Slumping Sales How Effective is Workforce Reduction for Car Manufacturers in Solving Sales Issues?
Cost reduction is the key goal for layoffs, temporarily improving financial condition.
The primary goal for any company to lay off employees is to control costs, because in many industries, the biggest expense is labor cost, which includes your salary, social security and housing fund contributions from the company, as well as various expenses incurred by you when coming to work every day that the company needs to pay for.
Although there are other expenses, they are relatively lower compared to labor costs, and many investments can be converted into assets, whereas most people’s salaries are just costs that remain as they are, needing to be offset against the level of profitability.
Therefore, if a company wants to make its financial situation look better in the short term, laying off employees is a simple and direct method.
At least it can immediately reduce the current expenses by a lot, so it temporarily appears that there has been some easing, but this does not directly solve the problem.
As for the relationship between lay-offs and sales volume, there is not much direct correlation, especially when the company itself is already on a downward trend, the most direct reason for the decline in sales is that the product has lost its competitiveness and customers do not want to buy. Whether you lay off or hire more employees, or adopt more aggressive marketing methods such as indiscriminate bombing, it still won’t help.
Many seemingly effective methods in the short term are basically exploiting the reserves and resorting to desperate measures. For example, a certain broadband company in a certain area, in order to increase sales, first voluntarily shuts off the user’s broadband, then has the maintenance personnel come to the door and falsely claim that the equipment is broken and must be replaced with the latest optical modem, and after the modem is installed, the broadband is turned back on.
This method indeed appears to have a high success rate. Many people who don’t understand broadband will fall for it, and then the company’s sales will suddenly increase in the short term, resulting in increased revenue.
However, the problem is that such large-scale systematic operations involve a large number of people in every step, and news will quickly spread.
This is also the main reason why such desperate measures are short-sighted and counterproductive. When users who have been treated like fools realize it, it will inevitably lead to even more serious backlash.
However, if a company encounters some problems in its short-term operations and needs to improve its management and adjust its direction through cost control and other means, laying off employees is just one of the steps in a series of adjustments. After systematic changes, it returns to normal and sales increase again. This does not mean that lay-offs have solved the sales problem.
The essence of enterprise layoffs: cost cutting.
The purpose is not to solve the sales problem, but to save labor costs. Job cuts may not solve the sales problem. Short-term cost saving, long-term benefits uncertain. Layoffs are often due to poor performance or incompetence. Sales problem may be related to market insight and product acceptance. Layoffs are both necessary and strategic. Consider product issues and innovation for struggling companies. Employees should plan for career development after layoffs. It is important to first understand the underlying purpose of company layoffs.
It is not to solve the problem of low sales in car companies, but rather to save on labor costs. For a company, talent is mainly associated with salary expenses, social insurance and housing fund contributions, as well as various subsidies and benefits. In other words, the cost-effectiveness of an individual is something that companies often openly discuss.
Whether layoffs or salary reductions can solve the problem of low car sales is actually uncertain.
What can be certain is that in the short term, it can indeed help companies save some unnecessary expenses, but in the long run, it seems to have little significant benefits.
It should be noted that not only car companies, but also many internet companies in the cold winter phase have used layoffs as an excuse, resulting in a mix of firing older employees and hiring new ones, terminating slackers, and dismissing those with poor performance…
However, the methods of layoffs and salary reductions are not directly related to sales.
In many cases, if a company’s sales are not doing well, it is either due to a lack of market insight or the unwillingness of customers to make purchases. Alternatively, the company may be on a downward trend, with its products facing difficulties in gaining acceptance from users.
Under such circumstances, various problems can arise regarding the company’s cash flow, investment risks, and even business direction. But fundamentally, layoffs and salary reductions are only strategic measures.
On one hand, it may be a result of the company’s helpless situation, where it truly lacks the ability to bear excessive personnel costs due to factors such as decision-making mistakes, blind expansion, or setbacks in business.
On the other hand, the company may take advantage of poor sales as an opportunity to intentionally lay off unreliable individuals. For example, old employees who are set in their ways, or those with poor performance who like to slack off, and so on.
Therefore, when the sales of many established car companies are poor, they should focus more on contemplating the problems with their products, as well as the company’s level of innovation and development.
