Friday, December 12, 2008

Planning for Industry Life Cycles

The auto industry bailout failed to obtain Congressional approval this week although news reports indicate that a few tweaks to the bill might have brought aboard enough Senators to secure passage. But, true to form, the U.S. Treasury holds out the possibility that it still will give some of your money to help the auto makers. It sounds like an end run to me.

All of these bailouts are making people mad. Mish Shedlock says,"Bankruptcy is the best possible result. I am sick and tired of taxpayer money funding corporate ineptitude. Nonetheless I am fearful that Bush and Pelosi will try one more time to revive the dead." Let's hope that the effort will not be resurrected. The industry has had 3 decades to restructure in the obvious face of global competition and innovation and, supported by easy credit, has not prepared adequately for the inevitable.

A couple of decades ago I read an article in the editorial section of the Wall Street Journal describing the demise of the British Steel industry at the end of the 19th century. In 1875 the British had 40% of the world production of steel and exported 40% of their output to the U.S. By 1896 their share of the world steel market had dropped to 22.5% and they exported little to the U.S. The Journal article attributed the demise in part to the industry's reluctance to ignore their sunk cost in the aging Bessemer process and reinvest in the more efficient open-hearth process. A history of the steel industry concurs: "[Etsuo] Abé explores the record of iron and steel firms in Victorian England by analyzing Bolckow Vaughan & Company. The leading problem of the company was its focus on the wrong technology, not switching to the open hearth furnace method until long after the technology was developed. It is apparent that the company was not focused on long-term decision-making."

Long-term decision-making in business is not only about developing a 3-year strategic plan to sell cars and compete in the existing market with existing resources. In a major corporation, it is not even limited to a 5-year investment plan. It also includes careful evaluation of product life-cycles and planning, at least tentatively, decades out, for the long term health and survivability of the corporation. There are established methodologies for doing that, which are well-known by sophisticated business people and which are regularly revisited by the best companies. Different strategies, such as grow, harvest, or exit, apply at different points in the life-cycle; and those strategies have different implications for investment and marketing. I have experienced such planning and seen it work quite well in a variety of industries from vacuum tubes to hard rubber. Whether or not there is planning for it, change happens (see, e.g. The End of the U. S. Piano Industry). It will either happen for you -- or to you.

I suspect that many company executives are reluctant to face the prospect of radical reorientation of their business when they have become emotionally and professionally committed to a product or a technology, or a location for that matter. It is not easy for an executive to step outside the day to day, or year to year, and think about the demise of a business that he and his employees have struggled for a lifetime to build. But that's what an executive and his staff need to do. And they need to do it well because choosing the wrong path can lead to unnecessary collateral damage -- negligent damage to people.

After the Japanese consumer electronics manufacturers overtook the American television industry in the early 1970s, they moved the fast-maturing manufacture of picture tubes and television sets to Taiwan and Korea and upgraded their home capabilities to higher technologies. It was not by accident -- and this in a culture that was committed to lifetime employment.

Peter Drucker wrote an excellent little book, The Effective Executive, in which he noted the importance of an executive's taking time off from day-to-day management to close his door and contemplate the future of the business. That is a tough thing to manage, but it is a key to developing an objective view of the business and the corporation's ultimate viability. And the CEO's resulting foresight should move the organization to understand and plan for the realities of a dynamic marketplace.

I don't know what kind of process the auto-makers undertook to address the long term rise and fall of automobile manufacturing in the U.S. As an outsider, I don't see individual transportation disappearing in the next 50 years. I expect that to be around. But, like 19th Century British steel, U.S. auto maker tardiness in adopting new technologies has lowered their sales potential; and their fixed costs, including union contracts, have left them unprofitable.

Let's Hope the Auto Bailout has Failed for Good . It will not be the end of the world as we know it. Bankruptcy just might provide the industry an opportunity to consider all options, including some that will allow a future in the United States.

Wednesday, December 10, 2008

Stiglitz: Monday Morning Quarterback

Nobel Prize winning economist Joseph Stiglitz has written a critique of the financial crisis in Vanity Fair (see “Capitalist Fools”). But the critique is limited to an evaluation of where and how the “system” failed. And consequently any suggestions for avoiding future crises that he might have made or implied are limited to fixing his problems with the system – namely, elimination of the barriers between investment and commercial banking, non-existent or lax regulation, appointing as Chairman of the Fed, “a devotee of the objectivist philosopher and free-market zealot Ayn Rand” (a falsehood), tax cuts, opaque accounting practices, flawed incentive structures, and mismanagement of the bailouts. Having completed the critique, Stiglitz ends his piece with a conclusion that was not supported anywhere in his evaluation.

