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You can thank Unions and Government for that.
A special report [from the Economist] on innovation in emerging markets
The world turned upside down
The emerging world, long a source of cheap labour, now rivals the rich countries for business innovation, says Adrian Wooldridge (interviewed here)
Apr 15th 2010 | From The Economist print edition
http://www.economist.com/specialrepo...ry_id=15879369
IN 1980 American car executives were so shaken to find that Japan had replaced the United States as the world’s leading carmaker that they began to visit Japan to find out what was going on. How could the Japanese beat the Americans on both price and reliability? And how did they manage to produce new models so quickly? The visitors discovered that the answer was not industrial policy or state subsidies, as they had expected, but business innovation. The Japanese had invented a new system of making things that was quickly dubbed “lean manufacturing”.
This special report will argue that something comparable is now happening in the emerging world. Developing countries are becoming hotbeds of business innovation in much the same way as Japan did from the 1950s onwards. They are coming up with new products and services that are dramatically cheaper than their Western equivalents: $3,000 cars, $300 computers and $30 mobile phones that provide nationwide service for just 2 cents a minute. They are reinventing systems of production and distribution, and they are experimenting with entirely new business models. All the elements of modern business, from supply-chain management to recruitment and retention, are being rejigged or reinvented in one emerging market or another.
Why are countries that were until recently associated with cheap hands now becoming leaders in innovation? The most obvious reason is that the local companies are dreaming bigger dreams. Driven by a mixture of ambition and fear—ambition to bestride the world stage and fear of even cheaper compe ors in, say, Vietnam or Cambodia—they are relentlessly climbing up the value chain. Emerging-market champions have not only proved highly compe ive in their own backyards, they are also going global themselves.
The United Nations World Investment Report calculates that there are now around 21,500 multinationals based in the emerging world. The best of these, such as India’s Bharat Forge in forging, China’s BYD in batteries and Brazil’s Embraer in jet aircraft, are as good as anybody in the world. The number of companies from Brazil, India, China or Russia on the Financial Times 500 list more than quadrupled in 2006-08, from 15 to 62. Brazilian top 20 multinationals more than doubled their foreign assets in a single year, 2006.
At the same time Western multinationals are investing ever bigger hopes in emerging markets. They regard them as sources of economic growth and high-quality brainpower, both of which they desperately need. Multinationals expect about 70% of the world’s growth over the next few years to come from emerging markets, with 40% coming from just two countries, China and India. They have also noted that China and to a lesser extent India have been pouring resources into education over the past couple of decades. China produces 75,000 people with higher degrees in engineering or computer science and India 60,000 every year.
The world’s biggest multinationals are becoming increasingly happy to do their research and development in emerging markets. Companies in the Fortune 500 list have 98 R&D facilities in China and 63 in India. Some have more than one. General Electric’s health-care arm has spent more than $50m in the past few years to build a vast R&D centre in India’s Bangalore, its biggest anywhere in the world. Cisco is splashing out more than $1 billion on a second global headquarters—Cisco East—in Bangalore, now nearing completion. Microsoft’s R&D centre in Beijing is its largest outside its American headquarters in Redmond. Knowledge-intensive companies such as IT specialists and consultancies have hugely stepped up the number of people they employ in developing countries. For example, a quarter of Accenture’s workforce is in India.
Both Western and emerging-country companies have also realised that they need to try harder if they are to prosper in these booming markets. It is not enough to concentrate on the Gucci and Mercedes crowd; they have to learn how to appeal to the billions of people who live outside Shanghai and Bangalore, from the rising middle classes in second-tier cities to the farmers in isolated villages. That means rethinking everything from products to distribution systems.
Anil Gupta, of the University of Maryland at College Park, points out that these markets are among the toughest in the world. Distribution systems can be hopeless. Income streams can be unpredictable. Pollution can be lung-searing. Governments can be infuriating, sometimes meddling and sometimes failing to provide basic services. Pirating can squeeze profit margins. And poverty is ubiquitous. The islands of success are surrounded by a sea of problems, which have defeated some doughty companies. Yahoo! and eBay retreated from China, and Google too has recently backed out from there and moved to Hong Kong. Black & Decker, America’s biggest toolmaker, is almost invisible in India and China, the world’s two biggest construction sites.