For employees, they are often in a relatively vulnerable position. There are many reasons for company layoffs, as it is common for employees to be laid off due to poor performance.
However, what is more important is ensuring that one can maintain better career development even after being laid off. It is crucial to have a sense of proactive planning in order to avoid losing career opportunities due to layoffs.
Layoffs: Limited help in reducing costs, highlighting management’s determination.
Great question!
Layoffs are not just ineffective in boosting sales, but they also don’t help much in reducing costs.
Let’s take NIO as an example: On November 3, 2023, NIO’s founder, chairman, and CEO, William Li, sent an email to all employees titled “Organizational Optimization and Two-year Priorities,” stating that the company will reduce approximately 10% of its positions, which will be completed in November.
According to the 2022 annual report, NIO had a total of 26,763 employees, and the 10% reduction corresponds to around 2,700 employees.
So, how much is the labor cost savings for these 2,700 employees?
Let’s assume that none of the 2,700 employees are production line workers and are all relatively high-salaried white-collar office workers. Based on NIO’s salary levels, fresh graduates have a pre-tax annual salary of about 200,000 yuan, while those with work experience have a pre-tax annual salary of about 400,000 yuan. Let’s calculate based on an average pre-tax annual salary of 350,000 yuan, including the employer’s contribution to social insurance and housing provident fund, and other benefits. The annual labor cost per person is about 450,000 yuan. For 2,700 people, that’s about 1.215 billion yuan.
So, by laying off 2,700 employees, NIO can save 1.215 billion yuan per year. You might think this is a significant amount of money, but is it really helpful for NIO?
Not quite. Because NIO already incurred a loss of 14.44 billion yuan in just one year in 2022.
The financial situation in 2023 is even worse: NIO incurred a loss of 4.74 billion yuan in the first quarter and a loss of 6.06 billion yuan in the second quarter. Assuming the loss remains the same in the third and fourth quarters, NIO’s total loss in 2023 will reach a staggering 22.9 billion yuan!
In comparison, the 1.215 billion yuan labor cost savings from laying off 2,700 employees is only equivalent to 5.3% of the 2023 loss!
In other words, the labor cost savings from layoffs are simply insignificant compared to the losses caused by selling cars, battery swapping, and mobile phone production.
In fact, when faced with declining performance, it is a common practice, not limited to NIO, but we are just using NIO as an example. This is a common tactic in the entire automotive industry, or you could say, in various industries.
Since layoffs do not significantly reduce costs, why do large companies do it?
In fact, layoffs have always been a way for the management/founders of large companies to show their commitment to investors. The purpose is to indicate that the management is determined to tighten their belts, reduce costs, and face the challenges together with the investors.
NIO has been continuously losing money for the past 9 years. As of the second quarter of 2023, NIO’s accumulated losses amounted to 76.4 billion yuan. The new businesses, such as NIO’s mobile phones and Firefly brand, also suffered significant losses in the first few years. How many investors are willing to continue supporting NIO? These institutional investors also have a responsibility to their stakeholders. Therefore, William Li faces immense pressure from investors, and layoffs are an effective way to show his commitment.
However, the 2,700 innocent employees will have to start sending out resumes and looking for new jobs again~~~
This article was first posted on November 21, 2023, in Shanghai, China.
Follow me to learn about automobile cultures in different countries @JamesEmbarkingOnFullBattery.
The Truth about Big Corporations
Actually, employees in large companies are very expensive. Even with a monthly salary of 5,000, the company’s expenditure would still increase by more than 6,000 due to tax reductions.
If the average monthly salary is 25,000, then including taxes and various benefits, the company needs to spend several hundred thousand per employee per year. In a large company, all work needs to be specialized. In other words, specialization creates redundancy for employees, so that the departure or stay of one person does not affect the company’s normal operations. Therefore, overall, there is a redundancy rate of 1-2 positions for each business. For example, in a department where a manager is responsible, there may be 6-8 people, but only 1-2 people are actually needed, while the other 5-7 people are backups for sick leave, special events, team building, and rotational rest. This means that it is normal for 6-8 people to do the work of only 1-2 people in a large company.
