Automakers face a challenge in managing the future

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When businesses are initially established, their success largely depends on their value proposition and unique offering to the market. This success enables companies to grow and expand. But then what?

Large organizations often become so focused on current revenue streams that they lose sight of priorities like imagining the future, identifying innovations and making smart strategic choices about where to invest. Instead, they move into survival mode, trying to maintain their current positions rather than taking the risk of transitioning into new ones.

Put differently, the challenge for companies is how to deliver on this year’s goals while simultaneously trying to position themselves to be successful in the future. This dynamic is playing out big time in the transportation industry. There is perhaps no better current example of this dilemma than traditional automakers. These companies are facing disruptive technologies such as electric vehicles, connectivity, autonomous vehicles, a change from vehicle ownership to purchasing transportation as a service, and the global emergence of subcompact vehicles. They also face an unexpected wave of new competitors such as Waymo, Tesla, Uber, Lyft and others from Silicon Valley, as well as BYD and LeEco from China.

The great challenge for senior industry executives is how to manage the decline in traditional vehicle sales until the return on new technology investments fill the void. In this way, auto executives are facing a situation similar to what traditional entertainment companies faced with the switch to streaming, or brick-and-mortar retailers with the rise of e-commerce.

The challenge presented is what strategic bets should automakers make going forward and how can they modify current business models to maximize positive outcomes for all stakeholders? Companies are having to reengage fundamental questions such as where and how they should compete.

Automakers aren’t the only one faced with challenges by a changing transportation industry. For those born since the 1980s, owning a car and getting a driver’s license aren’t the life milestones they once were. Younger buyers are more interested in ease of transportation and mobility, and with often crippling student loan debt they are thrilled not to have car payments. Students graduate college with an average of about $37,000 in student loan debt. It all adds up to $1.5 trillion across the country.

Millennials are also killing the motorcycle industry. For instance, Harley Davidson is struggling with declining sales and an aging demographic that is increasingly hanging up its boots. Being an “Easy Rider” is no longer easy for an aging customer base, and younger consumers are more interested in less expensive bikes that generate lower margins for manufacturers. To attract younger customers to the brand, Harley Davidson is setting up riding schools around the country and is releasing an electric motorcycle called the “Livewire,” which will be priced at just under $30,000. The manufacturer’s suggested retail price for the entry- level Toyota Prius is about $23,500.

In the unlikely event you are not clear on this, everyone – individuals and institutions – are living in an age of disruption. The growing challenges of globalization and the rapid spread of digital technologies and artificial intelligence offer existential threats as well as new opportunities. The younger generation will experience the consequences of these disruptions for many years to come and will witness industries in transformation through their own daily experiences as they change the way Americans live and work.

It once again shows that the late, great author V.S. Naipaul was right when he said, “The world is always in movement.”

 Originally Published: February 9, 2019

Find an intelligent way to deal with China and economy

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Trade policy is a contentious issue in contemporary America. A common refrain in trade discussions is “all we want is a level playing field.” President Trump portrays his tough trade sanctions, especially against China, as a confrontation aimed at remedying decades of America being ripped off in the global marketplace.

This represents a major reversal in America’s China policy. Since President Nixon’s opening to China in 1971 and across eight subsequent administrations it was generally believed that engagement would induce China to work with the West and become a peace-loving democracy with no designs on regional or global power.

As a candidate, Trump stood out for his embrace of America-first policies and his promise to “Make America Great Again” by addressing the grievances of ordinary citizens who feel dispossessed. Once in office, Trump, a self-described deal maker, has not been fond of large multilateral deals. He was quick to withdraw from the Transpacific Partnership agreement. After first threatening to void the North American Free Trade Agreement by executive order, his administration renegotiated it.

