "no one spotted the credit crunch" or saw "a world financial crisis looming," according to a report from Agence France Presse. [Clearly, she and her advisors had not read Financial Armageddon or else she might have rephrased her questions.]
Still, I would be remiss if I failed to point out that some of those who don't have knowledge of finance and economic history did sense that something was seriously wrong.
In fact, today's Wall Street Journal features a fascinating report, "A Snowblower Maker Braces for Slump's Blizzard of Woe," about one astute businessman who saw trouble looming a while back and the steps he took to prepare for the onslaught.
BRILLION, Wis. -- Daniel Ariens's biggest concern right now isn't the financial crisis. It's getting his hands on snowblower engines.
The chief executive of Ariens Co., a maker of mowers and snowblowers, got a curt email last month from the company that for decades supplied engines for his line of snow machines, telling him they're halting production in 60 days -- essentially cutting off motors at the peak of his season. A host of problems hobbled that supplier, including the loss of a huge customer and problems obtaining crucial parts, such as starters, from the engine maker's own supply base.
"I'm quite sure we have other suppliers that won't make it through this cycle," says the 50-year-old Mr. Ariens.
This highlights a grim reality now dawning across the U.S. economy. Deep problems existed long before the meltdown on Wall Street and won't be fixed by the government's injection of taxpayer money into the nation's banks. Even if the credit crunch eases, as now appears to be happening, companies such as Ariens are bracing for a painful recession and taking steps to survive it.
Car sales and industrial production have plunged, consumer confidence has wilted, and companies have accelerated layoffs. Manufacturing, particularly autos and machinery, is leading the way down. Exports can't be expected to cushion the impact because the slowdown is global.
Ariens, which operates two large factories in this tiny Wisconsin town, saw signs of softening more than a year ago. The company shifted into austerity mode and is now hunkering down. Ariens is reviewing every supplier, both for price and financial viability. It is examining each step of the production process for unnecessary movement, in an effort to boost efficiency and reduce costs. It is designing products with nervous and stingier consumers in mind.
"There's no way we could have predicted a credit crunch," says Mr. Ariens. "We're not that smart, but we could see gathering stress in the marketplace."
The 75-year-old company -- founded in the Depression as a maker of tillers for farms by Mr. Ariens's great-grandfather -- has repeated this drill often, having been through several recessions. The measures taken are different each time around, since operations and markets evolve. But the essence is the same: finding ways to tweak production and squeeze efficiency from workers, suppliers and delivery networks.
Other manufacturers, likewise seasoned in surviving cycles, are embarking on the same lean path. "Recessions push companies to make the hard decisions," says Michael J. Swanson, senior economist at Wells Fargo. "Maybe they have assets in the wrong place, doing the wrong things. But when cash flow stops, it's do or die -- and they usually do what's necessary to survive and are better for it."
He recently visited a trailer factory, for instance, that revamped its assembly lines in the wake of the last recession to be far more flexible and has recently used that capability -- switching deftly from producing trailers used by home builders, where the market collapsed, to making trailers designed for still-strong agricultural users.
Cutting Inventories
Joseph Carson, U.S. economist at investment-management firm AllianceBernstein, says the clearest sign companies have been moving ahead of the curve is visible in what they've been doing with inventories, or stocks of goods in the production and distribution pipelines. "Never before has liquidation of inventory occurred so far in advance of a drop in demand," he says. Mr. Carson notes businesses have reduced inventories in six out of the past seven quarters, something that usually only occurs once a recession has begun.
Another feature of this cycle, says Mr. Carson, is that companies generally didn't splurge on capital investment as they did during previous upswings. By not overbuilding, companies are less exposed.
Mr. Ariens says he saw the first signs of trouble over a year ago, in the wake of the housing downturn. Ariens sells its branded mowers and snowblowers through dealers and in big retailers such as Home Depot. The company caters to homeowners as well as commercial companies that use mowers and snowblowers to serve what until recently were fast-growing American suburbs. Lawn-mower sales in particular tend to fall when people stop buying new homes. Ariens, a privately held company, doesn't disclose sales and earnings figures.