Even in the previous company where I worked, a well-known automobile manufacturer, they couldn’t find a single person in the entire department who actually worked on specific tasks. The purpose of this is to ensure that when a sudden event occurs, everyone can contribute to dealing with that event. On normal days, everyone reports to each other, hampers each other, and consumes each other’s time. At that time, we even made up interesting things for reporting and hindering each other, such as the “Office Lean Project”. We know that lean production is effective in production departments, so we implemented lean production for white-collar workers too. The headquarters in Germany sent a savvy foreign expert to rotate through each department, providing 24 hours of lean content training to each employee. In reality, most of this training does improve employees' thinking methods, such as the need for organization and thorough work breakdown, the concept of flatness, how to do reporting, and even specialized training in PowerPoint. In short, employees are willing to participate in these activities. But from the perspective of the company’s structure, this kind of training is conducted every year. If you look closely, everything written in it is correct, but it’s all empty words.
I worked for this brand for five years. I have to boast a little - I was often assigned to specific tasks because some tasks could only be done by me and not by others. So I often only attended half of these types of training sessions. But what about others? Other people really just attend training every day without producing any concrete output. Even internet companies usually have brainstorming sessions, but these people don’t do anything other than training. They have training sessions from one reporting season to the next. During this time, they have to create PPT presentations… At that time, I was involved in many projects, and many people tried to find ways to be a part of the projects I led because the German colleagues challenged us one by one, and we had to come up with specific responses. For example, during the process of adjusting millimeter wave radar, I found a signal distortion issue. The foreigners would ask, “Is this within your responsibility boundary? Is it your responsibility to adjust it?” Some senior executives would even ask in a mix of Chinese and English, “At what level of adjustment can we consider it crossing the recall boundary?” The Germans also challenged the Chinese examiners with their substandard English and a mix of Chinese and English.
What does all this mean? It’s to tell you that everyone in a large company seems busy. Training one day, doing projects the next, reporting the day after, and performance evaluations the day after that. But in reality, the higher level of the company knows that they can’t afford idle employees, so they come up with various reasons to keep everyone busy. The purpose is to ensure that everyone can cover all the demands when dealing with sudden events. On normal days, everyone must be exceptionally busy.
Of course, all of this is only applicable when the company’s performance is good and everyone has met their targets. At the end of the year, there will be dinner parties and toasts. When the performance is not good, sorry, why should a department with only one person’s worth of output hold 8 people? What contribution do you make? As a leader, how much value do you bring to the company each year? For a department of 6-8 people, considering their size, it would cost 10 million in annual salary alone. If it’s a department that doesn’t interact with external parties and doesn’t report well internally, it’s very likely that it would be completely eliminated, starting from the senior manager downwards.
Therefore, as long as a large company finds around 10 redundant departments like this, they can easily reduce annual human resource costs by hundreds of millions. This is particularly easy for multinational companies. Some multinational companies have several thousand employees, but only fewer than 100 actually do the work. It’s easy to let go of 1,000 people in the short term, but the company’s performance can double within a year. This is especially true for automobile companies, where most positions are for laying the groundwork. During the initial stage, it takes a team of 10 people to complete the work, but once everything is in order, only one person is needed. By reducing the number of employees through layoffs, the company can definitely improve its efficiency.
Having said that, if you’re in the automotive industry and you find that your own product isn’t doing well in terms of sales volume or pricing, and you notice that there are many older employees around you and the company’s benefits are particularly good, then this could be a dangerous signal. It could signify a downturn in the industry. Don’t blame the sudden announcement; one minute you were discussing how to use your annual leave in the coffee shop, and the next second, there are rumors of layoffs in the group. This is a normal phenomenon.
So far, everything I’ve mentioned is theoretical. There is still a huge gap between theory and practice, which is the issue of benefit distribution. Some people may say, “What benefit distribution is there in layoffs?” That’s right, even layoffs involve benefit distribution. Employees who focus on specific tasks generally look down on those who engage in reporting, but because they are busy with specific tasks, they lack the ability to report at a higher level (+2 and +3). So, when layoffs occur, those who have a grudge against them (+1) will take advantage of this lack of reporting ability and say bad things about them in front of their superiors (+2 and +3), ultimately resulting in their dismissal. On the other hand, those who understand reporting but don’t understand the tasks will stay. In the end, the layoffs are ineffective. Don’t think I’m exaggerating; almost all companies, when they lay off employees, cannot lay off the most reasonable ones. Cliques and flatterers always manage to remain. This effect is known as the “Dead Sea effect”. Just like high temperatures evaporate water molecules, but leave behind salt, this ultimately leads to a situation where no living organisms can survive in the sea.
