GM Closes the Hummer

The Largest US corporations that manufacture automobiles had a difficult year coinciding with the financial crisis starting in 2008. Among them, General Motors suffered because a number of its models could not maintain market share once petroleum prices began to rise. One of the most recognizable of the gas guzzlers was the Hummer brand. Its aesthetics aside, it is an instantly recognizable vehicle.

Judging from its appearances in many music videos produced in the US, the Hummer such as the H3 model in the picture, was very popular with wealthy musicians. Indeed, with the exception of the Army, this model was largely a show of conspicuous consumption and suggestive of an aggressive lifestyle.

Nick Bunkley confirms that GM has made the decision to shut down further production of the Hummer brand after a Chinese corporation withdrew a bid to purchase it. To My mind, the Hummer brand was quite recognizable even outside the United States but the economics could not work because the demand for gas guzzlers has been reduced remarkably. Two lessons emerge from this story and the first echoes claims by Eliot Spitzer referred to here that these corporations responded poorly to competition from foreign firms because they chose to appease trade unions. The second idea is that the car manufacturers have not found the appropriate model for celebrity endorsements to sustain sales. (Photo may be subject to owner copyright)   

Can India's Democracy Sprint?

In the last couple of days, two pieces in the NYT have drawn me to consider my contention about how a large democracy manages the messy business of governing effectively. Reading this story covering the political economy issues facing the privatization process in India reveals the difficulty of making a definite transition from a socialist orientation towards a more market driven economy. I have no doubt that India needs to deepen economic reforms by undertaking privatization in order to ensure that resource allocation in that economy occurs through the market mechanism. No country could maintain efficient resource allocation where enterprises owned by the government collectively contribute 45% of GDP.

And yet the divestiture programme that has raised nearly US$ 3.5 billion in the last ten months alone still faces the hurdles because of the strength of political parties and monopolies that benefit from the high degree of government influence in the economy. That story suggests that in spite of the obvious success and the good timing, opposition to privatization may delay government divestiture programme. To my mind, while India is large and finally growing at impressive levels, it is unlikely to match china's growth levels unless the second generation of deep economic reforms are undertaken and the divestiture programme substantially advanced.

A second piece here tackles the related issue of large deficits and the need to curb expenditure by the Indian government. While it is clear that controlling high debt situation demands either the reduction of expenditure or hike in taxes, the Finance Minister in India seems to be at pains to sell these alternatives to politicians who are opposed to both alternatives. This situation too highlights the general frustration that people have with democracies because decision making requires wide consultation during which populism often takes over and delays sensible economic policy.

In earlier blog posts, I have often stated that my long term bets are laid with India because of the overall value that democracy confers. I maintain that bet though it is clear that given the speed of economic policy making in China, India is very slow and chaotic.

Toyoda Goes to DC

In my thinking, there is a definite problem in having a congressional panel put to task Toyota Corporation's leadership on account of the alleged failures in the electronic acceleration control system. The main reason is because a number of US automakers that are now protected and subsidized by the state are direct competitors to this firm. That aside, legislators are representatives of people and are bound to want to ask questions when the public seems to be concerned and where loss of life is attributed to these failures.

Lisa Twaronite of MarketWatch reports that Mr. Toyoda's contrition was very well read by the equity markets and this resulted in the share price outperforming the market for that day. I see this as a good signal to corporations that it does help to adopt an attitude that is not combative.

Looking at the numbers quoted in the article, I am trying to figure out how many accidents really took place because 8 million cars are recalled when the reported fatalities were 38. A fuller picture would be required to make a definite conclusion but I think the safety standards in the safety systems are quite decent noting that those cars log in millions of kilometres.

A Portrait of Paul Krugman

Of the many brilliant economists that emerge from the singularly enviable training of the American academies for economics, I am most in awe of Paul Krugman. And my admiration preceded his elevation to Nobel laureate status so I have some justification in claiming that I could see the inevitability of that prize. In reading the common blogs by ideologues and other party apologists who appropriate libertarianism as necessary, one would think that Paul Krugman never went through a first principles course in economics. It is possibly because ideology and political biases often trump rational thought and makes people more interested in attacking the man and not bad ideas.

Writing in the New Yorker Magazine, Larissa MacFarquhar has painted a sharp and immensely entertaining portrait of Paul Krugman based on a visit to the professor's home in St. Croix. While the title suggests that it is about the formation of some of Prof. Krugman's strong political ideas in the United States, I think that it presents a clear picture of the household of two scholars with solid ideas and who are accomplished in every respect. Consider that they both have graduate degrees from distinguished schools of economics, have taught in such schools, been consultants to corporations, published a text book in their subject and one bears the rare distinction of a Nobel prize in Economic Sciences.

