Viewed 838 times | Published on 2019-09-04 16:36:35
This article is about something more than the companies listed in the title, or my birthplace, Turin.
It is actually about using recent news to discuss about how our 1950s-1960s organizational structures that here and there keep returning despite all the "lean" brouhaha, are obsolete and could actually benefit by the impact of changes within the interactions between citizens, customers, companies, and States/local authorities.
It isn't rocket science: it is just a matter of thinking at the wider picture and seizing each opportunity to transform without losing what maybe took a century or more to develop.
Yes, it is apparently easier to rebuild everything from scratch, and sometimes is also the best way to create something new out of a merger or demerger of pre-existing organizations, but you have to resist the temptation- and observe before acting.
As announced on August 31st on an Italian newspaper, yesterday CNH presented to analysts the new plans, including about the spin-off that was already announced in early 2019 by the former CEO of CNH Industrial, Richard Tobin.
Disclosure 1: I worked in the past with most of the companies that I will discuss in this article (in Turin, you cannot talk about automotive mobility smart city without talking about FIAT i.e. FCA, CNH and Iveco, and Magneti Marelli plus their leading shareholder, Exor).
1. never worked within the group at the level (GEC) where the decisions discussed here were taken
2. worked last time with companies belonging to the group before said decisions were taken
3. last but not least: was never an employee of any company within the group, just a consultant on various assignments for various suppliers (from software developer in the 1980s, facilitator in the 1990s, PM/BA in the early 2000s, and PMO in the 2010s).
If you want to check the experience, have a look at the manufacturing CV.
Disclosure 2: as I wrote few times on my Facebook profile for my foreign friends and connections, I think that one of the issues in Italy is that we are too inclined to "hedging"- at all levels. And in all activities. All the time.
Most Italians follow the balance of powers shifts as if we were a country of Cremlinologists during the Cold War.
Hence, our productivity suffers from hedging more than from inability, lack of resources, or lack of skills: I remember both IT and business projects when choices were never final, so, to "hedge", teams whenever an option was selected, just in case, kept working silently on all the others.
And, quite often, they were right, as discarded options returned- and somebody had to make up a logical reason for the resurgence (or become the scapegoat to justify that resurgence).
As I wrote in the past while discussing about the local business environment vs. other countries, a typical side-effect is that a "gated" systems of contracting is really a iffy proposition, in Italy.
Personally, in the past negotiated contracts the traditional way: quid pro quo (i.e. deliver results in exchange of monetary and non-monetary value, more about this in a future publication), risk-sharing vs. value delivering, acceptance of what was delivered, seeding future further collaboration.
So, it is not something impossible in Italy, to behave as in any ordinary country: simply, leaving ambiguity in place is the custom.
And not just for bribing purposes, despite what some foreigners think.
Ambiguity, in Italy, is a form of "business continuity".
In Italy, often no agreement is final, and more than once had to revise contracts "cast in stone" that yes, were legally binding and formally correct, but were neither sustainable nor anywhere close to "complete".
I know that a "perfect" contract does not exist (that's what those clauses about how to manage differences, variations, etc stand for).
Often, even if you were so inclined to prepare a perfect contract, in most cases would require perfect information that can be obtained only... after you start working on the contract (this is a typical case for organizational change, or modelling decision-making processes that used to be within the head of few managers).
But from that, to contracts that invite either a form of indentured servitude (all the risk on the supplier) or litigation (the two sides never reconciled their differences, and created a contract that looks like a minefield without a map to go through it), there is a wide range of opportunities to make more sensible choices.
The upside is that now in Italy both on the political side and the business side some relevant voices are starting to say we need more people in Italy "talking straight" (to quote a Lee Jacocca book that I read few decades ago, but the context was wildly different): but I will believe it when I will see it.
The only senior manager talking straight that we had recently was Sergio Marchionne- he was much reviled at the beginning, and then turned into a saint after his premature dead. Typically Italian attitude.
When hedging piles up on hedging, it ends up as with the derivatives piling up a decade ago: in the end, nobody has a perception of the real value anymore.