Therefore, in principle, car companies will not easily resort to layoffs. Everyone knows the effects that I mentioned earlier. Many people have experienced this. It is the best way to quench one’s thirst with poison. However, sometimes, even if this poison is deadly, it’s still better than dying of thirst on the spot. Perhaps this is why many companies know that layoffs are destined to fail, but they still choose to go through with it.
Finally, I’ll leave you with a difficult-to-understand statement, but after some time, you will understand:
“Look up to the industry and look down at the human resources. No one can live in the present without predicting the future.”
I am Old Wang. See you next time.
Reducing Workforce is Not a Solution for Sales, But a Last Resort!
Layoffs are the last resort for companies facing difficulties, but they are not the solution to improving sales!
Currently, the development of car companies is being influenced by the trend of new energy vehicles, leading to intense internal competition. The direct result of this competition is that some companies inevitably struggle to survive, which can result in business closures and job losses.
In order to cope with the harsh market competition, companies employ various cost-reduction and efficiency-improvement measures. These measures include strengthening attendance systems, subsidizing and reducing fees, cutting wages and incentives, reducing business volume, and decreasing expenditures. These are all direct actions taken within companies' management systems and implementation methods. However, considering the limitations of long-term development funds, and in order to minimize burdens, layoffs are the most direct measure!
In the early stages of rapid internet development, the greatest cost for companies came from human resources. Due to the limited investment in fixed capital, the cost of maintaining employees was the highest. As a result, during economic crises, internet companies' first thought was to reduce peripheral staff and retain core employees, thereby ensuring the sustainable development of the company. After the crisis, they would recruit new employees. This idea has gained support and imitation from numerous internet companies and has become an accepted and effective measure.
Now, during the high-speed development period of new energy vehicles, many internet companies have transitioned into the automotive industry after reaching their peak in the internet sector. The development of new forces in this field partly originated from practices in the internet era. This has led to accelerated development and iterative updates in the entire automotive market. When companies face life or death situations, they will resort to any means to maintain their business, and layoffs become the last resort!
The immediate consequence of layoffs is a reduction in manpower expenses in the short term, but the impact is enormous. First, it allows companies to continue their development. Second, it affects the remaining employees. Furthermore, it cannot be guaranteed whether the employees being laid off are truly of no value to the company. From this perspective, the recovery period for the motivation of companies to sustain their development will still require a long time!
If we talk about sales, layoffs do not have a direct relationship with increasing sales. Even if sales personnel are laid off, the impact on sales improvement may not be noticeable. Moving from a state of personal concern to constant worry is a shared issue for all employees, and it may actually have a significant impact on the healthy operation of the company.
Development is the fundamental principle, so the real truth lies in how to achieve development.
Reducing Costs and Increasing Efficiency
Cutting costs and increasing efficiency is something that every company has to do.
On Product
For example, in terms of products, using homogenized car designs can save a large amount of production lines. With just one or two lines, everything needed for car production can be accomplished.
According to the performance report released by Li Xiang Auto in the third quarter of 2023, the total revenue for the third quarter was 34.68 billion yuan, an increase of 271.2% compared to the same period last year. Among them, vehicle sales revenue was 33.62 billion yuan, a year-on-year increase of 271.6%. In terms of profit, the company went from losses to profits, with a net profit of 2.81 billion yuan in the third quarter. Since achieving profitability for the first time in the fourth quarter of last year, Li Xiang Auto has achieved profits for four consecutive quarters.
Li Xiang, the CEO of Li Xiang Auto, wrote on a social platform: “Maintaining the maximum production capacity = delivery volume. This week, the sales of the three models, L7/L8/L9, from Li Xiang Auto have almost equaled those of Mercedes-Benz and Audi. Weekly revenue has surpassed Audi.”