Countries often use protectionism tools such as tariffs and quotas to support domestic industries until they are able to compete internationally. Tariffs are taxes imposed by a country that make imports more expensive. Quotas amount to quantitative restrictions on imports. It helps to keep in mind who loses and who gains from a tariff or quota. Domestic producers and employees gain and consumers lose. Governments also benefit from tariffs because they generate revenue, but tariff revenues are typically not a big consideration in developed countries.

Countries can also impose stringent quality and safety standards on foreign products. A country can tailor the standards to the product descriptions at home, thereby giving domestic producers an advantage. Consider the continuing debate over stricter standards for antibiotics in the European Union versus the United States. Are these measures of safety or a way to protect a domestic industry? Then there are all kinds of red tape that delay exporters from gaining access to a country’s market.

Still, there is another insidious tool that a country can use to promote its domestic industries. China and other countries build national champions with government funding of state-owned enterprises (SOEs). China is the world’s second largest economy, accounting for about 15 percent of global economic output. It has seen extraordinary economic expansion over an extended period, with double-digit growth for close to 30 years.

Its SOEs have facilitated that growth and are the backbone of the Chinese economy. The nation’s approximately 150,000 SOEs control around $16 trillion in assets, constitute about 40 percent of China’s gross domestic product and employ 35 million people in strategic industries such as energy, technology and telecom.

China’s government helped launch new and emerging industries by channeling capital into SOEs. For example, it flooded global markets, depressed prices, and literally shut down hundreds of U.S. solar-panel startups. China’s SOEs are front and center in implementing China’s One Belt One Road initiative, the nation’s vision for massive development of trade routes between Asia, Africa, and Europe.

These government subsidies stimulate excess production, depress market prices, and enable state-owned enterprises to capture market share. Closely related is the theft of intellectual property and forced technology transfers, often by SOEs, that highlight the need to constrain these enterprises. Countries such as China hesitate to allow state-owned enterprises to fail for fear that it would unleash a tidal wave of unemployment.

While trade talks between China and the United States may be productive in dealing with tariffs, the Trump administration should also address less traditional tactics that amount to cheating. They include China’s use of subsidies to key state-run companies to undercut their American competitors. What should be clearly understood here is that dealing with the Chinese is like engaging in unprotected sex.

Originally Published: January 27, 2019

Sham tax ‘reform’ proves more than ever that isn’t about reform, it’s about money and influence.

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The imperfect tax bill President Trump signed into law on Dec. 22 is further evidence of the rot in Washington,. The tax bill isn’t about tax reform, it’s about money and influence.

Consider the giveaway known as the carried interest rule. It’s another outrageous example of the powerful getting what they want, as they always do. This will come as no shock to anyone over the age of five.

The term “carried interest” derives from the share of profits that 12th-century ship owners and captains were given as an interest in the cargo they carried, usually a 20 percent commission to provide an incentive to keep an eye on the cargo.

Today carried interest is the 20 percent of profits from their funds with which private equity firms, venture capitalists, and real estate partnerships compensate themselves. These proceeds are taxed at a capital gains rate of 20 percent, about half the top individual income rate, which will fall to 37 percent under the new tax law. Critics argue that this money is effectively income and should be taxed at individual income tax rates. The constituents for the deduction argue that removing the incentive would reduce entrepreneurial risk taking.

The reason for the loophole’s survival comes down to campaign contributions to key lawmakers and intense lobbying to maintain the favorable tax treatment. As Gary D. Cohn, director of the White House National Economic Council said, “The reality of this town is that constituency has a very large presence in the House and the Senate and they have really strong relationships on both sides of the aisle.”

The American Investment Council, a Washington trade association that represents private equity firms, reported some $970,000 in lobbying expenditures for the first three quarters of 2017. This is in addition to the smart investment made by way of campaign contributions targeted to key lawmakers. For example, employees of the private equity firm The Blackstone Group L.P. contributed $212,000 to Senator Majority Leader Mitch McConnell in 2017 alone. In turn, politicians serve their contributors by protecting the carried interest preference.