This portrait reveals that paul's political ideas and his articles in the NYT arose from a reflection of the circumstances of the country and the denial of some facts that were evident to him. This created the need to understand and comment on how the politically dominant ideas influence society and the economy.

Paul's strident attacks of the Republican Party and its dominant paradigm makes him a loathsome target for party operators and their intellectual foot soldiers. What often gets lost in the debate is the fact that Prof. Krugman has a set of very solid intellectual credentials and an unrivalled portfolio of ideas that changed the field. The article summarizes some of these contributions in diverse areas starting with his understanding of financial crises, international trade and geography and trade. Some of these findings are now so embedded in the subject that they are taken as having been a part of the theory all along.

As would be expected of an elaborate article like this, the author would eventually ask his subject whether there are other contributions of consequence that are expected to emerge from him. Paul Krugman goes back to the history of humanity where poverty has been almost a fixed feature. His question though is why with such stability in poverty among humans do some states suddenly begin a relentless growth path toward prosperity. My hope is that Paul Krugman rediscovers the obsession that is required to fully answer this profound question.

Rise of Invention Capital

Out of all the broad categories of intellectual property, I am most troubled by patents for the reason that they amount to a monopoly in an idea for extended periods of time. In addition a whole lot of intellectual products are gaining classification as patents and thereby conferring on their owners a lot of monopoly power even when the idea itself is not altogether novel. In spite of my concern for the fact that a number of corporations hold enormous patents and use these to extracts revenues out of their monopoly, I still think that broadly stated, the intellectual property architecture is necessary for innovation.

Intellectual Ventures is a new kind of corporation that generates intellectual property and utilizes it in an entirely different way. Steven Lohr of the NYT captures the rising trend in firms that exists purely to generate ideas and collect patents. Nathan Myhrvold seems to instinctively understand that the market place of ideas will become increasingly valuable and has dedicated himself to building this this firm.

Taking the claim that the firm has paid up to US$ 315 million to inventors makes it clear that the business model is beginning to work. And perhaps as Myhrvold hopes, it is clear that corporations that rely on technology will be faced by a change in the power equation because he understands that patents do not sufficiently reward the generators of ideas. Having been at Microsoft, it is is obvious that corporations may be faced with a new environment when it comes to licensing intellectual property represented by patents. I welcome the competition and the rise of a new corporate model which makes thinking as the primary business.Needless to state, this is a category of corporations that is worth watching at close quarters.

Algorithms Can Catch Welfare Gamers

Fraud is a perennial problem for governments that provide any form of welfare assistance to citizens who are either indigent or temporarily disadvantaged due to the lack of a job or illness. Notwithstanding the concern for people who are unemployed, it is demonstrable that many welfare systems in high-income countries are so flawed that undeserving recipients game the system shamelessly. And to me this is a far more legitimate objection than the ideological arguments that I have encountered.

Deboarah Orr, writing in the Guardian here tries to understand the complex conflicts that come with being a benefits recipient. With the admission that she was also gamed the unemployment systems while holding a low-paying job, she attacks the recent proposal asking British citizens to report on benefits cheats. The sensible reason that she proffers is that there are a variety of reasons that lead people to try to gain from the system and rarely are undeserving recipients bad people trying to enrich themselves. It is difficult to believe that a one individual within a neigbourhood of people who know one another would easily snitch on others for the pecuniary benefits.

To my mind though, it is still possible to design a mechanism for finding those who game the system without asking them to betray their neighbours and friends. A better way would be to build a database of all recipients and make the data talk by building an algorithm that would sniff out the undeserving recipients. Indeed, if as this blog post stated, Steven Levitt and Ian horsely could construct a reasonable algorithm to detect individuals with a predilection towards terrorism, then I am certain that it is possible to design one for those who game welfare. So the market for devices to catch dishonest beneficiaries of welfare is just poorly designed. I would not mind giving it a try because there may be substantial gains to the public from such a system.

Large is Beautiful for Economic Policy

"Scale may enter here through several routes. One is that the quality of the civil service can be higher in a larger society simply because it can be more selective. It is around 50 times more competitive to become Permanent Secretary to the Ministry of Finance in India than in Africa and so the quality will on average be higher." Paul Collier and Tony Venables.