Some analysts believe that Li Xiang Auto is likely to achieve overall profitability this year, becoming the first domestic new energy vehicle company to cross the annual profit and loss balance point. It is understood that Li Xiang Auto is the first new energy vehicle company to achieve quarterly profitability. So far, Li Xiang Auto remains the only new energy vehicle company to achieve profitability.
Ma Donghui, the President of Li Xiang Auto, said: “In the short term, we will focus on reducing costs in commerce. In the medium and long term, we will achieve project platformization, including procurement grouping and cost accounting, to bring procurement prices back to a reasonable level.”
In terms of Structure
The second method for cutting costs and increasing efficiency is through structural optimization. Taking Shanghai as an example, assuming a person’s salary is 5,000 yuan, the company needs to pay about 2,700 yuan in social security taxes based on the minimum social security payment.
In other words, for a single worker, the annual cost of salary and benefits amounts to about 100,000 yuan. And if the employee’s skill level is higher, the cost will be even higher.
For expanding companies, there will be a large number of redundant positions. Although the numbers seem small, they accumulate to be a considerable amount of data.
For example, some time ago, NIO’s internal memo stated a need to lay off 10% of its workforce. By the end of 2022, NIO had a total of 26,763 employees, which means more than 2,600 people would be affected. Even if calculated at the minimum wage standard, it would save about 260 million yuan in annual salaries—not to mention additional employee benefits, rental costs, etc. And the same situation applies to salary cuts.
Does this help solve sales? It certainly does, but not directly. The effect is indirect and may not be immediately apparent. Massive layoffs are only a surface-level solution. The profound reasons lie within the internal structure of the company, requiring significant adjustments.
For example, Xiaopeng Motors is the best example. After a large-scale layoff and internal reorganization, their product pricing and configurations returned to normal, and sales continued to grow steadily.
Of course, as I mentioned before, this change won’t happen overnight. It will depend on the subsequent actions of the company and gradually manifest itself.
The Impact of Layoffs on Sales and the Importance of Cost Savings
The impact of downsizing on sales is not significant, but the most direct effect of downsizing is cost savings! For example, a car company that downsizes by 2,000 employees can directly save 10 million yuan per month, based on an average salary of 5,000 yuan per person. That amounts to 120 million yuan per year, without considering the 13th month bonus. What kind of business can have such profits? These were originally real expenses that had to be paid out.
In fact, car companies have many “idle” positions or redundant personnel. The salaries of these employees are wasted, so rationalizing personnel has a positive effect on the company. Firstly, the most direct benefit is cost savings. Secondly, the culture of slacking off is detrimental to companies, especially large-scale car companies.
In addition, employee “slacking off” is the “philosophy” of most companies. Three people’s work can be done by two, or even two people’s work can be done by one person, which can save a considerable amount of labor costs.
However, this kind of excessive workload is actually detrimental to social development. Reducing the workforce means that more people will lose their jobs, the number of idle individuals in society will increase, and social stability will decline. The benefit is that more money goes into the pockets of capitalists.
Killing a chicken to scare a monkey.
Although downsizing has the most direct output in terms of cost savings, it also means that everyone has the risk of losing their jobs. Therefore, the remaining employees will be more proactive in their work attitudes. This is what is referred to as “killing a chicken to scare a monkey.” More proactive work will ultimately be reflected in sales, but the impact of this effect is not significant and there may also be a counterproductive effect. For example, some employees may think, “It’s better to be laid off”, as laying off employees can actually result in financial compensation. Many car companies have relatively high compensation for layoffs. Suddenly having an extra source of income and not having to worry about finding a job for those who have work at hand, their work attitudes may become more negative. They may continue slacking off, even trying to slack off more, since the probability of being laid off is small and being laid off could be better!
Therefore, the most significant meaning of downsizing is to save on personnel expenses, trading a few months of future losses (compensation) for a large amount of cost savings. It does not have much impact on sales.
两个路径: 提质增效和降本增效 (Two Paths: Quality Enhancement and Cost Reduction)
Reducing costs and increasing efficiency are two separate issues.
Laying off employees can reduce costs, but it may not necessarily increase efficiency.
We divide the path to improve productivity into two types: improving quality and efficiency and reducing costs and increasing efficiency.
Improving quality and efficiency refers to the operational path, which aims to increase overall revenue by increasing output and enhancing product quality.