But the opportunities are equally extraordinary. The potential market is huge: populations are already much bigger than in the developed world and growing much faster (see chart 1), and in both China and India hundreds of millions of people will enter the middle class in the coming decades. The economies are set to grow faster too (see chart 2). Few companies suffer from the costly “legacy systems” that are common in the West. Brainpower is relatively cheap and abundant: in China over 5m people graduate every year and in India about 3m, respectively four times and three times the numbers a decade ago.
This combination of challenges and opportunities is producing a fizzing tail of creativity. Because so many consumers are poor, companies have to go for volume. But because piracy is so commonplace, they also have to keep upgrading their products. Again the similarities with Japan in the 1980s are striking. Toyota and Honda took to “just-in-time” inventories and quality management because land and raw materials were expensive. In the same way emerging-market companies are turning problems into advantages.
Until now it had been widely assumed that globalisation was driven by the West and imposed on the rest. Bosses in New York, London and Paris would control the process from their glass towers, and Western consumers would reap most of the benefits. This is changing fast. Muscular emerging-market champions such as India’s ArcelorMittal in steel and Mexico’s Cemex in cement are gobbling up Western companies. Brainy ones such as Infosys and Wipro are taking over office work. And consumers in developing countries are getting richer faster than their equivalents in the West. In some cases the traditional global supply chain is even being reversed: Embraer buys many of its component parts from the West and does the assembly work in Brazil.
Old assumptions about innovation are also being challenged. People in the West like to believe that their companies cook up new ideas in their laboratories at home and then export them to the developing world, which makes it easier to accept job losses in manufacturing. But this is proving less true by the day. Western companies are embracing “polycentric innovation” as they spread their R&D centres around the world. And non-Western companies are becoming powerhouses of innovation in everything from telecoms to computers.
Rethinking innovation
The very nature of innovation is having to be rethought. Most people in the West equate it with technological breakthroughs, embodied in revolutionary new products that are taken up by the elites and eventually trickle down to the masses. But many of the most important innovations consist of incremental improvements to products and processes aimed at the middle or the bottom of the income pyramid: look at Wal-Mart’s exemplary supply system or Dell’s application of just-in-time production to personal computers.
The emerging world will undoubtedly make a growing contribution to breakthrough innovations. It has already leapfrogged ahead of the West in areas such as mobile money (using mobile phones to make payments) and online games. Microsoft’s research laboratory in Beijing has produced clever programs that allow computers to recognise handwriting or turn photographs into cartoons. Huawei, a Chinese telecoms giant, has become the world’s fourth-largest patent applicant. But the most exciting innovations—and the ones this report will concentrate on—are of the Wal-Mart and Dell variety: smarter ways of designing products and organising processes to reach the billions of consumers who are just entering the global market.
No visitor to the emerging world can fail to be struck by its prevailing optimism, particularly if his starting point is the recession-racked West. The 2009 Pew Global At udes Project confirms this impression. Some 94% of Indians, 87% of Brazilians and 85% of Chinese say that they are satisfied with their lives. Large majorities of people in China and India say their country’s current economic situation is good (see chart 3), expect conditions to improve further and think their children will be better off than they are. This is a region that, to echo Churchill’s phrase, sees opportunities in every difficulty rather than difficulties in every opportunity.
This special report will conclude by asking what all this means for the rich world and for the balance of economic power. In the past, emerging economic leviathans have tended to embrace new management systems as they tried to consolidate their progress. America adopted Henry Ford’s production line and Alfred Sloan’s multidivisional firm and swept all before it until the 1960s. Japan invented lean production and almost destroyed the American car and electronics industries. Now the emerging markets are developing their own distinctive management ideas, and Western companies will increasingly find themselves learning from their rivals. People who used to think of the emerging world as a source of cheap labour must now recognise that it can be a source of disruptive innovation as well.
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Interesting article.
Time to starting getting off our butts and teaching our kids about the rest of the world.
You can thank Unions and Government for that.
