Tuesday, July 26, 2016

Trump's Way of Screwing Suppliers Isn't Crazy...

One of the aspects of Donald Trump's business career that will be debated over the next several months is his, what should we call it?, tendency, to not pay his vendors.

There have been lots of discussions on it in the media, using a long list of examples:

Company X (usually a small business) gets the opportunity to work for Trump on a project...Company X fulfills all or part of its obligation...Trump tells Company X to screw off when it's time to pay up.

This isn't like Trump University, where Trump takes advantage of people to sell them on an over-valued product, but it's related.

The most recent example comes right from the Trump campaign -- involving a group of dancers called the 'USA Freedom Kids'

Here's a link to the broader story, but it sounds very similar to ones I've read before.

The USA Freedom Kids were offered a chance to perform as part of the Trump campaign extravaganza. But after they performed, and in other instances after they did their best to meet their end of the agreement, they couldn't get compensated from the Trump organization. From the reports, the Trump organization didn't hold up their end of the deal across multiple instances. USA Freedom Kids ended up out a considerable amount of money (not to mention some probably disappointed children)

I bring up the example because you might read it an wonder, why (and how) can someone routinely pull this off?

If you think about it for a minute, it's actually pretty logical for Trump. First, you have to assume he's someone who puts earning money ahead of being a good person (not a tough stretch).

But now that we've done that, consider how most commercial transactions work in the world. In most cases, engaging in business is a repeated-game scenario. Let's say you and I live in a small town. I run the town's carpet cleaning business and you own the town's carpeted adult movie theater. Let's say you come to see me about some carpet cleaning. My first question to you would be why the hell is the theater carpeted, but my second question would be when can I show up to clean the carpet.

In this scenario, you could decide to screw me over and not pay your bill. But given that we both operate businesses in the same town and we both may have to work together again, you don't have an overwhelming financial incentive to do that. Because if you skip out on the bill, you won't be able to get me to clean your carpet in the future. We're playing a repeated game - the get your adult theater's carpet cleaned regularly game.

The risk you face when you rip me off is actually a bit larger when you consider that I could go around telling everyone you ripped me off. If we're in a small town, they might listen and stop doing business with you on other things for fear you'll screw them. I could also sue you for the money you owe me (because I'm great at cleaning carpets)

But now let's think about Trump and all these vendors. The cases we're talking about, at least the anecdotes that have been reported on, describe lots of various small businesses. A kid's dance crew, an architect, small contractors. In all of these cases, the vendors got the opportunity to work with Trump, but Trump wouldn't pay the bills.

Well, why would he?

If he's hiring small businesses and works in discrete one-off projects (build a building here, build a golf course here, create an grotesque presidential campaign here), then Trump isn't playing a repeated game. Trump is playing a single-period game. The mistake vendors make is when they assume Trump will play like it's repeated. It's an easy mistake to make, because that's how just about every business in the world operates.

But for Trump, there are a number of conditions that would make him more likely to view each project as a single period game:

- His projects are discrete (e.g., a building, a golf course)
- His projects are geographically diverse (outside NYC) - making it hard to really create a risk to his long-term reputation
- Partners are disproportionately local/smaller - creates a dynamic where threats of lawsuits are less of a risk
- Partners are service providers, not manufacturers of goods - No mechanism for slighted partners to recoup their investment by repossessing work product (what's an architect going to do once you've built the building?)

If he picks a small business to do some work for him -- he can save money by not paying his bills and assume he'll find a new small business partner a few years down the road if he happens to be in the same place again. He gets to save money, and all the small business can do in response is try to ruin his reputation and/or sue him. Neither of which is easy for a small company against a large one.

So Trump can get the vendor's work, pocket the money, and look for his next mark when the time comes. If you're someone focused on money (and he's running a business after all), it's pretty hard to argue with the logic. The only concern would be that if enough of these instances occur, eventually your reputation should suffer (I mean, it would have to, right?).

But by that point, maybe you've moved on to a new career...maybe something in politics...

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