Reducing costs and increasing efficiency refers to the management path, which aims to decrease total costs by reducing working hours and waste.
Guided by these two paths, based on the dimensions of productivity and production relations in the production and operational processes, we have developed the TOP model for improving productivity:
- The first is technology/T, which involves improving production tools and techniques. By enhancing the efficiency of these tools, we can improve our overall efficiency. Examples include digitization and the introduction of new equipment and technologies.
- The second is organization/O, which involves adjusting our production relationships to ultimately enhance organizational efficiency.
- The third is personnel/P, referring to the producers and workers. Improving the effectiveness of labor essentially means improving labor efficiency.
The strategy that is easier to implement and yields quicker results is the one that enterprises should choose.
Furthermore, when automotive companies experience positive growth, they may have overly high expectations for the future and end up recruiting excessive positions.
It’s similar to starting with an orange but expanding and diversifying the business, eventually becoming a grapefruit. However, just cutting a grapefruit a few times doesn’t necessarily expose the flesh inside.
The same goes for layoffs. Removing redundant positions and unprofitable business lines won’t necessarily harm the essential aspects of a company.
However, enterprises must carefully consider what truly matters. After reducing costs, it is crucial to identify where the increased efficiency lies. Costs can be reduced, but efficiency cannot.
For more information, please continue to follow us at @51SocialSecurity. If you have any further questions about salary, taxes, social security, or employee management, feel free to reach out at any time.
The Difficulty of Understanding the Correlation between Layoffs and Sales.
This question cannot be answered, or at least it is highly unlikely that anyone can provide a definitive answer at the moment. The issue of the relationship between layoffs and sales volume requires evidence to determine whether it is helpful or not. Is there any evidence for this? Is there any supporting historical data? If not, then we can only rely on personal cognition to answer this question, whether it has a positive or negative correlation, strong or weak correlation… Without support, it can only be a matter of personal opinion. Everyone has their own reasoning, but it doesn’t have any substantial effect. This is also a difficulty in current management!
Management is an art, management is esoteric…
Actually, I really hope that dedicated individuals can search for the historical development of enterprises, regardless of whether it is in China or abroad. Through management measures, they can try to find some evidence-based clues and provide scientific guidance to company managers. This would be beneficial for the company, its employees, and would also have social benefits.
At that time, this question would be easily resolved.
For now, without scientific investigation and research data to support it, no matter which perspective we take, companies have their difficulties, and employees have theirs. However, the answerer is not directly involved in the situation, so it is inevitable to be accused of speaking without experiencing the actual situation.
Can layoffs help car companies in difficult times?
Yes, helpful but not decisive.
Compared to the asset-light internet industry, car companies belong to the asset-heavy manufacturing industry, where labor costs make up a relatively small proportion.
Moreover, in the manufacturing industry, there is a limit to the number of positions that can be optimized or eliminated (they are already compressed to the extreme).
Layoffs do not reduce expenses for car companies as much as imagined.
On the other hand, internet companies have a significant proportion of labor costs, so it is relatively easier for them to reduce expenses through mass layoffs. This is why internet giants often lay off thousands or a proportional number of employees.
By doing so, they can maintain operations at low costs during difficult times and have a chance to rebound when the right time comes. Layoffs are never intended to solve the problem of sales (market).
It is the decline in sales and the decrease in market revenue that triggers layoffs in order to cut costs.
Cause and effect cannot be reversed.
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Are layoffs helpful for car companies to get through difficult times?
Yes, they are helpful, but not decisive.
Compared to the asset-light internet industry, car companies belong to the heavy asset manufacturing industry, where the proportion of labor costs in the cost structure is relatively low.
Moreover, in the production and manufacturing industry, the number of positions that can be optimized and eliminated is limited (they have already been compressed to the extreme).
Layoffs do not result in as significant cost reduction for car companies as imagined.
On the other hand, in internet companies, labor costs account for a large proportion of costs, making it relatively easy to reduce expenses by means of mass layoffs. Therefore, it is common to see internet giants laying off thousands of employees or cutting staff proportionally.
By doing so, they can maintain operations at a low cost during difficult times and have a certain chance to make a comeback when the time is right.