Archive for November, 2008

Car companies: too big to fail, or too big to survive?

Monday, November 24th, 2008

For a time, “economies of scale” meant that the key to success was making a business bigger, and focusing on nothing more than profit. Sell more products however you could, and cut costs as much as possible. This is no longer the case. We’re entering a time when smaller businesses that solve real problems can be profitable, and the former behemoths are becoming dinosaurs.

The past

The assembly line was the key innovation of the auto industry, that famous invention of Henry Ford. By creating stations where each person did one thing, and moving the products past the people, it was possible to crank out thousands and then millions of mostly identical cars. As robotics came along, it was possible to remove people and reduce payroll. As globalization grew, it was possible to find places where the people you did need to employ cost less.

Who did this system benefit? For a while, it benefited auto workers, once the unions were in place to provide basic protections that limited repetitive stress injuries and guaranteed living wages. It definitely benefited owners of the car companies, at least the ones that survived to be bought by one of the big 3. It benefited the shareholders of the big 3, which for a time included in some small part much of the American middle class, along with many retirement funds more recently. And it brought cars and a whole car culture to several generations of Americans.

But there are many, many costs we’ve paid as a society for this. Many American cities had streetcar or rail systems in the 1920s and 1930s that were dismantled with the rise of the automobile. While some argue that streetcars were slow and inefficient compared to cars, many point to GM buying up the streetcar systems and dismantling them. And I have yet to see any accounting for the mass subsidization of the car system we’ve made over the years, the cost of paving the millions of miles of roads and parking lots, the gas distribution networks, or health issues related to air pollution. That’s not to mention the opportunity cost of dedicating all that land to our cars.

The number of people benefiting from the car companies is quickly declining through off-shoring and automation. Worse, for decades, the Big 3 have been buying up competitors and burying innovation. Rather than compete with its more lucrative mainstream cars, GM killed its early electric car program. Big car companies need to do a lot to maintain their monopoly. Big unions have arisen to provide some protection for the labor these companies needed. Big oil is perhaps the biggest benefiter of the auto industry, as it’s been for decades. But the effect of all of this bigness is funneling dollars from the mass middle-class to a tiny group of owners of these companies.

The present

The car companies are saying that if you account for all the parts suppliers and other companies that depend on the big 3 for revenue, they’re responsible for nearly 10% of our economy. But there’s some false logic here. First of all, if the big 3 go under, we’re not going to stop driving. It won’t take down the entire industry–we do love our cars. What it will do is create a big vacuum in the marketplace that will open it up to hundreds of innovative startups, giving them a much bigger opportunity to succeed.

If the big car companies fail, there will be a lot of talented people who know how to make cars looking for work, and many of them probably have some brilliant ideas to make them better. I think we’d see a renaissance in the car industry, with many companies going out of business but a lot more starting up to take their place. The old car industry has long been complacent, relying on heavy marketing to make their outdated business model keep running. And it worked, for a surprisingly long time.

The problem is, the assembly line is obsolete. It appeared during a period when talent was scarce, and raw materials plentiful. So big car companies got big by doing what they could to produce more with less people. Much of our business world has the idea that you make more money by replacing jobs that take skill with jobs that do not. Make the process smart, and make it so you can put a trained monkey (or robot) in a position so you can reduce your cost and make more money.

Unions stand in the way of this, protecting workers’ pay while their jobs become ever less. So these workers, their pensions, and their health-care benefits become a huge cost for the American car companies, compared to foreign companies that do not need to pay for these costs. Yet ironically, by paying decent wages, these companies also create people who have money to buy their products.

Here’s the real reason we’re in a recession and facing even worse: our entire business system that has been built on maximizing profits has worked so effectively in funneling capital to the wealthiest and away from our middle class, that the vast numbers of Americans can no longer afford to make the purchases that keep our economy running. We’re quickly becoming share-croppers in a neo-feudalistic world, slaves to our wages that effectively dwindle against rising health-care costs, mortgages that are 10 times as much as our parents, and fuel costs that have only diminished because nobody can afford to buy anything.

Who needs a bailout?

