Detroit’s true innovation

Silly me — while I was concentrating on the technology (see last posting on “Detroit discovers flexible manufacturing“), I missed the real innovation in Detroit’s latest marketing ploy. From
WSJ.com – Business World: Why Detroit Can’t Stop Haggling:

Shopkeepers in ancient Babylon used splashy discount promotions to clear excess inventory. For reinventing this wheel, General Motors is now being hailed as a marketing genius for a new millennium. What gives?
You can’t fault the numbers produced by its “employee discounts for everyone” promotion, begun in June and now extended into August. June sales were up 47% compared to a year ago; the goal of cleaning up a million-vehicle backlog was evidently met. Dealers are now complaining about a shortage of merchandise.
Yet, and peculiarly, the average selling price of a car was almost identical to the price before the promotion. The “Law of One Price” prevails in the car market after all — i.e., the market price for a car is the market price for a car, however you gussy it up. GM’s “employee discount” merely substituted for various rebates and other “incentives” that GM had previously used to rationalize the gap between the sticker price and the selling price.
But, lo, a mystery presents itself: What accounted for the big increase in volume if not a big drop in prices?
Answer: GM’s inspired gimmick may not have meant better deals on new cars, but it did mean a radically altered buying process. All but eliminated was haggling, which surveys show is reviled by most consumers.

So what happens when the novelty of the marketing gimmick wears off? Then we are back to the point I made earlier about going beyond costs. Even the Business World columnist, Holman Jenkins, makes the same point (after railing on the auto companies’ labor costs).

Yet notice that dozens of models — from the Chevy Corvette to the Ford Mustang to the humble Dodge Neon SRT — were carefully exempted from the employee discount offer. These cars command a market price that reflects the sticker price, and covers the cost of building them. Why? Because they are desirable cars, which is Detroit’s only salvation if it can’t create more flexibility in its labor overhead.

Build desirable cars? What a novel idea. A lot better that the industrial era strategy of “flexibility in its labor overhead” (read: cut worker costs and benefits).
Maybe Detroit is doomed to enter the I-Cubed Economy after all.

Detroit discovers flexible manufacturing

From yesterday’s Wall Street Journal, “Amid Price War, Chrysler To Revamp Manufacturing”:

DaimlerChrysler AG’s Chrysler Group plans a major revamp of its manufacturing process that it hopes will shave billions of dollars off the cost of developing and producing cars over many years.
The move reflects how U.S. auto makers have begun to rethink basic assumptions about manufacturing cars and trucks as they seek a way out of the intense price war, and surge in overseas competition, that has sapped their North American profits since 2001.
Chrysler’s new manufacturing process, which will be rolled out this fall at a plant in Belvidere, Ill., that is among the company’s biggest money-losers, is intended to allow the flexibility to build three or more completely different models of cars in a single plant. Typically, U.S. auto makers produce one or two types of vehicles per plant. The idea behind the retooling is to improve the odds of a plant operating at close to maximum capacity – a big key to profitability in a capital-intensive industry like autos.
. . .
Increasing factory flexibility by retooling one plant to build three different cars isn’t a new idea. Japanese car makers, led by Toyota Motor Corp. and Honda Motor Co., have nearly a decade of experience with the process, known as flexible manufacturing.
But with costs rising, Chrysler, GM and Ford face acute pressure to rethink the decades-old calculus of their North American vehicle-making businesses.
“This environment requires people to do things differently,” said Frank Ewasyshyn, executive vice president of manufacturing at Chrysler, in an interview. “You have to find ways that you never thought of before to reduce your cost and pass it on to the customer.”
. . .