The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America—and much of the rest of the world—of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.

Ipse dixit.

A free market is self-adjusting. But when government interferes in the market to eliminate the incentives, whether positive or negative, the market’s adjustments become distorted. The market then becomes moved, not by the invisible hand, but by an iron fist.

Had Dr. Stiglitz critiqued free market economic philosophy in his article, we might have been able to identify some specific point to debate, but alas, Dr. Stiglitz provides no statement of economic philosophy except the bare assertion that markets are not self-adjusting and that the role of government should not be minimal.

Oh yes, he does make an ad hominem argument against capitalist “ideology” – “a flawed economic philosophy” – by playing the Ayn Rand card. Such sophistry is certainly not beneath the likes of Henry Waxman, but you would think that it should be beneath the intellectual stature of a Nobel Prize-winning economist.

I guess not.

Stiglitz wants to perfect a system that itself is flawed to the core and cannot be perfected. He could have addressed the problem at the core – that the century-long experiment in central planning (the Federal Reserve System) has reached its logical conclusion. He might have engaged in a constructive discussion about how to establish a medium of exchange that is not subject to the whim of politicians or the coercive monopoly of a cartel of banks that are insulated from risk and indulge in moral hazards. See "Credit Crisis and Moral Hazards."

Instead, Stiglitz has revealed himself to be just another second-rate Monday morning quarterback.

P.S. The "flaw" in Greenspan's thinking was that he was attempting to apply free market principles to a system based on government control. If he were a "devotee" of Ayn Rand, he would have recognized the contradiction immediately and understood that one of his premises was wrong.

Thursday, December 4, 2008

Kant and the Mindless Sheeple

As a younger person, I found it mystifying that an advanced, educated German population in the 1930s could be duped into allowing themselves and others to be sacrificed for the "good" of the group, the collective, the state. Then I learned about Immanuel Kant, Georg Hegel, Frederich Nietzsche and Martin Heidigger, the philosophers whose theories were used by demagogues to justify genocide and oppress a willing and docile population that had been conditioned by the intelligencia into rejecting the evidence of their own minds and blindly following evil people down the path of aggression and tyranny. Stephen Hicks has an excellent DVD, Nietzsche and the Nazis, about how this historic tragedy developed.

John Tate has written a succinct and readable summary of Kant's core premises. Check it out. You will detect the familiar ring of the relativism and the self doubt that plagues the humanities, political science and journalism departments of many of today's institutions of "higher" learning. These notions, which have been advanced, refined and blended with the ideas of Rousseau, have permeated the main stream media and, through them, the less educated population who, it appears, represent the majority of voters. Of those who recognize the origins of such distortions of reality, few stand up and speak out against the assault on common sense.

For more, read David Kelley's Evidence of the Senses and Stephen Hicks' Explaining Postmodernism.

A country populated by people who doubt their own minds and believe that one morality is just as good as any other will be easily (mis)led by power hungry and avaricious men who, while pretending morality, care nothing about it.

More important to the advancement of civilization than the current economic crisis (although largely responsible for it) is the crisis of philosophy. The conventional wisdom that philosophy is for impractical people with their heads in the stratosphere is a myth. If you want to consider yourself educated, you need to understand and adopt a philosophy. Develop a conviction, progressively, about what is real (metaphysics), the validity of your knowledge (epistemology), how to reason (logic), what is right and what is wrong (ethics), and how to live with other people in a mutually beneficial society (politics).

Wednesday, December 3, 2008

Why the Continued Panic?

There are those who, pursuing the contrarian viewpoint, are suggesting that the market might have bottomed. For example, the well-respected Aden Sisters have published Some Positive Signs. Carl Swelling in Very Oversold Market thinks that there might have been at least a temporary bottom. Why, then, if things are beginning to turn around, are the authorities continuing to dump a historic volume of greenbacks on what appears to be a garden variety recession. Well, it's because their solutions are not producing results but are making matters worse and they fear, not a recession, but a deflationary depression. Drake Bennett in the Boston Globe describes "Depression 2009: What Would It Look Like?" It seems that this vision has panicked those who feel that they have the responsibility to Do Something. Not that they have distinguished themselves by their economic acumen, but their apparent fear ought to give you a reason to consider your personal situation with this prospect as one of the realistic alternative futures before you.