I used to believe that, too, but no longer. Unions and government intervention were a flawed response to inadequate wages. Here, again, is an example of a workforce that was over-worked and under-payed to the extent that they couldn't hope for upward mobility while executives made a disproportionately large chunk of the profits. The unions were a solution to the problem, and led to an (initially) more equitable distribution of company wages. Under the unions, Detroit had a remarkable economic renaissance during the 50's and 60's, but by the 70's a corporate culture of mediocrity began to emerge. Car companies -- in bed with Big Oil -- designed cars that were perversely inefficient, poorly designed, ugly as , and overpriced. Union heads, on the other hand, got more and more deeply involved with Detroit execs such that they became as disproportionately wealthy and corrupt (in relation to the workers) as the Detroit execs had been to the pre-unionized workers.
Meanwhile, a new generation of consumers was less interested in horsepower and power windows as it was in value, efficiency, and ease of maintenance. VW came in and took over the cheapie market. Detroit's response was to trot out some amazing POS compacts while focusing on making cars for the rich. I think they thought it would pass. But then the Japanese cars came in and slowly won more and more market share, to the extent that VW had to rebrand itself as a "sporty import" brand like BMW.
Still, Detroit took no notice, and continued to make cars whose built-in obsolescence was a little too brisk, that drank gas like Keith Moon drank booze, and that were riddled with design flaws. None of those issues had to do with the government or the unions, they had to do with a management structure that had become complacent and uncompe ive.
I could go on, but I have to find some space for the game tonight. As Dark Reign has a lot more insight on all things Detroit, I hope he weighs with his thoughts. Go Spurs!
1970's and 80's car production was purely driven by Government fuel efficiency standards. CAFE standards have forced the auto industry into a market it didn't want to go. Had it not been for them, Toyota would still be overseas.
In other news, more Americans now prefer domestic vehicles.
http://www.google.com/hostednews/ap/...LS9ZwD9F7HBNG1
WASHINGTON — America's love affair with the automobile has a new spark — a renewed affection for U.S.-made cars after a long dalliance with foreign automakers.
Slightly more Americans now say the United States makes better-quality vehicles than Asia does, with 38 percent saying U.S. cars are best and 33 percent naming autos made by Asian countries, according to an Associated Press-GfK Poll.
The survey suggests those numbers are largely fueled by a plunge in Toyota's reputation and an upsurge in Ford's. The poll was conducted in March, as Toyota was being roiled by nightmarish publicity over its recall of more than 8 million vehicles around the globe and allegations that it responded sluggishly to safety concerns.
Though the U.S. advantage is modest, it marks a significant turnabout for American automakers battered by recession and relentless compe ion from foreign manufacturers. When the same question was asked in a December 2006 AP-AOL poll, 46 percent said Asian countries made superior cars, while just 29 percent preferred American vehicles, reflecting a perception of U.S. automotive inferiority that began taking hold about three decades ago.
"Toyota's problems are not to be minimized here," David Williams, dean of the business administration school at Wayne State University in Detroit, Mich., said in explaining the at ude shift.
In both AP polls, Japan — home to brands like Toyota, Honda and Nissan — was by far the dominant Asian nation volunteered as producing the best cars. European autos — which include BMW, Mercedes Benz and Volkswagen — were called top quality by 15 percent last month, about the same as the 17 percent who said so four years ago.
Williams and others also cited a fresh look Americans are giving U.S. automakers, especially Ford and General Motors. Though GM and Chrysler went through bankruptcy last year and the federal government invested $80 billion to keep them afloat, GM has revamped its lineup with more fuel-efficient and crossover vehicles. Analysts say Ford revived its reputation by not accepting the taxpayer bailout and improving its vehicles' gasoline mileage.
Highlighting the changing at udes, 15 percent in the March poll said Toyota makes the best cars, down from 25 percent who said so in 2006. Moving in the opposite direction was Ford, cited as tops by just 9 percent in 2006 but by 18 percent last month.
Eighteen percent said GM cars were best, little changed from 2006. Chrysler — which continues to struggle — remained mired at 3 percent.
"They last," Charlotte Flentge, 60, of Chester, Ill., a Chevrolet Cavalier owner, said of American autos. "You get a good American car, you know you have a quality car you can be safe in and not be afraid to put your family in."
Those likeliest to say Asian-made autos are superior included men, the better educated and residents of Western states. U.S. cars were a strong preference for those age 50 and up and rural residents.