If you prefer a movie example, is like in that Woody Allen movie, "Shadows and Fog"
Personally, I have been a negotiator in business, but before that in politics as a kid, liaising with the youth organizations of the main political parties when I was a late teenager, and also in sales.
Now, there are times when you have to be "diplomatic", but there are often differences on what is the acceptable result of a negotiation in politics or in business.
And some negotiators, in business as well as in politics, are unfortunately so much in love with their manipulative side that end up as some described negotiating with Tony Blair as a mediator: both parties left the room assuming that he agreed with them.
As I said the first time in 1990 in Paris to a sales colleague advocating a "big bang" offer to a customer: if the ground is ready for a first step, go for that, and then expand trust and "territory" (i.e. sales).
In Italy, notably in Turin, talking straight is considered naive and impolite: but that attitude delivered a slow decline despite lavish funding of investments, new initiatives, etc.
If you never want to displease anyone, you want to be on stage, not in business or politics (I mean real politics, delivering change, not just becoming a career politician).
It is akin to continue on a project when you already understood that you might have wasted 20% of the budget, but wasting the remaining 80% will not improve.
Anyway, in a face-saving nation where failure is a sin, we routinely toss that additional 80% into the cauldron hoping for a miracle, and even expand the budget so that "something" is done.
It is not by chance that we have e.g. an highway that has been inaugurated more than once, and that hospitals and other public facilities that were completed, provided with machinery, but never used.
But this post is about business, not about politics. As I wrote in the past, I think that business has increasingly a political value, i.e. should be integrated within the overall social ecosystem, and anyway it is something that was already known at beginning of the XX century (or even before: look at the East India Company history).
Therefore, while ordinary Italian "hedging" people might say that discussing some elements is impolite, naive, or something else...
...frankly, in business I rather remove ambiguity from the table sooner than later- I saw in Italy and abroad what happens when negotiations are based on a pre-existing balance of power, and then, when the winning side "overwins", alters the balance of power through neglect, so much that the loser is the real winner, in the long term.
Now, back to the article.
In negotiations, the opening salvos might be just talking, what a colleague long ago called having not even "prospects" but "suspects".
Then, you qualify: I know that some negotiators like negotiating for the negotiating sake, but if you know that your "suspect" has neither the resources nor the need for your products and services, it is customary maybe in Business-to-Consumer to sell anyway (that's what consumer credit is for), but for companies, bar e.g. "shelfware" in business software (projects or packages paid but never used), the cost of acquisition of a customer often implies that you want repeat business.
And manipulating into buying what is neither useful nor needed isn't really the best way to build a long-term Business-to-Business relationship, and actually could be the best way to help develop the business of your competitors.
So, also in this article, let's see first the context, then the ideas that I already shared in Turin.
1. The context
My birthplace, Turin, was once called a "company town"- but that was an understatement.
I discussed in the past how all the town revolved around what was, at the time, a major employer in many locations in Italy, not just in Turin.
So much that its suppliers e.g. in finance and logistics ended up "seeding" their growth on being a top supplier of the FIAT group.
In Italy, many make the mistake to assume that the group was just about cars- it was about that and many more things, as it was customary until few decades ago.
But limiting ourselves to the automotive side, the change over the last few decades has been nothing short of dramatic- and this before the early 2000s change crisis at FIAT that opened the door for a change of approach with the arrival of Sergio Marchionne (his approach would have never been accepted before).
Long ago, the overall employment in Turin and around Turin related to the group was assessed by a former CEO of a major supplier at around direct 200,000 (not just FIAT, also others directly automotive), 700,000 with all the supply chain (I do not know if including all the services, e.g. employees do need to shop somewhere- and that should be counted as an element of employment generated by a major employer moving into town).
This Italian article shows how those figures changed over the last decade, with remarks on the number of cars produced in Italy: "i numeri raccolti attraverso interviste a capi personale, manager aziendali e delegati sindacali, incrociati con quelli estrapolati da Istat, Anfia, Acea ed Eurostat dicono che in due decenni, dal 1999 al 2018, la produzione di auto in Italia si è pressoché dimezzata, passando dai 10,2 milioni del periodo compreso tra il 1999 e il 2008, ai 5,6 mln nel periodo 2009-2018. Nello stesso periodo i posti di lavoro sono calati del 41% e le ore lavorate del 35%. In particolare, per quanto riguarda l'area torinese, nel 2006 le auto prodotte da Fca sono state 218 mila con 6 modelli contro le 43 mila del 2018 con 3 modelli e al 31 agosto di quest'anno le vetture prodotte sono state poco più di 11 mila."