Private equity firms have the means and vanity to get what they want. It is further proof that money is the mother’s milk of politics and that big money gets its way in Washington, D.C.

During the presidential campaign both President Trump and Secretary Clinton gave a pitch-perfect populist performance, wanting everyone to know that they were militantly opposed to this loophole, a form of welfare for the wealthy. When a politician says something like that, sports fans, try inserting a negative and you are likely to hit pay dirt. Political rhetoric is as unrelated to the truth as an advertising campaign.

The power of money seems eternal. Politicians love it like a child loves Christmas, and all are working hard to avoid reading their own political obituaries. Knowledge that it has always been this way is no consolation.

They tell pro forma lies to the public and the media, and then begin to believe what they read. Not laying blame, just putting truth into words. So House Ways and Means Committee Chair Kevin Brady (R. Texas), with a truly magnificent smile, said on the Morning Joe talk show “carried interest, we can talk about that for the next hour if you like, but for most Americans they could care less about that.”

In its pursuit of a free lunch, the public is often a bit too eager to accept the things they want to hear at face value, even though they should know that truthfulness is not a long (or short) suit for elected officials, who spin untruths with the same gusto young Abraham Lincoln supposedly split logs.

You can’t bring about change by wishing upon a star. You can run with that.

 Originally Published: January 6, 2019

A high-stakes contest for technological supremacy

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Meng Wanzhou, chief financial officer of privately owned Huawei Technologies Corp., was arrested by Canadian police at the behest of American law enforcement authorities seeking extradition as she changed planes at Vancouver International Airport. Wanzhou is the daughter of the company’s founder, a former military engineer with China’s People’s Liberation Army.

She has been charged with conspiracy to defraud banks in connection with alleged violations of American sanctions on Iran. The December 1 arrest occurred on the same day that President Trump and Chinese President Xi Jinping agreed to a cease fire in the escalating trade war between the world’s two largest economies.

Huawei, China’s smartphone and telecommunications giant, has long been at the center of drama between the United States and China. The U.S. has pressured allies to limit use of Huawei products and technology.

Huawei may not be a familiar name to Americans, but it is a global telecom behemoth, with about $93 billion in revenue 2017, almost on par with Microsoft.

Based in Shenzhen, near Hong Kong, it has the biggest research and development budget of any Chinese company. The firm has benefitted from Chinese government subsidies, contracts, and financing from the state-owned China Development Bank. These subsidies give Huawei a huge advantage over its competitors.

The company is the world’s second largest maker of smartphones, behind only Samsung. It is the world’s largest provider of telecom equipment, including switches, routers, cell tower gear, cloud computing and cybersecurity. It also sells personal computers and a wide array of wireless devices like smart watches.

Huawei is seen as a global leader in 5G, the ultra-fast wireless technology that will soon allow all the objects around us to be connected. That is good for China and bad for the United States. The U.S. worries that if Huawei wins the race to develop 5G technology, Americans may someday be buying their equipment to connect factories, vehicles, homes, utility grids and more.

Huawei is also seen as a cyber-security threat. Washington has accused it of being a potential conduit for Chinese spying and cyber theft. The Justice Department, intelligence agencies, and regulators have long believed the firm has violated American sanctions against Iran, that it works primarily for Chinese government interests and that its equipment contains back doors that allow that government to spy on customers.

In 2012, the House Intelligence Committee released a report that tagged Huawei’s products a potential security threat, accused them of engaging in intellectual property theft and recommended a ban on the company’s equipment. As early as 2003, Cisco Systems accused Huawei of infringing on Cisco’s patents and illegally copying source codes used in its routers and switches. Other accusations have also surfaced. Motorola named the firm as a co-defendant in a lawsuit and T-Mobile alleged that Huawei stole technology form its headquarters.