Overall, though, only 51 percent in last month's poll expressed strong confidence that cars sold in the U.S. are safe, with owners of domestic and foreign cars giving similar responses. The 2006 survey did not ask that question.
"Toyota is leading the parade in reducing confidence in the safety of automobiles," said Gerald C. Meyers, a former auto executive with American Motors and now a University of Michigan business professor. "I suspect that's holding the number down a lot."
Despite consumers' altered views, the poll showed that allegiance remains strong to many makes. Well over nine in 10 owners of Fords, GMs, Hondas and Toyotas expressed satisfaction with their cars, with the figure slightly lower for Chryslers.
Among the brand loyalists is Vernon Harmon, 44, a police officer from Rock Hill, S.C., proud owner of a Toyota and a Mazda.
"I know people are going to say, 'That guy, is he not watching the news?'" he said. "I know what's going on. I still think Japan makes the best cars in the world. Period."
With the U.S. trying to claw out of a recession, the poll showed that Americans' taste for alternative-fuel cars is being tempered by economic realities. Such cars often cost more than similarly sized vehicles that run on gasoline.
By 61 percent to 37 percent, most said last month they would consider buying an alternative-fuel auto. That was a narrower margin than the 70 percent to 29 percent who said so in 2006.
Tellingly, people cited the environment and a desire to save money about equally last month when asked which would prevail in making their decision. Four years ago, with a strong economy, protecting the environment outweighed saving money, 47 percent to 34 percent.
"I'm concerned about the environment, but I don't want to kill myself, I don't want to go into bankruptcy," said Kathryn Mershon, 47, of Henderson, Nev.
The poll also found that:
_Fifty-six percent own vehicles made by U.S. automakers, about the same as in 2006.
_Eight in 10 live in households with autos, including about two-thirds who have two or more cars.
_Six in 10 autos were bought used.
_About four in 10 say their dream car would be a foreign brand, compared with three in 10 wishing for a domestic car.
Flentge, the Chevrolet owner, picked the German-made BMW as her dream car, saying, "I don't know, it just sounds prestigious."
The AP-GfK Poll was conducted March 3-8 by GfK Roper Public Affairs and Media. It involved interviews with 1,002 adults conducted by landline and cellular telephones. The margin of sampling error was plus or minus 4.2 percentage points.
Doesn't hurt to have the Government -- who, by the way, owns GM -- hog tying the largest foreign compe or.
Although, Ford, who didn't take a hand out, is doing quite nicely because of GM's government/union ownership and Toyota's woes.
I own two. Have been driving them for a combined 435,000 miles without any major maintenance -- to which I attribute good routine maintenance. One is an '01 and the other and '02. I expect to drive them for another 8 or 9 years.
Two Fords?
[QUOTE=Yonivore;4262360]1970's and 80's car production was purely driven by Government fuel efficiency standards.[quote]Gas prices had nothing at all to do with it?
Nice selective memory.
Turns out they should have done a better job in the market in which they found themselves.CAFE standards have forced the auto industry into a market it didn't want to go. Had it not been for them, Toyota would still be overseas.
Had they not sucked, they wouldn't have lost all that market share.
Production is one thing. My understanding was consumers responded well to the combination of quality and affordability Japanese auto makers offered versus US ones.
Hard to account for the steadily rising US market share starting in the 1970's, if Japan wasn't making them too good, and too cheap, for maybe a little too long.
Last edited by Winehole23; 04-21-2010 at 10:37 PM.
I sure miss that 1974 Corolla. There was nothing, nothing at all wrong with that car, apart from the missing driver's seat. I was a dumbass and just walked away from it.
Presumably the underlying CAFE legislation would be one of the very few things President Ford didn't veto during his very short term.
Don't forget that we tax productivity rather than consumption also.
Yeah, into making crappy cars. And that's the reason Toyota and Honda are smoking the American car companies.
They might not have taken it, but they sure as asked for it at Congressional hearings. They also received a line of credit in case they did need a loan from the government. As well as receiving a loan so they could cover the health care costs of the auto workers.
The reason the auto industry in the U.S. blows balls is because over half their profits have come from gas guzzling SUVs. And when gas prices went up, nobody wanted to buy those SUVS.
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