I will not translate the information: just look at the numbers, except, comparing 1999-2008 vs 2009-2018: 41% less employements, 35% less hours worked, and from 218k cars with six models in 2006, to 43k with three models in 2018.
Now, this is a really short summary- let's see how the town lived that transition.
2. The transition
I wrote in previous articles on Turin since at least 2008 (some of them offline, those from 2010-2014 are available in this blog) how the town tried, sometimes with some chaotic choices.
Turin often calls itself "the European Detroit", but if you read about how Detroit lived through the retrenchment of the automotive industry, and compare it with Turin, there is a major difference.
Talking business, I am referring to the side-effects of the 1990 privatization law that endowed banking foundations.
A recent article reports over 10bln EUR as the current assets of banking foundations in Piedmont (at a recent conference I heard a higher figure, over 20, probably talking about impacts through leveraging etc).
In Turin, there were two major banks, Istituto Bancario San Paolo (now part of Intesa Sanpaolo) and Cassa di Risparmio di Torino, whose privatization added resources to two foundations, Compagnia di San Paolo and Fondazione CRT.
Reading about Detroit and comparing with Turin, the first element is how the resources of those two foundations (and others- it is not just about finance, it is also about human resources) made a difference- but also supported trying to reposition the town not toward one line of business, but multiple alternative lines, sometimes with conflicting demands and at cross-purposes.
Sometimes, having resources to avoid making choices is addictive- and risky.
Last year, the two main foundations stated repeatedly that the "footing the bill" approach was to be reconsidered: a much-overdue removal of that "opium for the spending gentrified masses" (local élites state that their personal spending is "understatement", meaning "stingy", an attitude that disappears when they demand public funding for yet another think tank, or steering committee, or association, or initiative).
3. Retrenching automotive - part 1
You can read online few articles that I posted in in June 2019, commenting about the evolutions of FCA.
Despite the downsizing of production, it will take a long time to balance local culture with local reality- and it isn't something for the faint hearted: we Italians generate complexity even when unneeded, but dislike coping with it, notably when requires long-term efforts.
My main criticism, now as in June, is the same, as I shared again yesterday in Turin: if you make a merger focused on future sustainability and scaling up, then the value of each partner should not be based only on current stockmarket value.
A manipulative negotiation could deliver a merger, but it would create issues down the road, while any merger within the automotive industry right now wouldn't be as one decades ago: it would need to be a cooperative and highly political effort.
The title of this section is "retrenching automotive"- and some in Turin would think that I am referring only to FCA.
But if you read my previous articles or met me in Turin, Milan, and Frankfurt over the last few years, you know that I am actually talking about an industry, not a company.
While the Italian article quoted above reported data from a study from trades unions and from the manufacturers' association, it is omitting a point of reference.
Look around the world: the 1950s "American Dream" model of at least a couple of cars per family as a target, eventually (in Europe) with a smaller city car (or two) to be used on daily basis and larger car, has been steadily challenged by urbanization and new social models.
It isn't just millennials: in Italy, when I was a kid (1970s) everybody looked forward to turn 14 or 15 to have their parents buy a "motorino" (moped), then 18 to have a car and a driving license.
Nowadays, I know many Italians younger than me living in towns, and they looked forward only to have a driving license- but would never consider buying a car.
They rent one with their smartphone app when they need, and maybe, if they are over, say, 35, have a city car that they use occasionally.
All around the world, two trends are already impacting the automotive industry: most people focus just on the electrification (due to the potentially smaller number of parts in fully electrical cars vs. those using a combustion engine), but there is also the concept of use and ownership.
So, two massive cultural changes within the industry.
