The Painful Death of the Old Economy

20060124

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     Today, Ford Motor Company announced that it will likely lay off some 30,000 workers and close 14 North American automobile manufacturing plants over the next several years. This is tragic and disheartening news for the workers whose jobs will be lost and for the American automobile sector, once a hallmark of America’s economic prowess. Yet, this news is neither surprising nor unexpected, and it comes as a result not a failing economy but of a failing business model.

     Unfortunately, many of America’s, and indeed the West’s, hallmark businesses and industries are suffering terribly in the modern marketplace because those businesses and industries fail to realize that the old way of doing business- raising profits, paying giant dividends to shareholders, and paying unbelievably massive bonuses to members of the board- is no longer the way to earn money. The ‘build it and they will buy it’ economy is dead.

     In fact, the modern economy is about services delivered instead of products sold. Consider the average American household. Granted that most households pay rent or a mortgage and at least one car payment, but after those expenses, the most money paid out is for services. Americans spend hundreds of dollars a month, adding up to tens of thousands of dollars a year, on internet access, cell phone plans, and digital television programming delivery. Even in their purchasing of cars and houses, this same rule applies. How many people buy a car because it has a built in DVD player or GPS navigation system, or chose where they live because there is DSL available?

     Meanwhile, the American automobile industry continues to produce substandard, overpriced products, often lacking in the innovative, service based features that the modern purchasing public looks for, while their competitors overseas, especially in Japan and South Korea, continue to push the envelope with their own innovative and service based offerings.

     This reality is reflected best in two areas specifically related to cars: mileage and advanced technology. American manufacturers lag behind their foreign counterparts sometimes in the double digits in MPG figures, a significant factor in the mind of the purchasing public. Simultaneously, American manufacturers lag behind in the offering of advanced and alternative technologies such as hybrids. As a result, the American manufacturer market share is being crushed by an American purchasing public that wants quality and substance to be part of its purchase.

     This reality stands only to get worse in the next decade as technological advancement leads to the availability of technologies like fuel cells, advanced technology hybrids, autopilot navigation systems, and the like. Some of these technologies are already being tested in Japan and South Korea while most people in the US have not even heard of them.

     The bright side of the deflation of the American automobile manufacturing industry is the creation of an environment where, for the first time since the 1920s, small innovative companies suddenly have a chance to establish themselves in the marketplace. No one should be surprise if, in the next 5-7 years, several new and innovative- and hopefully American- automobile companies appear, offering consumers truly advanced products at affordable prices.

     This same model promises to repeat itself in industry after industry over the next 20 years as the demand for technology in everything we purchase takes hold. Companies who conceive of this driving force and embrace it will survive. Companies that fail to do so will be crushed under the weight of those who succeeded.

DLH