The Committee on Foreign Investment in the United States, an inter-agency committee of the federal government, has blocked deals involving Huawei on grounds that it had possible ties to the Chinese government and that the strategic nature of the telecommunications industry made such deals potential threats to national security. This August a defense policy bill prohibited the federal government from using Huawei equipment.

President Trump is considering an executive order that would bar American companies from using telecommunication equipment made by Huawei and other Chinese telecom companies because the equipment poses serious national security risks. Of course, the company strongly denies stealing intellectual property or enabling Chinese espionage.

It is unclear how the arrest of Meng Wanzhou will influence ongoing trade talks between the United States and China. One possibility is that the U.S. government will allow trade to trump national security concerns, as the president has suggested he would intervene on the Huawei issue if it would help secure an agreement.

Americans best stay tuned as this high-stakes contest for technological supremacy unfolds.

Originally Published: January 4, 2019

 

Corporate America needs a 21st century Dragon Lady

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While successful female business leaders have made headlines in recent years — a Mary T. Berra, Virginia M. Romelty, and Indra K. Nooyi all come to mind — just 5.2 percent of CEOs of companies in the S&P 500 are women.

To reduce this imbalance we need a modern incarnation of the Dragon Lady, a protagonist who is surely among the great characters in American literature. Unfortunately, her real significance has become obscured by the passage of time since she starred in Milton Caniff’s comic strip “Terry and The Pirates,” which he set in turbulent China during the 1930s and 1940s and is now regarded as something of a masterpiece.

It began as a standard newspaper comic strip that followed the adventure story traditions of its time. Terry Lee was a plucky adolescent who ran around China under the watchful eyes of his adult mentor, Pat Ryan. Pat was a two-fisted Black Irish soldier of fortune who was assumed to be an appropriate guardian for Terry because he smoked a pipe, talked in terse ambiguities, played football in college and never displayed any discernable sense of humor.

But all these conventions went out the window when the Dragon Lady appeared.

These days, people think of her as the quintessential Asian temptress, luring men to perdition with her irresistible female wiles. Embodying in full-blooded glory all the primal male fears of women, which they have woven into elaborate horror stories to tell each other in locker rooms, sports bars or their equivalent ever since Old Testament times.

Many contemporary women find this stereotype offensive, and rightly so. But it has nothing to do with the remarkable character Caniff created. Unfortunately, newsprint is highly perishable, so few people today can see for themselves what the Dragon Lady was really all about.

Yes, she was awesomely beautiful. But she never let this genetic accident define her character. She paid no attention to the standard male view that a woman’s physical appearance is the most important thing about her.

Yes, she spent most of her life engaged in various illegal activities. But this was more an expression of her clear-eyed pragmatism than evidence of any moral depravity inherent in her female nature. From her perspective, living outside the law gave her more freedom to be herself than she could ever have enjoyed in any of the conventional roles assigned to women. The Dragon Lady had no patience with this.

It is worth mentioning that Terry and Pat were not above reproach either, since they were seeking a lost gold mine that was obviously not their lost gold mine.

She was a brilliant and sophisticated woman, whose Chinese-English ancestry had made her an outcast to both societies. Highly educated in Eastern and Western cultures, she was wise in the ways of the world and the frailties of its people. Most of all, she choose to live entirely by her own existential set of moral principles that gave no quarter to anyone. All of which made her more than a match for Caniff’s irredeemably wicked multiethnic villains.

He introduced her in 1934 as the strong-willed leader of a pirate gang preying up and down the South China coast. This kind of dominating role in command of an all-male crew was scarcely common among female characters in the American literature of the time. But Caniff made it seem like the most natural thing in the world by emphasizing her cool intelligence, emotional toughness, and Wall Street trader’s ability to balance risks and rewards.

The behavior of many members of the masters of the universe club would suggest that they have limited talent. Many organizations are directed by the can-do-no-wrong man of the extended moment who leaves no indelible trace and will be forgotten long before he will be remembered.