Now, I’m not suggesting we do nothing. If the big auto companies go out of business, there will be a lot of people out of work, with no safety net to keep them afloat. We pride ourselves on being a place where anybody can start up a business and potentially do really well–but the reality is, this is really hard to do in an environment where your potential customers aren’t buying anything.

I do think we need a bailout. I just think that rescuing the car companies is not who to bail out. We need to soften the landing of the hundreds of thousands of people who may find themselves suddenly out of work, and we need to figure out how to get capital in the hands of new entrepreneurs who can put these people back to work. The car companies have proven they’re not the ones with any sort of vision for the future, so they need to die now.

Right now, the barriers to creating a new business are steep. Very few people understand everything that’s involved in starting up a business, but most understand that the stakes are high if you have no other source of income. Many, if not most, successful businesses are started by people who have saved up a good amount of seed capital, or have spouses with a stable income, or by those who have done it before and have connections. Without money or connections, it’s extremely difficult to start a business.

I think we need a national program to help match engineers with business people and ideas, and provide seed money to get them launched.

There’s a few nascent events in Seattle along these lines: 6-hour startups, startup weekends, and the like put smart people in the same room and let them see if they can develop some sort of web site with business potential. We need this kind of thing expanded to include more than just software people, and also provide some financial backing to see if they can get running.

This is basically the role of venture capital, but the biggest problem with venture funds is that their timelines are too short–they expect a profitable exit event within a few years, and won’t necessarily fund something that isn’t designed to make a huge profit in a short amount of time.

Some of the work of the Small Business Administration and the Small Business Development Centers is admirable in this area–the problem is, not enough people know about these programs, and far too few engage with them. I think a large part of this is fear of losing health-care benefits, retirement plans, and other benefits that large companies provide at a huge advantage to smaller companies.

America has a huge mythos built on top of the entrepreneur, but very few people who actually become entrepreneurs. We would do far better to provide a social safety net for people out trying to start new ventures, making sure they have healthcare and other basic needs covered, along with the tools they need to figure out how to grow and thrive, than to bail out the decadent dinosaurs.

The Future

As bleak as the current financial system and business climate appears to be, there’s a ton of opportunity for real change. But we need to re-align our business value system to make this happen. Here are three specific mental adjustments the business world needs to make.

First of all, we need to recognize that people are our most valuable asset. Where businesses used to do everything possible to make people interchangeable cogs in a vast machine, to succeed in the future they’ll need to use perhaps our biggest untapped resource: our brainpower. To succeed, a business needs to find smart people who haven’t had their sense of initiative crushed by working in large businesses, and give them tools and encouragement to solve real problems. Rather than the cynical marketing to the lowest common denominator and appealing to “Joe Sixpack” as the average American, we need to recognize the genius in our neighbors and ourselves. We can be so much more.

Secondly, we must recognize that we are in a dire position, and need to work together to survive. It’s human nature to adopt an “us versus them” mentality. We’ve always separated people into our friends and our enemies. Nothing unites a people like a shared enemy. For a brief time, 9/11 brought Americans, and much of the world, together in shared suffering. In the large businesses of the world, success is measured by your sales compared to your competition. In the Cold War, nearly the entire planet was divided into the Free World versus the Communist world. But during all of this, we’ve been dumping waste into all the natural systems that support our very lives. We’ve been increasing the temperature of the planet by pumping greenhouse gasses into the atmosphere, causing galloping glaciers in Greenland and drowning cities. We’ve been poisoning our rivers and streams. We’ve been decimating entire fisheries at alarming rates, killing the great sources of our food. We’ve created rivers of garbage floating around in the middle of the oceans. And we’ve drawn down every natural resource available to us as if there was no tomorrow — soil levels, water levels, oil levels, all being consumed to give us an unreasonable standard of living. If we don’t start addressing these problems quickly, we won’t have a tomorrow.

We need to focus our energy on solving these problems, because they threaten our very existence. Our human enemies are mainly just the people who are unlucky enough to be faced with these problems first. It’s time to set aside our differences and get to work creating a place where our grandchildren can live.