4. Flat vs. hierarchical
A cultural change in a company whose size is above the "extended family size" (approx. a couple of hundred of people or less) implies changing many "invisible processes" and communication channels, business practices, and motivational tools (call it the "informal organizational culture and structure").
It isn't just an Italian issue: when you design an organization, you are working on assumptions and aims, but then is reality to adjust how the organization works, before a formal adjustment of the organization tries to align it with reality.
Yes, since the 1990s we have an obsession for "lean", "flatter" organizations.
But organizational structure defines and is defined by corporate culture.
In a "flatter" organization, "virtual restructuring" can be faster and continuous: cope with and anticipate trends faster.
Frankly, I am agnostic on the number of layers.
Flatter is easier and apparently cheaper (at least on the payroll), but a flatter organization delivers benefits only if the corporate culture allows it.
If each failure or reassessment is a chance for a witch-hunt or search for a scapegoats, stick with a multi-layer organization, it will be easier to compartmentalize accountability.
A flatter organization implies delegation of trust, not just of authority, and could imply a higher degree of "soft skills", and more "bridging" with less specialization: it isn't just a matter of removing few layers.
Now, this is wasn't a digression, but a clarification.
Whenever a merger occurs, the first instinct is for "quick wins" in terms of costs to justify ex-post a "political" decision, the merger itself.
De-layering the organization is also a way to justify rebalancing power.
In any merger, it is normal to have managers from both sides, with their own "succession line", vying for power: I saw it in few countries, so it isn't just Italy.
Albeit, in a relational economy, it is objectively more difficult to switch roles just on merit: you have to rely on connections, and in a merger it depends not just on who is the buyer, but also on the cohesion level within the team- it isn't unusual for the purchased party to gradually increase its power on the purchasing one.
Merging companies from different cultures can be difficult, but, again, the cohesion level of a more formal culture (as it is relatively easier to reassign positions, powers, etc), when meeting with a highly relational culture that is equally cohesive but through informal channels, can give some headaches.
Yes, it is a clash of two corporate politics approaches.
5. Retrenching automotive - part 2
The retrenching of the automotive industry will imply a redesign not just of some processes, but also of whole supply chains- in Europe, Brexit will add a further element, as suddenly timelines for delivery will have to either contemplate delays (e.g. inspections for compliance, etc), or additional costs either side of the UK-Continent.
The latter requires a bit of explanation.
While living in Brussels, I was once in a while in The Netherlands, where Rotterdam is located, and I wondered how, post-9/11, containers' security was dealt with (yes, also to avoid scenarios such as that in a movie based on a Tom Clancy book).
Our security approach to counterterrorism on hijackers before 9/11 was focused on something akin to 1970s routines: hijack, negotiate, etc.
After 9/11, most of the measures adopted were the same that before only El Al adopted, as you never know when the rituals of negotiation could become second fiddle to other political aims.
I remember reading two items.
The first one was a study from the insurance industry stating that, as terrorist groups financed themselves with trade, they weren't interested in disrupting logistics.
The second one said that actually US Customs etc were planning to start checking containers not just by sampling some, but each one of them, and, to avoid an impossible logistical situation and delays, simply were considering to ask that containers headed for the USA were processed for inspection by US officers e.g. in Rotterdam.
After Brexit, at additional costs, either in UK or on the Continent there could be such a check for compliance, as recent decisions by Boris Johnson government imply that it cannot be assumed that whatever is produced in UK is still compliant with EU regulations.
Now, if you consider that anyway supply chains would have to be restructured after any merger (at least to renegotiate supply agreements with shared suppliers, and potentially also to prune the number of suppliers), Brexit could be a testing ground for other changes.
Such as the electrification, streamlining of production and research sites, platforms, and overall integration in supply chain and within the new shape of markets.
And revision of other items such as working hours, roles, location of work, etc.
But I already wrote about the issues related to restructuring the automotive industry, e.g. getting used to working hours spread across more, better qualified, and probably routinely retrained people.
And, incidentally, getting all the workforce used to spend their career in half a dozen companies or more, not just one company, and maybe even in more than one industry.