You will know women have finally arrived when there are as many incompetent women in the C-Suite as incompetent men. Ain’t it de troot?

Originally Published: December 23, 2018

 

Short-term thinking costs General Motors, US taxpayers

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Just after Thanksgiving, General Motors made the jarring announcement that it was closing five factories in Ohio, Michigan, and Ontario, killing the production of several models including the Cadillac CT6, the Chevrolet Cruze compact, the Buick LaCrosse, the Volt plug-in hybrid, and cutting about 14,700 jobs. This is the firm’s largest cost-saving plan since the taxpayer-funded bankruptcy bailout in 2009.

GM received more than $50 billion of taxpayer assistance through the Troubled Asset Relief Program during the financial crisis. While the feds recovered $39 billion, the firm’s management failures cost taxpayers $10.5 billion. General Motors had racked up more than $40 billion in losses since 2005 alone, losses that had little to do with the financial crisis.

Many of the jobs to be eliminated are populated by those who are perpetually in debt, no matter how hard they work. And if you believe senior GM executives will not receive their annual bonuses, then you believe pigs can fly.

The automaker, the leading automobile manufacturer of the 20th century, expects to free up $6 billion in cash flow by the end of 2020, which will enable it to double down on its investment in electric and autonomous vehicles to stay competitive in a fast-changing market and sluggish sales.

The automobile industry is simultaneously facing multiple disruptions. For example, young, environmentally conscious, technology-oriented urban residents increasingly shun car ownership in favor of more convenient, less expensive mobility options. Owning a car and getting a driver’s license aren’t the life milestones they once were.

For years, General Motors has not been building the vehicles American consumers want. As a result, their car lineup has had more misses than hits. It has been slow to respond to competitive pressures and to align firm resources with changing market demands. For example, the rapid rise of Tesla Motors in the electric vehicle market, Toyota gaining market share with its eco-friendly Prius and the subsequent GM bankruptcy suggest that the firm made the wrong decision when it aborted its electric vehicle program in 2002.

In the ultimate irony, General Motors had a head start with electric vehicles. The firm introduced the “Impact,” a concept electric car, at the Los Angeles Auto Show in January 1990. The Impact was met with immediate praise and GM announced that it would become a production vehicle. Based on the proof of concept electric vehicle, the California Air Resources Board passed a zero-emissions vehicle mandate that required all major automobile suppliers to develop them if they wanted to continue to sell in California.

General Motors became the world’s first mass-produced electric vehicle retailer when, in a blaze of glory, it released the EV1 in 1996. The vehicle could only be leased, despite requests by many customers to purchase it.

But in 2002, the firm cancelled the model that might have been its best hope for the future, citing high costs, a limited market for electric vehicles, and the lack of technology to make high-performance cars. GM recalled all the EV1 and, in one of its worst public relations moves, recycled them, meaning the recalled vehicles were taken to Arizona and crushed. The electric powertrain that powered Tesla vehicles was based on the prototype developed for the EV1.

Once again, GM management demonstrated that short-term thinking is extremely costly in the long term. It is a reflection of the firm’s slow adjustment to changing consumer tastes and the failure to tailor the firm’s resources and business strategy to rapidly changing market forces.

General Motors may have been a 20th-century giant with a large past but today its future may be getting smaller. The sands of time may well be running out for the firm to prepare for the automobile industry’s still-uncertain future.

Originally Posted: December 22, 2018

A day that should live in infamy

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Early in 1941, the government of resource-poor Japan realized that it needed to seize control of the petroleum and other raw material sources in the Dutch East Indies, French Indochina and the Malay Peninsula. Doing that would require neutralizing the threat posed by the U.S. Navy’s Pacific Fleet based at Pearl Harbor in Hawaii.