Ron Harbour, president of Harbour Consulting, which puts out a closely watched scorecard of auto-manufacturing productivity, said Chrysler’s new initiative “gives them the chance to catch up to Toyota and Honda,” but notes that the Japanese are not standing still. “Five years ago, I thought [the Big Three] would have caught up by now, but the Japanese have continued to move forward and [the Big Three] haven’t moved fast enough,” he said.
. . .
Industry manufacturing experts point out that Detroit’s auto makers have announced ambitious initiatives in the past to revolutionize vehicle development and manufacturing, only to see them fizzle. In the 1990s, for instance, GM set out to create a common set of underpinnings that could be used to make midsize cars by its auto brands in Europe, the U.S. and elsewhere. But its divisions ended up modifying the underpinnings so much that the cars that use them — such as the Saab 93 and the Chevrolet Malibu — shared relatively few parts and couldn’t be made on the same production line.
Toyota has been working to improve its own flexible-manufacturing systems. At some plants in Japan, Toyota and Honda produce as many as six different models per assembly line.

I don’t know whether to laugh or cry. These ideas of flexible manufacturing and a common underpinnings (not the same thing – although the reporter seems to think so) go back well before the 1990’s (remember the “world car”?). Every few years, we seem to get a new wave of assertions by US auto makers (including the Americanized German company DaimlerChrysler) that they are on the verge of a manufacturing revolution. In the mean time, the Japanese companies continue along with their process of continual improvement. And they pay attention to other things besides costs — like quality and design.
Judging from this story, the US auto industry seems stuck in the days of Henry Ford when the key to success was “plant operating at close to maximum capacity” (to quote from the story as the reason for the change). They had a good run with innovative new products — minivans, SUVs. But now those creative juices seem to have dried up and they can’t adjust to the new circumstances.
No wonder Detroit has to practically give their vehicles away in order to maintain sales.

Information in the information society

In the information age, most people very quickly realize that not all information is equal. Some ideas are half-baked and some assertions are just that, assertions and not facts. One of the most important elements of the making the information economy work is the ability to judge the validity of information.
In this light, President Bush has made what is seemingly a reasonable request: schools should teach all sides of the evolution controversy. I say “seemingly” because this request is not as straight-forward as it appears. The request is not for a free flow of information, but to elevate the credibility of one side of the controversy – creationism, aka “intelligent design”. This is a well known rhetorical trick of trying to compare apples with oranges by saying they are both round (see my earlier posting, Science or not science).
Evolution is a scientific theory subject to the scientific method of empirical verification and falsification. Creationism is a dogmatic religious assertion – no amount of facts can prove or disprove it.
Teach creationism if you must; but teach it in religion classes where you also teach all the major world religions.
I wish all those who are so keen on proving that theories like global warming are nothing more than “junk science” would turn their attention to the attempt to junk-ify science by equating creationism with science.
Unfortunately, that is what the President has just done – endorsed the ultimate of junk science. And by doing so, he has undermined one of the key pillars of our information age.

The aspirational economy

Lee Gomes of the Wall Street Journal relates this interesting lesson in the importance of design in “For Certain Consumers Of High Tech, Function Isn’t Always Enough”

With the home-improvement season in high gear in the neighborhood, I decided to replace a few of the windows in my house and called on a nearby dealer who makes simple custom ones in his own shop.
His windows were clearly well-made and would last for decades — the two points that were the beginning and end of his sales pitch. While entirely comfortable discussing his old-fashioned craftsmanship, the window maker seemed bewildered and a little impatient with the finicky style-oriented questions I started asking. Are there different sorts of trim detailing available? How many kinds of knobs do you offer? What sort of options for frosted glass are there?
It was as if I was talking about a different product completely, which in a way I was. He was selling windows; I was buying a design statement. He was offering something entirely functional and pragmatic; I was looking for something aspirational.
This functional vs. aspirational dichotomy is an instructive, possibly even amusing, way of divying up the technology industry — along with many others.

Amusing — possibly; instructive — definitely. Never underestimate the role of the aspirational – or, maybe a better word is “inspirational.” In the mass production era, the common belief was that engineering reigned and functionality ruled. But was never really the case. Aspirational/inspirational was always sitting next to functionality. Case in point: art deco and the “modern” design of functional things like railroad locomotives (the 20th Century Limited).
I’m somewhat surprised that Mr. Gomes’ window maker didn’t understand this. Every craftsman I have ever dealt with is a master of the inspirational as well as the functional. And anyone who as even glanced at one of the innumerable home decorating magazines knows that windows are a fashion statement.
The aspirational/inspirational has also long been part of the technology culture, as he points out:

Apple Computer, of course, is often mentioned as the ultimate aspirational technology company. It isn’t simply that the iPod or the PowerBook is “well-designed”; it is that Apple realizes the extent to which the people buying its products are making a statement about their good taste.
Even if a Dell Windows machine does all the same things — and is less expensive and faster to boot — it still doesn’t matter, as a walking tour through any tony design studio will tell you.

