When Woodworking Network reports the restructuring and rationalization of factories - cabinetry, furniture door, window manufacturing, with big firms reducing overhead by consolidating plants - the story line is really not so different than what has happened in the auto industry.
We saw Detroit on the mat, posting huge losses. Now auto firms are posting record profits.
Reducing capacity to increase wood factory utilization rates, and capitalizing on the speed and efficiency of automated machinery, is how profitability will return. It is part of the reason U.S. workers are among the most productive in the world, even with our higher wage levels.
But the other thing that happens on balance sheets is a write down of good will, and of asset values. Items like brand names, ongoing relationships with distribution channels, ability to to advantage of market demand quickly with production capacity - soft factors like that are chalked up to good will, and recorded on balance sheets as equity.
Manufacturing capacity also declines in value when it becomes clear that the capacity is far in excess of market needs. When cabinetry company MasterBrand acquired Capital Cabinets a portion of the purchase price was allocated against good will. When Masco opened a plant for KraftMaid to take advantage of the housing bubble, it established equity on its balance sheet to account for those state-of-the-art assets.
Now, with plants closing, or unneeded equipment auctioned, those values must - by accounting rules - be reduced on the balance sheet to reflect their actual value. Every bubsiness woner large and small knows this painful reality. As a result, a loss is posted. Operating profits may even be improving, but write downs splash gallons of red ink all over it.
It's important to see these transformations for what they are: courageous actions by gutsy managers who held the course awaiting things in the market for wood products to return to "normal." Now they are are preparing for the new shape of the markets, and recovery, to come.
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