The government assigned this task to the Imperial Navy, whose combined fleet was headed by Admiral Isoroku Yamamoto. The Imperial Navy had two strategic alternatives for neutralizing the U.S. Pacific Fleet. One was to cripple the fleet itself through a direct attack on its warships, or cripple Pearl Harbor’s ability to function as the fleet’s forward base in the Pacific.

Crippling the U.S. fleet would require disabling the eight battleships that made up the fleet’s traditional battle line. It was quite a tall order.

The most effective way to cripple Pearl Harbor’s ability to function as a naval base would be to destroy its fuel storage and ship repair facilities. Without them, the Pacific Fleet would have to return to the U.S., where it could no longer deter Japanese military expansion in the region during the year or so it would take to rebuild Pearl Harbor.

It soon became apparent that the basics of either strategy could be carried out through a surprise air raid launched from the Imperial Navy’s six first-line aircraft carriers. Admiral Yamamoto had a reputation as an expert poker player, gained during his years of study at Harvard and as an Imperial Navy naval attaché in Washington. He decided to attack the U.S. warships that were moored each weekend in Pearl Harbor. But in this case the expert poker player picked the wrong target.

The Imperial Navy’s model for everything it did was the British Royal Navy. Standard histories of the Royal Navy emphasized its victories in spectacular naval battles.

Lost in the shuffle was any serious consideration of trying to cripple Pearl Harbor’s ability to function as a forward naval base. So it was that, in one of history’s finest displays of tactical management, six of the world’s best aircraft carriers furtively approached the Hawaiian Islands from the north just before dawn that fateful Sunday, Dec. 7, 1941, launched their planes into the rising sun, caught the U.S. Pacific Fleet with its pants down and wrought havoc in spectacular fashion. On paper at least, this rivaled the British Royal Navy’s triumph at Trafalgar.

But so what?

The American battleships at Pearl Harbor were slow-moving antiques from the World War I era. As we know, the U.S. Navy already had two brand new battleships in its Atlantic Fleet that could run rings around them. And eight new ones the navy was building were even better.

More importantly, the Pacific Fleet’s three aircraft carriers weren’t at Pearl Harbor. American shipyards were already building 10 modern carriers whose planes would later devastate Imperial Navy forces in the air/sea battles of the Philippine Sea and Leyte Gulf.

Most importantly, as the sun set on Dec. 7 and the U.S. Navy gathered the bodies of its 2,117 sailors and Marines killed that day, all-important fuel storage and ship repair facilities remained untouched by Japanese bombs, allowing Pearl Harbor to continue as a forward base for American naval power in the Pacific.

So in reality, Dec. 7 marked the sunset of Japan’s extravagant ambitions to dominate Asia. Admiral Yamamoto and the Imperial Navy’s other tradition-bound leaders chose the wrong targets at Pearl Harbor.

The dictates of tradition are usually the worst guides to follow when it comes doing anything really important. After all, if they survived long enough to be venerated, they’re probably obsolete.

Originally Published: December 5, 2018

 

 

If the American Dream isn’t dead, it’s in big trouble

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The American Dream is one of the country’s most attractive founding myths. Ask Americans what the term means and they will provide various definitions that are neither true nor false; people are free to define their core concepts as they see fit.

There is no one American Dream; there are many, based on specific circumstances. Historically, definitions have ranged from religious and political freedom to social equality and economic mobility in the hope that everyone would have an equal chance to succeed.

Sadly, the idea that anyone who really wants to can make their way to the top in the United States may be dead. The ordinary working-class individual would have to be living in a commercial to still believe in the American Dream. When you are poor, trying to get a fair share of the American pie can become a burden that only makes you angry and frustrated.

In 1931, the now obscure historian, James Truslow Adams wrote “The Epic of America,” a book that gave one of the first recorded definitions of the American Dream. He was not writing about consumption, buying things you don’t need and can’t afford with borrowed money. He focused on ideals rather than material goods. According to Adams, the American Dream was:

“That dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement. … It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position”.