Stresses were visible elsewhere as well. His more than 350 suppliers were being hammered by high steel and oil costs and began asking for their cash sooner. Many of them had big auto suppliers as customers, too. That meant that as car sales plummeted, a broad base of their suppliers felt squeezed.
Advance Payment
In March, a small metal fabricator informed Ariens that it had run out of cash and, for a time, would ship parts only if Ariens paid in advance. Two months later, another supplier, a maker of plastic parts used in more than half their products, asked the company to make payments 30 days after parts were delivered, rather than the traditional 60 days.
"We've just seen more and more of this filtering through the system over time: Our suppliers being pressured by their suppliers to pay more quickly, so they're turning to us," says Steve Ditter, an Ariens sourcing manager.
Now Mr. Ditter and other company buyers are pressing for better deals from their suppliers and reviewing surcharges that can no longer be justified in an era of falling oil and commodity prices. Surcharges on metal castings have plunged nearly 30% in the past two months alone, for instance. Steel prices are also drifting down, and steel suppliers are quietly reverting to contracts with Ariens that set prices quarterly, rather than monthly. Longer-term contracts help Ariens by giving it more ability to anticipate price changes.
Facing so much turmoil among suppliers, Mr. Ariens 18 months ago plucked one of his top managers out of his factory and put him in charge of reviewing each of them. In easier times, he would figure that most suppliers could borrow more money if they got in trouble. He wasn't worried about them vanishing. Now he is.
Robert Bradford, the man spearheading the review of suppliers, keeps a three-ring binder on his desk, divided into sections devoted to major categories such as steel, plastics and tires. "There's no way to work on all of this," he says, flipping through the pages. "So we break them into bite-sized pieces."
His most pressing issue right now is snowblower engines. Ariens started making snowblowers in 1960 and had always bought engines from Tecumseh Products Co. of Ann Arbor, Mich. In recent years, however, Tecumseh began having problems. Last year, it sold the factory that makes the engines to private-equity group Platinum Equity. Mr. Ariens says he recently received an email from the engine maker saying it would soon cease production.
A person familiar with the situation says the engine maker faced a host of problems that undermined its profitability and made it necessary to close the plant, including losing another customer that represented 40% of its business. Platinum didn't return calls seeking comment.
In order to cut its dependence on a single supplier, Ariens has been testing alternative engines for several years. It has been rushing to line up two alternative suppliers that Mr. Ariens says will be able to step into the breach.
Tom Runiewicz, an industrial economist at IHS Global Insight, an economic forecasting and consulting firm based in Lexington, Mass., says companies have always weighed the financial viability of their suppliers. "But, even compared to just six months ago, that factor has shot to the top of the list of concerns," he says.
Ariens is also taking a tough look at what happens on its own factory floor as it searches for ways to conserve cash and keep business profitable through the downturn. The company long ago made many sweeping changes to how it organizes its assembly operations, such as moving machines once scattered around the factory floor into tight clusters focused on making single products. This cuts the amount of time and movement needed to make each machine, shaving costs and reducing the chance of parts getting damaged or misplaced.
Every two weeks, small groups of workers are assembled and assigned to tackle a new set of problems. One group, for instance, was recently assigned to figure out how to reduce the number of steps needed to collect the parts for an edging machine. Mr. Ariens says he would be pushing for these incremental changes even if business was booming. However it's even more crucial now to cut costs, he says.
The company is also looking at how to cut inventories and transportation costs. When fuel prices skyrocketed earlier this year, Ariens began ordering parts in larger batches simply to fill trucks, the emphasis then being on getting more bang for each transportation buck. They're now reversing that.
"We have to manage for cash," says Mr. Ariens, which means minimizing the amount of goods sitting around that aren't generating revenue or profit.
The ultimate test for any company, however, occurs in the marketplace. Ariens is getting ready to introduce a lower-priced line of riding mowers, in response to consumers who are growing less willing to spend freely. The new machines, which will hit stores in the spring, are expected to sell for between $1,999 and $4,699, which is roughly $250 to $750 less than Ariens's comparable existing models.
