There has been a debate going about the American automotive industry that I have been following with great interest. You will probably be aware of the fact that there is a danger of the ‘great American brands’ to go broke over the current financial crisis. And that is where the world seems to split up into two camps. One is in favor of rescuing the large corporations with huge amounts of money. The loss of employment when it is not done is one of the greatest drives for their argument. The other camp is in favor of having the big giants die their natural economical death. The latter camp usually says that by removing the big companies, the market will be open for new players that will be more innovative. In my opinion the thought is great. I would love to go back to smaller more innovative car companies, but reality will show a different story.
If we look back in history, seldom has succesful innovation sprung from an economic decision to have other companies die. Innovation has come from people who walk besides the big companies and one day decide that they can do it better. Or from people who are on the outside and decide that what is built now does not meet their requirements, so they will make it themselves. Or from completely new techniques that allow people to build something out of the ordinary that is a much better match for the demand out there. Forcing it will not be the answer to this debate. It will not lead to the innovation we dream of. And besides, there is a lot of interest in the old giants from new economies like the Chinese, to buy it if nobody else wants to anymore.
I don’t have a clear cut answer here, but I would love to see more innovation stimulated to allow people to develop their view on the automotive industry, because there is much room their for innovative players that do not only cater for the happy few who can buy supercars. But players that can give average families greener, more distinctive and more enjoyable transportation.
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2 comments
Martin Wolf says:
Nov 25, 2008
Aren’t you setting up a false dichotomy here? The people who are in favor of letting the giants die a natural death, are not saying that the government should deliberately go out of its way to kill off those companies — they are just saying that if a company cannot compete in the free market on its own merits, then it should not be propped up artificially, through tax money (“corporate welfare”) or protectionist measures against (foreign) competitors.
The innovation which is killing the old American car giants, is already taking place. In fact, it has been taking place for decades so that we don’t even recognize it as innovation anymore. It’s just that so far most of it has come from Asian countries. Those innovative, small, reliable cars from Asia are the reason why the American giants are dying in the first place. If you think of it as killing off the big companies to make room for innovation, you are reversing cause and effect.
Furthermore, even if we look only within the American market, there is something to be said for the notion that not bailing them out will help the situation. First of all, as long as the giants are being propped up with tax money, they have an unfair competitive advantage over any small start-up companies which may want to enter the market with some cool new product. Also, the giants can use “regulatory capture” (aka bribing policy makers to throw up an artificially high barrier to entry) to keep out newcomers.
And finally, while you may well be right that cool new ideas often come from outside, there is also something to be said for adversity being the mother of invention. As long as Chrysler can just go on making the same old gas guzzlers and be bailed out by the government if they cannot make a fair profit on the market, they don’t have much incentive to go out and take some risks with new technology. For example, by working together with some cool new startup which has visionary ideas but which does not have the economy-of-scale needed to mass-produce their idea instead of just making a few hundred cars as rich people’s toys.
Arne says:
Nov 25, 2008
@Martin,
Thanks for your comment. I might be using a couple of shortcuts here, but in the end all it revolves around is the question whether having the current giants die will result in a higher rate of innovation. On the other hand, you are cutting a couple of corners as well when you say that the cars from Asia are the innovations are killing the giants. There are many factors that influence that that have nothing to do with car manufacturing. And that is a shame. I am sure that the big three would be able to do a lot better if they would be able to restructure. But they would still be the big three and they will not take a very sharp turn in what they are doing.
In my opinion innovation will need to go much further than building smaller cars against lower prices. Real innovation will need to come from companies taking a completely new approach to producing cars. New ways of ‘propulsion’, new materials to work with, new approaches to transporting people in an individual way from A to B. Which sounds strange coming from a car nut like myself, but I do feel that this is the direction real innovation needs to come from.
The book ‘here comes everybody’ you referred to in your mail is bang on the money in this aspect. Or at least in my opinion. And that is also the reason why I am not taking a stand on whether to let the giants die (I did not say kill them off) or whether to support them until something else takes over. For me the whole idea revolves around innovating the way in which people are transporting themselves from A to B. Henry Ford did it with the Model T. It is now time for its successor.