He was describing a society that values equality and merit are above all else; with hard work, everything is possible. It doesn’t matter where you are from, what schools you went to, or how much money your parents have. What matters is that if you work hard, you can become anything you want. Everyone in America has a chance to pursue his or her personal vision no matter who you are.

Conversely, success is a choice. It’s your own fault if you don’t make it from rags to riches.

In the wake of the Great Recession and the 2008 financial crisis, many people believe the American Dream is dead. The issue of economic inequality has captured the attention of groups across the social and political spectrum; the general public, policy makers, business people, and academicians. Surveys show that more and more Americans believe income and wealth are distributed unfairly.

Few would deny the growing gap between rich and poor in the United States is at historic levels. Wealth and income imbalances have been documented with monotony.

The inconvenient truth is that the richest 10 percent currently own nearly 60 percent of U.S. wealth. The top 1 percent now earns about 30 percent of total income. The top 0.1 percent earns more than 10 percent. According to the Federal Reserve Board 40 percent of Americans can’t cover a $400 emergency expense.

A number of factors have been suggested as important contributors to the widening gap between the “haves” and “have nots” and the increasing concentration of income and wealth. Among them are globalization, technological advances, crony capitalism, lower taxes on the rich, and government policies and programs.

Until these causes and consequences are addressed, there is no realistic hope for dealing with unacceptable levels of economic inequality in the world’s richest country. America will continue to witness the erosion of the middle class and the creation of a permanent underclass that undermines the conceit of a democratic society in which all people have an equal and inalienable right to life, liberty and the pursuit of their own happiness.

Originally Published: November 19, 2018

 

The lesson of the Sears bankruptcy

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Once the greatest retailer in the modern world, Sears Roebuck, now saddled by debt and declining sales, filed for Chapter 11 bankruptcy on Oct. 15 after 125 years in business. The company was unable to pay $134 million in loans and announced it would close 142 unprofitable stores near the end of the year.

These closings are in addition to 46 others that were expected by next month. That will leave roughly 500 store locations. It is unclear whether the company will survive beyond the holiday season and the bankruptcy reorganization plan.

It was not always like that for the institution that was once regarded as America’s Everything Store. At the top of its game for decades, Sears was regarded as one of the best-managed retailers in the world. It accounted for more than 2 percent of all U.S. retail sales, selling everything from TVs to dresses to lawn mowers. The target customer was the average American, neither the richest nor the poorest 10 percent.

The often-overlooked thing about the company is that it was a technological wonder, the Amazon of its day. It pioneered supply chain management, store brands, catalogue retailing, and credit card sales, all of which are critical to the success of today’s most admired retailers.

Sears planted the seeds of its demise when it jumped from one strategy to another in the 1980s. For example, it acquired the financial services firm Dean Witter in 1981 and tried to sell investment products as well as power saws under the slogan “From Stocks to Socks”. Customers could not reconcile the new image with the old. Inconsistencies like these confused customers and undermined Sears’ credibility and reputation.

While the firm shed Dean Witter in the 1990s, another big challenge loomed. It had to deal with heightened competition from big-box stores such as Walmart and Target throughout the 1980s. Sears was late to grasp the power of discounting and later the rise of online shopping. The company failed to understand that retailing was changing and, like other old-economy, big-name retailers such as Toys “R” Us and A&P, it failed to change with the times.

In 2005 the company merged with Kmart, which was headed by hedge-fund manager Edward Lampert. He believed that merging the two firms, with a combined 355,000 employees and more than 3,500 stores in 2006, would make them strong. At the beginning of 2018, that workforce totaled less than 68,000 across fewer than 700 shops. The bankruptcy threatens to put these employees out of work and throw the financial security of its 100,000 pensioners into doubt.

