Debt brings down venerable manufacturing firms, right on schedule - Eric Janszen

[EJ]

Debt brings down venerable manufacturing firms, right on schedule

Here's the formula. Take one part debt bubble from 1% interest rates and financial engineering, two parts hubris and self-delusion, add a recession and a credit crunch two years later and what do you get? A wave of bankruptcies and unemployment.

Crystal, china maker Waterford Wedgwood collapses
January 5, 2008 (Jane Wardell, AP Business Writer)
Waterford Wedgwood files for bankruptcy protection after failing to find a buyer

Wedgwood has been an iconic name in British pottery for 250 years, after its founder Josiah Wedgwood opened the first factory in Stoke-on-Trent, central England, in 1759. It began making bone china in the 19th century.

Waterford Crystal traces its lineage to a factory opened in Waterford, southeast Ireland in 1783, although that business failed in the 1850s. The brand was revived by Czech immigrant Miroslav Havel in 1947.

Waterford Wedgwood, which employs around 7,700 worldwide, is the latest in a burgeoning list of iconic British companies to succumb to the global economic slowdown and credit squeeze. Department store veteran Woolworths, the queen's tailor Hardy Amies, tea and coffee merchant Whittard of Chelsea and fellow ceramics stalwart Royal Worcester and Spode have all filed for bankruptcy protection in recent months.

AntiSpin: Didn't survive the last real Great Depression (see The Real Great Depression) and hasn't survived this one, either, even in its early stages. Why did Waterford go out of business after surviving every downturn since the end of WWII? In a word: debt.

The company, which has net debts of €449 million, had been unable to raise €150 million of new equity it had sought in August.

Waterford Wedgwood has been forced to appoint a receiver, which it named as David Carson from Deloitte, the accountancy firm, after it missed a January 2 deadline to meet loan repayments. - Waterford Wedgwood collapses over debt pile, Times Online, Jan. 5, 2009

How much debt is that?

The company last month reported pre-tax losses of €63.2m for the six months to October 4, up 13% from the loss of almost €50m a year earlier. Revenue fell by 15% to €207.6m, though the fall was only 6% when currency movements were stripped out. - RTE Business, Waterford Wedgwood runs out of time, Jan. 5 2009

What is a company with €207.6m in annual revenue doing with €449 million in debt?

Waterford Wedgwood also announced it had refinanced its debt through a new arrangement with a subsidiary of Wachovia of New York, but offered no details of the terms. - USA Today, Waterford Wedgwood wants to buy Royal Doulton, Oct. 12, 2004

Without the debt, the company may have survived a 6% drop in revenue. How many more companies levered up during the 2004 to 2006 boom years who without debt might weather the economic storm but instead will go bust in the year ahead as they find themselves unable to make debt payments? Who could have known?

Add to the two generally acknowledged guarantees in life -- death and taxes -- a third: recessions after a massive speculative bubble has collapsed. And if we get a recession next year, as we've pointed out before, a bunch of uneconomical PE buy-outs will become even more uneconomical. It's not unlike the post tech stock bubble, except rather than the venture capital (VC) money drying up that's needed to keep uneconomical businesses running that were started during the boom, companies will be left trying to make huge principle and interest payments on debt. - iTulip, After the buyout boom: The bust?, Dec. 18, 2006

The USA's first and oldest outplacement consulting company is Challenger, Gray & Christmas, providing outplacement programs for executives, and middle managers, and key employees. When we interviewed Challenger CEO John Challenger, June 13, 2007 six months after our forecast he told us:

Janszen: Bond securitization, such as CDOs in the mortgage industry and CLOs in private equity, has for the past few years created new credit to fund commercial real estate growth and private equity deals. Now that the market for these debt products is slowing down, we expect a slow-down in these sectors. For example, the market for mortgage related CDOs declined from $30 billion in April to $2 billion in May. Are you seeing any indication yet of weakness in either commercial real estate market or in industries which have been the target of private equity deals?

Challenger: No indications yet, but a recession caused by an increase in bankruptcies and layoffs due to corporate over-indebtedness is a plausible scenario.

