Certain industries are notorious for losing massive amounts of capital, where bankruptcies and reorganizations are common and investors trade on short-term arbitrage opportunities rather than long-term growth. The airline, auto, and retail industries come instantly to mind. Delta, Northwest, US Airways, Aloha, and Frontier, as well as Chrysler, General Motors, CompUSA, Circuit City, and Linens & Things, to name a few, have declared bankruptcy over the past few years. Cumulative losses have stripped out profits accumulated in these industries.
Let's face it. Home building is right there, too. Not only has our industry lost billions of dollars of shareholder equity during this downturn, but the profits earned during the boom years have evaporated. Not to mention that bankruptcies have become all too common as well.
What can we learn from airlines, automakers, and retailers to avoid the same pitfalls? How do we avoid comparisons with industries that constantly under-perform? And how do we attract patient capital, a result of strong long-term growth prospects, rather than investors who trade on short-term arbitrage? In a capital-intensive business, access to capital is critical. We'll keep getting compared with the airline, auto, and retail industries if we don't reduce earnings volatility and the risk to investment.
“A decline in sales isn't the only big problem facing Chrysler Group, LLC. Another, according to CEO Sergio Marchionne, is the almost ingrained tendency to react to falling sales by slashing prices,” wrote The Wall Street Journal on Jan. 12, 2010 (“Marchionne Upends Chrysler's Ways”).
I can't help but think similarly of our industry. The article continues: “‘But rarely,' he added, ‘has heavy discounting in pursuit of high volumes helped automakers generate profits in the long term. Unprofitable volume is not volume I want. We have a very good track record for how to destroy an industry—run the [plants] just for the hell of volumes, and you're finished.'”
According the article, Marchionne “spelled out what he saw as Chrysler's many deficiencies: Margins and vehicle quality needed to improve and better control over pricing was imperative.”
Replace automakers with home builders and vehicle with construction, and Marchionne's words ring as true for our industry as they do for his.
Home builders have a mission—providing quality housing to young and old, with incomes ranging from a little to a lot, and doing so in a way that ensures shareholder investments are protected and rewarded, lenders' loans are repaid, and top-quality employees and vendors are confident in their continued employment or engagement. More so than autos or airplanes or shopping, the “American Dream” of homeownership is something that makes our country special; it is American.
Our economic system relies on corporate leadership, integrity, and innovation; offering quality products consistent with expectations; repaying monies owed; protecting monies invested; and generating fair, risk-adjusted returns while valuing our employees and our trade partners. As an industry, have we lost sight of our mission?
Let's refocus on our mission. This way we can avoid following the paths of airlines, auto manufacturers, and retailers. Let's compete not on incentives and market share at the expense of profits, but by innovating and striving to differentiate ourselves from our competitors.