As automation, extending from production to administrative processes, will probably bring about an harmonization of processes and activities across industries to a set of common element, plus industry-specific layers, as it happened since the 1990s with ERPs and other software platforms (e.g. also databases, business intelligence, and other business-oriented systems).
6. Merging - then and in the future
At least in Europe, we still have groups whose companies stretch from mines producing raw material, to products that use those raw materials.
The old FIAT group was in more industries than you can imagine- from newspapers to cars (no, not butter- as far as I know).
Having many underutilized brands based on past glories represents potential value- but would require investments, and investments would make sense if there are expected sales.
But sales imply that customers have expectations, as they do expect products to be representative of the value that they would expect from the brand: how do you do if your brand has been "dormant" for a while?
So, just convincing even brand fans that the next product is up to their expectation requires something more than just some PR.
I read only from newspapers about the merger of between Chrysler and FIAT Auto, and it was probably an interesting case in corporate culture change.
Before purchasing Chrysler, Sergio Marchionne had actually de-structured the FIAT culture, flattening the hierarchical structure.
This probably helped to enable the merger with Chrysler, by undermining the cohesiveness of the relational corporate culture and its associated "tribal" approach to business.
Italy is a "tribal society", and therefore Italian companies when they grow might adopt an apparently Anglo-American structure, but in reality replicate the relational, tribal structure: you do not do something because it is your job, you are paid for that, or is part of a career path- you do that are required by your tribe in relationship with other tribes, and nobody would dare to do something that would benefit other tribes.
The positive side is that sometimes Italian companies can do miracles: remove the resources, remove the people, and while this abroad would make processes unworkable, the "tribe" self-reorganizes in its competition with other tribes (including the customers).
As I wrote in previous articles, I was surprised by the approach used in the June negotiation.
The current CEO is known as the Jeep brand development man.
But, actually, as I say since few years ago in Turin (and partially online), Jeep was said in the USA to have saved two companies, its original owner and Chrysler.
And I would say also FCA, as it is the key brand recognized outside Italy as FCA (and there was a time when selling the Jeep brand was discussed on Italian business newspapers as an option).
Few dots to connect:
- the recent relaunch of the potential merger with Renault after its stop in June 2019
- followed by rumors about a revamp of the previously discussed merger with Peugeot
- and coupled with recent production plans announces listed within the article from August 31st that I referred to at the beginning of this article
If you want to merge for the future, negotiating on the financial market value resulting from unpackaging the company into separate brands with a counterpart that instead can provide what would be needed to generate future value, is a false step.
Actually, unnecessarily discounts the strengths of FCA: market presence in USA, and partially unexploited brands with loyal fans; market presence and brands that could be the real value to your side of the merger.
A pity, because probably a merger FCA-Renault could create a second European player with presence both in Europe, the Americas, and Asia, and able to work on something more than just producing more cars as if we were in the 1970s.
As the future is on different model of fruition of mobility, and interaction between vehicles and urbanized areas (yes, I keep repeating it).
7. Demerging - then and in the future
And, of course, there is a third element: the Iveco demerger from CNH.
Richard Tobin, the former CEO of CNH, in early 2018 made a couple of announces that, frankly, sounded a little bit na´ve: first, duplicating Sergio Marchionne approach to "unbundle" to create value, by announcing that he was going to unbundle Iveco from CNH Industrial; then, an announce that he was seeing himself as a successor to Sergio Marchionne at the helm of FCA.
As he was rebuffed by Sergio Marchionne, who said "Non credo sia il caso. Sta bene dove è", resigned.
Nonetheless, as I said back then when I read about that in newspapers, and earlier this week after reading that article on August 31st that announced a meeting with analysts on September 3rd (see article here), a proposal being uttered for different motives doesn't imply being wrong.
Iveco delivers trucks, buses, and smaller commercial vehicles.
CNH is focused on agriculture and construction equipment.
So, their markets have different cycles and different target audiences, and probably could benefit from unbundling.
Most commentators focus on current results and margins of Iveco, to justify unbundling and maybe even selling Iveco.
But, as in the previous sale of Magneti Marelli, I think that yes, there is a value in CNH, but it is a different market, and there could be potential value in a different Iveco.