Janszen: Overall, what's your prognosis for the US economy over the next year?

Challenger: We are at the end of this economic cycle.

What impact will this have on unemployment? The AP story goes on:

Much of the business has now shifted offshore, where it employs 5,800 people, including 1,500 people at a plant in Jakarta, Indonesia, which produces most of the company's ceramics. The majority of its crystal production has been handed to Eastern European subcontractors.

They do not mean that the business has shifted offshore but that the jobs shifted offshore. If "globalization" meant post-industrial, FIRE Economy based countries like the US and the UK outsourcing jobs while keeping the sales, marketing, distribution, and revenue collection at home, what are the implications for the countries to which the jobs were outsourced now that the post FIRE Economy debt deflation is putting these companies out of business?

The company employs a work force just a third of that size at 1,900 in Britain, including around 600 in Stoke-on-Trent and 800 in Waterford.

Waterford Mayor Jack Walsh said the closure of the crystal factory would deal a cultural and psychological blow to all of Ireland, noting that the crystal plant was one of the country's top tourist attractions and the product "one of only a handful of iconic Irish brands.'

Unemployment will rise rapidly in the countries, such as China and Indonesia, where the manufacturing jobs were outsourced to and goods manufacturing is a large part of the jobs base. In the US and the UK, where the manufacturing jobs were outsourced from, job losses will be just as high but in the sales, marketing, and distribution sectors of the economy (see Housing Bubble Correction Update: Here comes the jobs crash). We believe that the collapse of FIRE Economies is putting "globalization" into fast reverse in 2009 (see Pop goes the Globaloney Economy).

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[GRG55]

Re: Debt brings down venerable manufacturing firms, right on schedule - Eric Janszen

Debt brings down venerable manufacturing firms, right on schedule

Here's the formula. Take one part debt bubble from 1% interest rates and financial engineering, two parts hubris and self-delusion, add a recession and a credit crunch two years later and what do you get? A wave of bankruptcies and unemployment.

Crystal, china maker Waterford Wedgwood collapses
January 5, 2008 (Jane Wardell, AP Business Writer)
Waterford Wedgwood files for bankruptcy protection after failing to find a buyer

Wedgwood has been an iconic name in British pottery for 250 years, after its founder Josiah Wedgwood opened the first factory in Stoke-on-Trent, central England, in 1759. It began making bone china in the 19th century...

My wife has ancestors from the Midlands. About 3 years ago, when we were living in London, we made a trip there with one of her cousins to tend to the graves and do the usual tourist stuff - pottery museum, etc.

We visited Doulton, Spode and the Leeds Pottery [famous for its creamware]. It was obvious even then that these businesses were in serious trouble, and like much of Britain I got the impression the crumbling industry was surviving on its reputation from the glory days.

Privately-owned Leeds still made all of its wares in the UK, but it was obvious the cost structure was uncompetitive, and the owners were trying to make a margin by compromising the quality of the product [I am no expert on pottery, but even I could tell]. Spode still made some of its lines in the UK [beautiful high-quality product, but priced accordingly], and Doulton had pretty well dumped everything to Asia. My wife and her cousin have some Doulton figurines made decades ago, and handed down in her family, that are exquisite - the hand painting on the Asian-made Doulton figurines in their shop didn't compare, even to my unpracticed eye.

I came away from that weekend with one more data-point reinforcing my perception that the entire UK economy was centred around the one-square mile know as the City, and the hedge fund headquarters in Mayfair. And that was when the official statistics showed the UK economy consistently outpacing that of France and Germany.

[Chris Coles]

Re: Debt brings down venerable manufacturing firms, right on schedule - Eric Janszen

The process of backing away from long term equity investment into UK industry has been going on for many decades. I delivered a 170 page report to the UK government in 1992 detailing the problems I had by then been able to clearly document regarding several attempts at capitalisation, one in conjunction with a major university where the answer came back to a very high level individual brought in to help by a Deputy Lord Lieutenant (Queens representative at the local level), "Research and Development old boy? Bottomless pit, never touch it with a barge pole."