Lampert’s strategy was to run the company like a hedge fund, cutting spending on advertising, inventory, and store improvements, as well as spinning off many of Sears’ best properties into a real estate trust he controlled. Over the past decade, the company sold or spun off many of its most valuable brands, such as Craftsman tools and Lands’ End clothing to stay afloat and pay the bills as it lost sales to Walmart, Target, Home Depot, and Amazon with its endless online catalog. All this hastened Sears’ decline.

The story of Sears’ demise is another cautionary tale about the ruthless process of creative destruction – new innovations driving out old ones. Once again an established company fell victim to the “creative destruction” – a term coined by Joseph A. Schumpeter, an economist working in the first half of the 20th century – of new entrepreneurs.

Technology and customer tastes change and provide opportunities for competitors, especially those regarded as “too small to worry about”, to develop new strategies that are better aligned with the altered industry landscape and ultimately eat established players’ lunch (and breakfast and dinner).

All in all, not a pretty story. One that once again proves that nothing is forever; not now, not ever.

Originally Published: October 21, 2018

Concentration of power benefits the haves

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In the continuing controversy over economic inequality in the United States, the focus is on such factors as the decline of organized labor, tax cuts for the well off, outsourcing of American manufacturing jobs overseas, and the substitution of capital for labor. But the lack of competition in many sectors of the economy is also a powerful driver of disparity, redistributing income and wealth from consumers generally to the affluent.

As with lengths of skirts, lapels on men’s suits, and other more or less important customs, there are also fashions in markets. Over the last two decades, many firms have been consolidated across the U.S. economy. Oligopolies are common and concentration is increasing in numerous industries.

Many markets are now oligopolies, in which a small number of companies account for most sales. In major industries from telecoms, social media and internet search to retail, airlines, beer, pharmaceuticals, hospitals, banks, the American public has seen a few giants come to dominate. What competition does exist is among just a few participants, not exactly the type described in textbooks.

These firms use their market power to increase prices, drive down wages and assert greater authority over workers. They find ways to deter new firms by creating and maintaining barriers to entering the market, and use economies of scale to exercise strong leverage over suppliers. In addition to raising prices relative to what they would charge in a competitive market, these powerful companies may also reduce quality or convenience, modifying product features and reducing customer discounts. All this leads to a transfer of wealth from buyers to sellers.

It should not be overlooked that consolidation of market power also concentrates political power, thanks to the lobbying muscle of oligopolistic companies. Economic and political power can be mutually reinforcing. As things stand, market power gives these companies the resources to protect their competitive advantages and leverage their advantages through the political process buying the all-important access.

Take the $2.5 trillion health care industry, where rising prices are partially driven by increased consolidation. Consider the large number of hospital mergers that limit competition among hospitals. Today, many Americans today live in areas where there is little such competition.

The same is true in other economic sectors. Merger mania in the airline industry has resulted in eight majors combining to create four giant carriers over the past decade. Not to be ignored is the fact that a handful of large institutional investors such as BlackRock, Vanguard, Fidelity, and State Street are among the top shareholders for all four major airlines. Given the huge extent of common ownership in the U.S. airline industry, it is not surprising that the price wars of the 1990s have ended and profits are on the rise as companies may refrain from competing aggressively when their competitors have the same large shareholders.

Consider the drastic increase in banking industry concentration, where too big to fail banks, instead of getting smaller, are pretty much taking over the financial universe. The five largest banks in the U.S. – JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and US Bancorp – have about $7 trillion in assets. That’s nearly 45 percent of the industry’s total. The other 55 percent of assets are divided among 6,000 institutions, according to the Federal Reserve. The top-10 banks’ share of the deposit market has increased from about 20 percent to 50 percent from 1980 to 2010.

Looking beyond individual industries affected by excessive market power, the bad news is that this concentrated power leads to concentration of wealth and income, and contributes to increasing economic inequality because the returns from market power go disproportionately to the wealthy, like company shareholders and senior executives.

God love them, for they are reaping rewards to which ordinary Americans have no access. Amen.

Originally Published: October 13, 2018