Actually, an August 31st articlealso announced the acquisition by CNH of an Australian company delivering information systems for market segments served by CNH product lines.
It is a common trend within automotive- as discussed in previous articles, in conferences in Italy and Germany since 2012 increasingly representatives of the car manufacturers explained as they saw the future of their revenue streams.
The keyword is: Ecosystem.
8. Demergers, ecosystems, and business models
If you equip vehicles with sensors, as it has been done for decades, eventually you connect those sensors.
And eventually those vehicles get an on board computer akin to the old Shuttle, moreover when you will introduce autonomous driving features, and you have to ensure that decisions too fast to be countermanded by humans are taken not by one single point of failure, but by something with the ability to recover.
Then, that information-system-on-wheels will communicate with the environment.
In the past, maybe just a central site or, for larger vehicles, via satellite links.
Eventually, with on-site computers and data collection points scattered across the environments that they will get through (more about this in a later publication, but I shared already something online in recent years).
Data. Services. Ecosystems- not just vehicle sales.
A demerger could actually enable developing separate ecosystems for CNH and for Iveco: as when you move from vehicles into services and ecosystems, you embed your company into the internal processes of you customers.
Actually, with a real ecosystem, it is a two-way street, and customers can influence and complete products by adding data, applications, services.
And an ecosystem is based, as in nature, on a balance, not just a pile up.
Therefore, while in aggregate terms could seem a waste to duplicate efforts, it isn't.
Creating a "general purpose" ecosystem covering everything from marine engines to construction equipment and minivans delivers not an ecosystem, but a general store.
Something that it is quite common in technology-oriented information systems and services, but we live in a customer-centric era, i.e. you have to create something that makes sense for your audience, not for you.
You do not expect a general store owner to be an expert in all and each activity of its customers.
So, there could be a space for sharing some elements, but then the business expertise has to be tailored to each audience: and construction equipment, agriculture, naval engines, defence, commercial vehicles do not have the same audience, processes, interests, and needs.
Anyway, I am still of the same idea as I was with Magneti Marelli.
Back then as now, I think that it would make sense to do what today newspapers reported as a statement from Exor: you can sell a company to let somebody else develop it, but that does not imply selling 100% if you assume that it can generate value.
So, Magneti Marelli and Iveco probably could become providers of products and services for future mobility to other companies providing components and systems or subsystems for mobility (not just vehicles, part, software- also know-how), including maybe in the future advising towns on integrated systems.
If 70% of the world population will be soon living in major urban centres, then you can expect that all the services and supply lines within towns will have to be redesigned to improve efficiency and efficacy, as that is the only way to improve sustainability without reducing quality of life is to better use resources- and find new ways (e.g. the urban gardens many talk about).
Providing also know-how could actually enable smaller but still urbanized communities to deliver services on a par with those delivered by larger towns.
As an example: over 10 years ago, as I saw the complexity of increasingly "vertical" rules and regulations applicable to local authorities prepared by experts either at the Central Government (ministries, etc) or EU level, I did an assessment on the ability to cope of Italian local authorities (8000+ towns and villages), to set up a new advisory service, a kind of competence centre integrated with local authorities.
Results? Over 800,000 people, the internal structure was able to cope and integrate locally the appropriate responses; below that, between 50k and 800k local authorities were able to understand the potential benefits but lacked the resources; below 50k, the structure was often too thin.
Future urbanization will try to retain small communities as lively connected dots with large "centres of gravity" towns- hence, in Italy we have metropolitan areas that should deliver to local villages the same abilities that in my research had few larger town.
It is still to be seen if, e.g. Turin Metropolitan Area will be able to sustain the multitude of scattered villages, as some have few hundreds or less citizens.
Still, private-public partnerships between the experts and the metropolitan areas and major towns can be expected: so, the expertise of car makers and other "wheeled vehicles" producers could benefit from a systemic approach based on integration with the decision-making processes of the local authorities that they will support.
Let's assume that both merger of FCA and Renault and the demerger of Iveco will go ahead, probably the latter, after a while, to carry out the real demerger, converted into another M&A with another company.
It will be interesting to see how all these changes in cultural references will impact on the town.