The UK has been an accident waiting to happen for some time now. But my problem is, do I stay or go? Will the message get through this time, and thus is it at all possible to see a chance to establish something new now, or should I abandon the UK entirely and seek a better location to establish new business. And for that matter, where do we go?

[Spartacus]

apropos - a crappy blast from the past I came across again today

whatever happened to what Ken Fisher was saying in late 2006 / early 2007 ?

The thesis that debt is good?

That "a few" Americans would be hurt by excessive debt, but that most Americans did not have enough debt, that more people should leverage up - take debt out on their houses and invest it.

http://www.amazon.com/Bloomberg-disc...sin=047007499X

http://theaustrianaccountant.blogspo...oves-debt.html

Unfortunately a quick search didn't turn up the article being described in this last link.

believe it or not, this thinking is STILL (!!!!!) out there.

[don]

Re: apropos - a crappy blast from the past I came across again today

whatever happened to what Ken Fisher was saying in late 2006 / early 2007 ?

The thesis that debt is good?

That "a few" Americans would be hurt by excessive debt, but that most Americans did not have enough debt, that more people should leverage up - take debt out on their houses and invest it.

http://www.amazon.com/Bloomberg-disc...sin=047007499X

http://theaustrianaccountant.blogspo...oves-debt.html

Unfortunately a quick search didn't turn up the article being described in this last link.

believe it or not, this thinking is STILL (!!!!!) out there.

We hear it everyday if we're not careful- a strict diet of no main stream media exposure, without exception :cool:

We just need to get housing values rising again...

0% financing right now at your GMC dealership....

He's off his diet again....

[rchdenton]

Re: Debt brings down venerable manufacturing firms, right on schedule - Eric Janszen

The UK has been an accident waiting to happen for some time now. But my problem is, do I stay or go? Will the message get through this time, and thus is it at all possible to see a chance to establish something new now, or should I abandon the UK entirely and seek a better location to establish new business. And for that matter, where do we go?

For what its worth I sold up in Skelmersdale in 1992 and moved down under. Today is beautifully sunny and it is a lovely place to live but the same problem exists here - property is the only game in town. I have now forsaken manufacture and adopted an "if you can't beat them, join them approach". My accountant (a very successful businessman not your usual type at all) said "Richard, it's time to move up the food chain."

Their is still a huge manfacturing potential left in the UK, even if it only a remnant of former days. I doubt if it is worth investing in though as there are too many resistances to change. My advice is sit tight a while and buy city commercial real estate when prices are devastated. The city will make a comeback when the world economy does. Anyway, if I still lived there that is what I would be looking at.

Manufacturing needs flexibility - if sales go down 50% you must be able to lay off 50% of your workforce immediately. Failure to do so leads to massive inventory building and the requirement for a massive wad of cash to pay for it, which is of course unlikely to be available. The unfortunate consequence of people friendly labour laws that protect the workers is it destroys the manufacturers. The UK is a horrid mess of endless layers of regulations laid on top of one another. It scares me when I visit. Everything is difficult.

Just listen to the conversations of the people around you. What are they talking about? Are they talking about real issues or nonsense issues about things that shouldn't be in the first place?

There is much that I love about the country I grew up in, which is why this issue stirs me so. I leave you with a kiwi joke:

"How do you know when an airplane from England has landed at Auckland airport?"

"When it keeps whining after the engines stop."



The question is why do they whine so?

[Slimprofits]

Re: apropos - a crappy blast from the past I came across again today

Is Ken Fisher the guy that inspired ad wizards to create the "Do you want to get away?" commercials for Southwest Airlines?

Learning To Love Debt

[rchdenton]

Re: apropos - a crappy blast from the past I came across again today

whatever happened to what Ken Fisher was saying in late 2006 / early 2007 ?

The thesis that debt is good?

That "a few" Americans would be hurt by excessive debt, but that most Americans did not have enough debt, that more people should leverage up - take debt out on their houses and invest it.