Finally, we need to harness all the efficiency and productivity that technology provides, and focus that on solving real problems. Computers can automate many menial tasks. Large businesses have used technology to cut costs. In most cases, “costs” equals payroll–you save money by cutting jobs. But if our talent is our most valuable asset, it makes no sense to get rid of them. Instead, we need to take those assets and put them more directly to work on projects they’re best suited to handle.

The rise of agriculture meant that more people did not have to spend their lives finding sustenance–people who farmed created more food than they consumed, which led to the rise of towns. Industrialization further centralized our economy into big cities, and centralized wealth into the hands of a few. Now the Internet and open source is changing everything, providing a decentralized model that completely levels the playing field–individuals with no prior connections can become as influential as centuries-old institutions. We no longer need to be dependent on big economics, big corporations, big publishing houses–we now have the tools to build small local economies. Innovation is done by individuals. Small companies with smart people can displace the old dinosaurs. We need to teach people to be smart, and encourage innovation–not teach them to be dumb, staying mute in the face of rigid hierarchies of corporations.

Let the dinosaurs die, and let’s get on with solving our real problems.

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Socialism, individualism, and open source

Tuesday, November 18th, 2008

I just heard a Republican pundit on the radio talking about how Republicans are supposed to stand for individual efforts over taking care of others, and small government rather than large. He posited that Republicans had lost the election because they hadn’t adhered to these core values.

A colleague who sounds a bit upset at last week’s results twittered a link to a blog post that accuses us of being “sheeple”, and going down the path of socialism, and apparently the author believes this will cause our country to collapse. The tail end of the McCain/Palin campaign hurled the Socialism epithet as well. Other colleagues have been sending cartoons of trick-or-treaters collecting candy on behalf of their friends who are “too lazy” to trick-or-treat.

There must be some fundamental difference in the way people see the world. I hear these things, and several thoughts come to mind: (warning: long, rambling unedited rant ahead)

  • We’re facing some awfully large problems. Sub-par health-care system. Failing education system. Crumbling transportation infrastructure built around gas-guzzling cars as the cost of oil goes up. Failure of the free market to regulate itself. It strikes me that these are all problems we need to solve together, not leave to the laissez-faire system we’ve had that have rigged the playing field towards the rich, redistributing our country’s wealth to the very top.
  • Why does the word Socialism have such negative connotations for the right wing? Is it just because it was part of the USSR’s name? Most of Europe has socialist programs in place, resulting in much better health coverage and a social safety net to help reduce homelessness.
  • The word “lazy” is used as a broad brush to dismiss the efforts of anybody who hasn’t reached some level of success, often by people who are struggling themselves. I’d argue that people at the bottom of the pay scale, working 2 minimum-wage jobs and barely scraping by, are anything but lazy. Opportunity is capricious, and not evenly distributed.
  • Open Source provides a proof-of-concept that illustrates that we’re better off working together to solve our problems, rather than keeping our solutions close to our chest and not sharing with our neighbors.

Us versus them

Our country was founded with a common enemy. For many people, it seems that patriotism depends upon having an external enemy. First the Brits. More recently, the Nazis and Japan, and then the Soviet Union. Now, it’s terrorism, along with illegal immigrants.

But Franklin Roosevelt, at his inauguration in the midst of the Great Depression, famously said “the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” And indeed, that is exactly what we fear today–terror. We’ve declared war on it, to the detriment of our civil rights and our moral standing in the world.

I think many people have transferred their fear and uncertainty of their own economic circumstances to this external threat of terrorism. But our real enemy, both here and abroad, is poverty and an unwillingness to work together in the face of much larger looming disasters, such as peak oil, climate change, water and energy shortages, overpopulation, mass extinctions. Instead of dealing with these issues, we’re blaming others for our problems.

I fail to see how the problems we face in the world are all because of terrorists, Democrats, or lazy people. I would argue we have terrorists because we have poverty, and hugely imbalanced distribution of wealth. If we don’t deal with those issues, we’ll surely see more terrorism in the future.

The individualist end game

Time is running out on many fronts. The sheer size of our population is putting a strain on the natural systems of our planet on which we’re completely dependent. Yet we squabble on how to divide up the planet, and those who play the dirtiest have long been winning.

