Page 2 of 2 Capitalism at the crossroads
By Chan Akya
default threats. Overcapacity simply means that the balance of power lies with
buyers of products rather than sellers; in turn meaning that every new product
launch is fraught with risk of failure.
To understand the makings of a profitable future for the auto industry, we need
to look no further than the computer industry of the 1950s and 1960s. Despite a
number of players, or rather because of them, the marginal costs of owning a
computer were prohibitively high in that period. This in turn kept overall
demand at an extremely low level, which further increased the risks of capital
expenditure being incurred by the industry on every new product.
In the 1970s, when the industry went into a demand turmoil, two events shook
it: firstly the launch of a dedicated personal computer by Apple and secondly
the emergence of the Windows-Intel duopoly (dubbed Wintel). The standardization
of operating systems and interface as well as the main processor chip meant
that the old norm of "IBM-compatible" gave way to a large number of parts
suppliers who specialized in making as well as improving standardized
components.
That took the bulk of capital expenditure away from the computer makers to the
parts makers, in turn rendering the former as assemblers and service-providers
from their previous role across the entire value chain.
In this kernel lies the future of the global auto industry. There is no reason
why a Nano made by Tata in India cannot have the same gearbox as what is used
on the smallest models made by Hyundai, General Motors, Renault or even
industry leader Toyota. Similarly, various other modules ranging from engines,
transmissions and even axles can be standardized.
This would rebalance the risks of design and interface; while pushing marginal
costs substantially lower. The vehicle makers of today would then become
designers and assemblers of products, much like the computer makers.
The inflection point for the computer industry came from the bankruptcies of
various manufacturers in the 1970s that pushed out parts manufacturing to
specialist start-ups. By saving the likes of GM and Ford, the American
government stands exactly in the way of true progress for the industry, which
can only come when the balance of risks is changed between parts makers and the
auto majors.
In effect, by denying the Schumpeter process of creative destruction, the US
government is effectively retaining the crisis mode of the industry;
perpetuating the very inefficiencies foisted on it by the Japanese and European
governments. Much like very few makers of computers survive in Japan or Europe
today because of their failure to embrace the American model, a change of
industry dynamics would similarly shift the balance of power from integrated
carmakers to the assemblers.
Pirate capitalism
The last and certainly not the least story in this series that has elicited
much chest-thumping from socialists pertains to Satyam, an erstwhile star in
the Indian computer software firmament that has been laid low by a scandal
involving misstated cash balances that were somehow certified for many years by
a global accounting firm. What is essentially a corporate scandal has somehow
been twisted as evidence of the continued failures of global capitalism, as the
story came on the heels of the Bernard Madoff affair in the US.
For many years, the Indian computer software industry has been a thorn for the
country's socialists as well as the left-controlled media; as in its success
lay the greatest argument for doing away with the fads imposed by the country's
socialist leaders. Thus, any failure in the sector would automatically lead to
calls for greater government involvement, as if that were a panacea of any
kind.
A similar outpouring of scorn for capitalists was visible in China on the heels
of the Gome Electrical Appliances affair last year (see
Going, going, GOME, Asia Times Online, December 6, 2008), when the
richest person in China, the company's chairman, was arrested for suspected
irregularities and market manipulation.
Yet socialists have done greater damage in both China and India than
capitalists could ever imagine. In the case of the former, Exhibit A is the
country's commercial banks, which benefited from some US$100 billion in
government assistance over the past five years as they serially wiped out their
capital bases on bad loans and corrupt transactions. In a country growing at
over 10% annually, these levels of losses at large banks are virtually unheard
of in a capitalist context; leaving us to judge them purely as failures of
socialism.
In the case of India, any visitor to the country would immediately highlight
the first example of the pitfalls of government intervention in the corporate
sector: the "national" airline, Air India, which stands as the perfect
combination of abysmal service and a terrifying safety record; its monopolistic
market share was wiped out when the government opened up the sector to private
sector entrants.
Conclusion
Over the course of 2009, we will have much cause to revisit the questions
raised in this article as the lurch towards Keynes and socialism produces a
series of unintended consequences for the global economy. In game theory terms,
the global economy will approach a "Nash equilibrium" this year as every player
accepts and executes a sub-optimal outcome because they simply cannot trust
anyone else to do better.
That in turn spells greater trouble for the global economy as it confronts the
true costs of a recession. Every step the socialists take will bring a great
depression closer to reality for a bulk of the world's population.
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