Quite agree, debt is most excellent stuff, I thoroughly recommend it.

Let me explain. A sword is a tool. So is a circular saw. Used well they are most useful. Used badly they will kill you.

Debt is a tool. Trouble is most of us have difficulty knowing when and how to use it.

Easy to see in retrospect that during an inflationary 70s style housing boom those with the most debt win. Maybe that's why it was the baby boom generation who went so strongly into housing.

[FRED]

Re: apropos - a crappy blast from the past I came across again today

Quite agree, debt is most excellent stuff, I thoroughly recommend it.

Let me explain. A sword is a tool. So is a circular saw. Used well they are most useful. Used badly they will kill you.

Debt is a tool. Trouble is most of us have difficulty knowing when and how to use it.

Easy to see in retrospect that during an inflationary 70s style housing boom those with the most debt win. Maybe that's why it was the baby boom generation who went so strongly into housing.

We follow a simple principle of debt use here.

Use debt to finance appreciating assets, like rent producing real estate.

Avoid using debt to purchase depreciating assets like autos and consumer electronics.

[rchdenton]

Re: apropos - a crappy blast from the past I came across again today

We follow a simple principle of debt use here.

Use debt to finance appreciating assets, like rent producing real estate.

Thanks Fred, my take is in a little while I will be able to tell the cream from the dross. The cream will have paying tenants, the dross will not. The return will be good. It is not easy sitting on my hands in the meantime.

I do have a question though.

I used to believe in manufacturing. That it was a "good thing", that it provided jobs, which led to a productive society. I now feel that was partly due to my upbringing in socialist Britain. Socialists and communists all blather on about industry and manufacturing and rights on so on (they are childlike in their lack of experience).

The trouble is the jobs created are pretty unfulfilling. They are repetitive and de-skilled. People's thought turn to rights not usefulness. In short we treat grown ups as children and they behave accordingly.

In my wilder moments I have declared that employment is for kids. My friends do not like this as they think it arrogance on my part. They are of course correct, but there is something in the argument nonetheless.

So, as I mention above, I have forsaken manufacturing, at least for the time being. My friend (the accountant mentioned above) has introduced me to the obscure pleasures of commercial real estate. The tenants are hard working independent business people for the most part. New Zealand is blessed with a lot of hard working small business people.

My question is this, is there a food chain?

As a manufacturer or farmer you feel that everyone feeds off you, that you support everyone else. Is that in fact so? If there is a food chain, how does it work? Who is at the top? Is it The Banker, ie the bank owner. Who is it? How do I become one? Should they be at the top? Should I become one?

These and other questions pussle me exceedingly.

[Spartacus]

Re: apropos - a crappy blast from the past I came across again today

the whole point of Eric's article is that ANY debt is now an accident waiting to happen.

Even if one took out the debt with the most solid reasoning and the most solid balance sheet accounting and income positions, it can now kill you regardless of how good you think you are at using it.

Quite agree, debt is most excellent stuff, I thoroughly recommend it.

Let me explain. A sword is a tool. So is a circular saw. Used well they are most useful. Used badly they will kill you.

WRONG, wrong, wrong. if everyone has an excessive number of hammers, hammers don't suddenly take on extreme danger they did not possess before.

but if everyone has excessive debt, it transmogrifies into a toxic agent and becomes dangerous for everyone - it becomes an altogether more dangerous, unpredictable beast than the one you thought you had - a tiger cub that has grown exponentially to a giant tiger.

[Chris Coles]

Re: Debt brings down venerable manufacturing firms, right on schedule - Eric Janszen

a lovely place to live but the same problem exists here - property is the only game in town.

I well remember my accountant, (senior partner top 100 firm), telling me that they had never seen anyone raise significant funds for anything other than a property deal.

Existing financial institutions are staffed by people that will never change their ways. It often crosses my mind that the only way forward is to create completely new financial institutions that set out, from day one, to invest savings in the productive industrial society. I do not have the financial resources to bring such thinking to fruition without access to royalties owed but unlikely ever to see.

Sorry about the whining and nice of you to make me laugh while opening my eyes to the noise.....