To help bankroll this initiative, including the cost of developing the new mowers and marketing them, Mr. Ariens needed to expand his credit line 30% to $56 million. That's why he spent a Friday afternoon last month leading a dozen bankers through his two factories. His lead bank, Chicago-based Private Bank, is syndicating the loan, and other bankers were invited to Brillion, to see his operation before deciding whether to participate.
The group was far larger than normal, says Mr. Ariens, who says he can't remember ever having that many bankers at his plant at one time. The reason for the crowd is directly linked to the credit crisis: The bankers had indicated they might be interested in the overall loan, but want a smaller stake in it than they'd usually take. So it takes more of them to come up with the total amount Ariens needs.
It didn't help that their visit happened to be Oct. 10, the same day that the stock market swung wildly, registering its first 1,000-point daily swing ever, plunging almost 700 points after the opening bell and later rallying more than 300 late in the session to end down 128 points. Many of the bankers checked their BlackBerrys repeatedly as they strolled past the giant metal presses on the factory floor behind Mr. Ariens.
Bernie Lacayo, the managing director at Private Bank who put together the syndication, glanced around the group and said: "There are a lot of these people who have done good business with this company over many years."
Loan Covenants
The credit-line extension was approved last week. Mr. Ariens says he's satisfied with the terms, though the interest rate is higher than he would have preferred and the loan carries certain covenants, including one that says he must confer with the banks if he decides to use any of the money for an acquisition.
Orders for lawn mowers will be finalized by December. "If those figures are low, we'll resize immediately,'' laying off temporary workers, he says. "The longer we wait, the more trouble we have."
That's another measure the company has adopted to keep costs in line. To minimize layoffs, it uses temporary workers for peak seasons and simplified the production process so that many basic jobs don't require massive training. Ariens now employs about 1,250 people, including temporary workers.
The company operates on a fiscal year that begins July 1, and its sales were actually ahead of expectations in the first quarter ending Sept. 30, Mr. Ariens says. In the next breath, he adds: "What worries me is our second quarter."
I've got to read the rest of this write up, but must say, many people DID see it coming. They just couldn't claim the exact date. I mean hell, anyone that can do simple math can sit down and figure out that this would happen. Again though, it's just no one really could claim a date or convince the power holders that it was truly going to happen. Politicians are good at ignoring the prospect of bad things, especially when things seem fine.
Posted by: Adron | November 07, 2008 at 11:15 PM
The real issue is what happens going forward. The story is silent as to the impact on Ariens' order book, but with auto makers down 30%-50%, I'd be very surprised if people are rushing out to buy new snowblowers and lawnmowers. Let's sale sales are down 30%. That means layoffs are coming to rural Wisconsin. Some of these people will foreclose, and so it goes.
This is a deflationary spiral. It's ugly. The worst possible thing is that the government policy of promoting more lending, more borrowing won't fix the problem. The unwind has to occur, whether our leaders acknowledge that basic reality or not.
Posted by: Guanacaste | November 08, 2008 at 02:11 PM
"Even Britain's Queen Elizabeth II was troubled enough to ask why "no one spotted the credit crunch" or saw "a world financial crisis looming,"
Excuse me, HRH Elizabeth ought to be arrested, tried and hung from the topsail halyard of a pirate ship as she is the top pirate. HRH the official head of state of Cayman Islands, Cook Islands, Channel Islands, Vanuatu, Man of Isle.... The historic fact is that some of the world’s major tax haven jurisdictions for decades have been England’s Crown dependencies. Islands remaining under Her Majesty’s dominion, not the United Kingdom but belong to Elizabeth II. The British parliament lacks power to enact laws for these islands. Technically, they are not considered a part of the United Kingdom. Islands that provide a 'safe' haven for people who wish to avoid paying their fair share in taxes to the countries they reside in.
Off with her head.
Posted by: rockpaperscizzors | November 08, 2008 at 06:00 PM