But I would argue that this over simplifies the case. Designers chose the Apple long ago because it was functionally better for graphics. And the Dell machines are not ascetically unattractive. (In the interest of full disclosure – I am writing this on a Dell Windows machine).
Rather than divide products on the aspirational versus functional line, I think the winners will be those who appeal to both (as the headline of the Gomes article implies). We can’t forsake functional for merely decorative; but nor need we settle for boring. In many ways, the I-Cubed Economy is the aspirational economy as well.

American Job Creation Act – not

Last year, Congress passed the American Jobs Creation Act which gave companies a tax break if they repatriated their overseas profits. Well, according to Business Week, “Profits Head Homeward, But Where Are The Jobs?”, the bill is not necessarily living up to its billing:

U.S.-based companies are on track to repatriate upwards of $520 billion by the end of December, estimates Henry “Chip” Dickson, chief U.S. equity strategist at Lehman Brothers Inc.
. . .
But if there’s little doubt the money is pouring in, figuring out exactly where it’s going is another matter. Though the bill was promoted as a job-creation measure, regulations set by the U.S. Treasury leave companies wide leeway in how they use their repatriated profits. Hiring, capital investment, research and development, marketing, acquisitions, pension funding, and debt repayment all qualify — and companies do not have to disclose specifics of their spending plans. They also have three years to allocate the cash. Moreover, if a company plows its foreign profits into research and development, for instance, it could take money previously earmarked for research and use it elsewhere. “You can’t trace the money,” points out Mickey D. Levy, chief economist at Bank of America Corp.
Still, some companies are starting to show how they’re putting their newfound treasure to use. In June, Pfizer paid $1.9 billion for Vicuron Pharmaceuticals Inc. (MICU ), a King of Prussia (Pa.) biotech firm. Pfizer also has initiated a $5 billion stock buyback — though the company says that isn’t a direct result of the profits it’s shipping home, since share repurchases aren’t allowed under the Treasury regs. But a spokesman for the New York-based drugmaker acknowledges: “It’s hard to say where money is going to and coming from.”
One thing is clear, however: The money piling in from abroad as the result of the Jobs Creation Act has done little to actually spur hiring. In fact, six of the 10 companies repatriating the biggest totals are axing workers in the U.S. They include HP, which announced July 19 that it would cut its head count by 14,500 in the U.S. and abroad, and Pfizer, which has said it will shutter 20 factories with undisclosed U.S. job losses to lower costs by $4 billion by 2008.
Oddly, the repatriation is also cutting into profits. The reason: Even that measly 5.25% rate means companies must pay higher taxes than they had budgeted when the earnings were tucked away outside the U.S. Pfizer has taken a $1.7 billion charge to cover taxes on its foreign profits in the first half, while Merck & Co. (MRK) has said it would have to take a one-time charge of $1 billion if it goes ahead with plans to bring home $15 billion.

Use of the tax code to achieve specific policy has always been tricky — but that doesn’t stop policy makers from trying. There are notable successes, such as the mortgage interest deduction that has spurred homeownership (and contributed to the real estate bubble, according to some). But there are also numerous programs that exist through shear momentum. The US tax code is the biggest example of our industrial policy. Yes, we have an industrial policy even though the use of that word is forbidden in polite company. It is hidden away in the closest of the tax code where only lobbyists accountants and tax attorneys can play with it.
It is unclear whether many of these industrial policies have anything to do with either helping or hindering the I-Cubed Economy. I would hope that the President’s tax reform commission is looking at the relevance of these hidden policies – but I am not optimistic. Maybe the case of the American Job Not-Creation Act might spur greater scrutiny.