[GRG55]

Re: apropos - a crappy blast from the past I came across again today

Thanks Fred, my take is in a little while I will be able to tell the cream from the dross. The cream will have paying tenants, the dross will not. The return will be good. It is not easy sitting on my hands in the meantime.

I do have a question though.

I used to believe in manufacturing. That it was a "good thing", that it provided jobs, which led to a productive society. I now feel that was partly due to my upbringing in socialist Britain. Socialists and communists all blather on about industry and manufacturing and rights on so on (they are childlike in their lack of experience).

The trouble is the jobs created are pretty unfulfilling. They are repetitive and de-skilled. People's thought turn to rights not usefulness. In short we treat grown ups as children and they behave accordingly.

In my wilder moments I have declared that employment is for kids. My friends do not like this as they think it arrogance on my part. They are of course correct, but there is something in the argument nonetheless.

So, as I mention above, I have forsaken manufacturing, at least for the time being. My friend (the accountant mentioned above) has introduced me to the obscure pleasures of commercial real estate. The tenants are hard working independent business people for the most part. New Zealand is blessed with a lot of hard working small business people.

My question is this, is there a food chain?

As a manufacturer or farmer you feel that everyone feeds off you, that you support everyone else. Is that in fact so? If there is a food chain, how does it work? Who is at the top? Is it The Banker, ie the bank owner. Who is it? How do I become one? Should they be at the top? Should I become one?

These and other questions pussle me exceedingly.

What do these hard working small business people do? Run accounting, law and property management firms for commercial real estate investors [the quintessential "service" economy]? Are any of them involved in manufacturing? ...

[rchdenton]

Re: apropos - a crappy blast from the past I came across again today

the whole point of Eric's article is that ANY debt is now an accident waiting to happen.

WRONG, wrong, wrong. if everyone has an excessive number of hammers, hammers don't suddenly take on extreme danger they did not possess before.

but if everyone has excessive debt, it transmogrifies into a toxic agent and becomes dangerous for everyone - it becomes an altogether more dangerous, unpredictable beast than the one you thought you had - a tiger cub that has grown exponentially to a giant tiger.

Thank you Spartacus, I guess I meant that timing is important. There are times to take on debt and times to discharge it.

As I understand it, and my reason for posting is that you can point out the error in my thinking, is that during times of asset price inflation debt is useful as it magnifies your gains. The danger is that during times of asset price deflation, such as we have now, it is to be avoided as it magnifies your losses.

The difficulty is getting out the door ahead of the crowd and knowing when to do that.

However, I have a lurking suspicion there is an aspect to this I'm missing.

The article starts with the demise of yet another iconic British business (assuming Wedgewood bought Waterford that is). Brought about apparently by excessive debt.

I understand that debt in a business becomes a fixed cost that you cannot get out of and part of the essence of manufacturing is to hammer your fixed costs as they do not go down when sales go down. You must design the business so it can cope with the ups and downs of the economic environment.

I get the feeling you have identified something about the nature of debt that I have not. That it is not just a matter of timing.

[rchdenton]

Re: Debt brings down venerable manufacturing firms, right on schedule - Eric Janszen

I well remember my accountant, (senior partner top 100 firm), telling me that they had never seen anyone raise significant funds for anything other than a property deal.

Existing financial institutions are staffed by people that will never change their ways. It often crosses my mind that the only way forward is to create completely new financial institutions that set out, from day one, to invest savings in the productive industrial society. I do not have the financial resources to bring such thinking to fruition without access to royalties owed but unlikely ever to see.

Sorry about the whining and nice of you to make me laugh while opening my eyes to the noise.....

Thanks Chris,

I was a bit concerned I might have been a bit too negative about Britain. One of the things I like about this site is it drew my attention to separating my thinking about finance and real estate from production and consumption. There is much more to learn I think.

There has been a British diaspora (if that's the right word, never used it before) going on for centuries. These are the very issues that have caused it. I find Michael Hudson's insights are very helpful but there is a part of this picture that eludes me.