Keep the Pyjamas At Home

Together with the general interest in the great development achievements of the People's Republic of China, I have maintained an interest in the odd and freedom-inhibiting regulatory provisions that countries maintain. Some of these blog posts such as this, have commented on the ingenuity of China's local bosses in designing laws and provisions with interesting outcomes. I have just stumbled upon another story which confirms that city officials in Shanghai have started a campaign to dissuade Chinese citizens from wearing their pyjamas in public.

This is interesting to me for two reasons. First, my libertarian instincts lead me to ask so what if a person chooses to wear pyjamas on the side walks. Indeed, they would probably look quite odd though it is possible that they may start a fad which is helpful for a major manufacturer and exporter of textiles. As a second point, this is worrisome because while there is no law yet, it suggest that some bureaucrats are obsessed with creating impressions to foreigners and are less mindful of the implications for individual choices.

Noting that the samples of pyjamas worn by the two men in the picture accompanying that story are quite decent, I still contend that a drive to impose behaviour on individuals just because the country is hosting an international event betrays a bureaucracy that is filled with busy bodies. Given Shanghai's place in the continuing economic development miracle achieved by China, one would think that bureaucrats in that city understand the opportunity costs of raising a campaign to stop people going about the sidewalks in clothes of their choice. With tongue in cheek, would one face the same scrutiny if the choice of pyjamas was from this Piero Galante store?

Seeing Microsoft From An Insider's View

I must concede ignorance about the fact that I have never heard of Dick Brass who was VP at Microsoft for close to seven years starting from 1997. However, he is a person that I will follow more closely now for he has given a very interesting view on why Microsoft has struggled in innovation in an industry in which it was the major player for a long time. This opinion article in the NYT shows that Microsoft has faced little competition in its main business area as evidenced by the dominance of the Windows operating system and the Microsoft Office suite. As a former engineer with the firm, Dick suggests that Microsoft had such a strong lead in this area that it could afford to apply the brakes to innovation beyond these two areas.

While I am alive to the fact that this is a former employee of Microsoft, the relative seniority of his formal position at the firm leads me to think that his analysis is instructive. He concedes readily that the firm has maintained large profits and enviable reserves but that it ignored the possibility of employing its employees to develop other hardware and software products. Most painfully, he mentions that Microsoft never developed a true system for innovation and that internal corporate rivalries led to the stifling of devices that could have changed the landscape in its favor. One of the victims of this internal fights for dominance is that a new technology named ClearType with clear commercial applications was not fully developed due to internal fears of its potential for success.

I find this assertion interesting because while there was no guarantee that the new technology would be profitable, it suggests that the internal work dynamics at Microsoft were far from perfect. At the same time, one must offer credit to the reluctance to develop hardware products when the corporation's orientation was to develop a winning suite of software for PC use. Dick is certainly right when one considers that the antitrust problems that this corporation had probably affected its focus on product development much more than is realized. In all, the entire story is far from comprehensive for such a large firm but it shows how a great corporation refused to take the chance to develop new products while it had an unassailable position. One decade later, one cannot maintain that it is the predominant technology firm.

Walmart As Business Case Study

I have come to the conclusion that even the best business writers often miss the essence of the most successful enterprises that they write well about. And my suspicion is that many businesses have maintained their success because of factors that are not immediately palpable. For instance, my view about Walmart is that it is may be correct to identify it as a retailer but that is not the essence of its business. To my mind, Walmart Corporation is really a large logistics and flow management firm and I keep alert to any articles that specifically mention the word logistics or any of its variants whenever the subject is Walmart or the retail business.

Reading this article in the NYT, one finds the characterization of the firm as a leading retailer but the story is largely about management decisions about the focus on its markets. It would not be a stretch of the imagination to state that its focus on a variety of factors are with the view towards providing its customers with a product at the least cost possible. And the corporation has chosen to chase the goal of cost reduction from the logistical end by ensuring that its merchandising is well considered and store location caters to local markets.

This orientation shows that Walmart merely uses its real strength derived from understanding logistics of supply and uses that in the retail business. For that reason, the real value to its shareholders is not by itself in the stores but the thinking that matches the choice of centres with a mechanism to supply goods and ensure that consumers take them off the shelves. That's a model that would apply for many more businesses irrespective of the nature of goods r services that they supply. And while I have not written any case studies for use by business schools, I would be glad to see whether schools are able to see what the essence of a firm lies.