In economics, there’s a distinction made between rivalrous and non-rivalrous resources. Rivalrous resources are those that can only be used by one person at any given time. Non-rivalrous resources are generally things that can be used by many at the same time. For example, my backpack is rivalrous–if you take it from me, I don’t have it anymore. A song is non-rivalrous–I can sing “Happy Birthday” without taking that away from you. Or at least, I should be able to…

In our current economic system, we have made more and more things rivalrous, at least in our legal system. We have carved up our land and made the vast majority of it private. We have granted patents on our very genes. We have allowed corporations to claim ownership of drinking water and charge people for access. We have companies whose sole purpose is to own a patent portfolio and make money off the use of ideas, whether or not other people came up with the same idea independently.

If you’re an individualist, you might see these things as capitalism at work, and the way it should be. But this is really a short-sighted view. Taken to the ultimate result of more and more people fighting over less and less, and you end up with situations like Rwanda in the 90s. According to Jared Diamond, one of the biggest factors leading up to the genocide was population-pressure–the population density had reached a level not seen anywhere else in Africa. Sons were fighting over postage-stamp lots of land to have something they could grow food on, as fathers divided the land into ever smaller bits. There were no shared spaces left, no mental buffers, not enough land to support the people. The rate we’re exhausting our planet’s resources, we risk a similar fate.

We’ve been steadily turning our common wealth into private wealth, redistributing wealth to a tiny few, leaving not enough for everybody else. We’ve been spending resources like oil that have taken millions of years to accumulate in a few generations, polluting our seas and soils, shipping our waste anywhere out of sight, and seeing all of this as somebody else’s problems.

Our country was founded on the principles of working together in the face of a common enemy. Ben Franklin is full of relevant quotes: “We must hang together, gentlemen…else, we shall most assuredly hang separately.” The biggest problem is that while these big companies take, take, take from our environment and people all to maximize their own profits, they’re stealing the resources everybody else will need in the long run, and socializing the true costs of them doing business.

Scarcity versus abundance

Ironically, the way out of this mess is to change perspectives and realize we really are blessed with tremendous resources. Among the largest, most under-utilized resource we’ve got are millions of smart people locked up doing menial work as cogs in the machinery of these big corporations. We’ve largely moved slavery out of agriculture into minimum-wage jobs across the country, and lower-wage jobs abroad. The term “wage slave” is not far off the mark. Prices of everything has been spiraling up while wages have flat-lined. In the past generation, the cost of buying a house has gone up by a factor of ten, while wages have doubled. Yet more people have bought houses than ever before, and we now see that it was mostly on borrowed money they couldn’t possibly pay back.

You hear the right wing complaining about big government, and how liberal policies reward people for not working. Our policies say a lot about what we value, and just about every decision congress makes benefits some people while penalizing others. We need to get a lot more strategic about our policy-making, and align those policies to address the big problems we’re facing–a health care crisis, global warming, deforestation, peak oil, the financial crisis, and more. If our most abundant under-utilized resource is brainpower, let’s make some policy changes that rewards using those resources, while penalizing the use of the natural resources we’re quickly exhausting.

We need to find ways of penalizing companies that consume natural resources and burden our systems with waste. We need to find ways of rewarding smart, responsible people and companies who help reduce waste in the system.

So how do we make this happen?

Let’s go back to the basics. What does everybody need? Food and shelter, obviously. Today, health-care needs to be a right–we’re a wealthy enough country that it’s absurd people have to choose between food and medication they need to treat and prevent a health issue. Beyond that, people need opportunity, and motivation. For far too long, our policy has been to motivate through fear. Make people afraid they won’t have enough food or have a place to live, and they’ll do drudgery work to avoid that. But it’s hard to give creativity free reign when you’re trying to scrape together the basic things you need to survive. Too many of our people are in exactly that position. And we need their help solving the bigger problems.

In fact, some of our biggest problems are caused by exactly this issue–people not having adequate food or shelter. Terrorists come from places where the future is bleak, where people aren’t secure that they’ll have a safe place to live and enough to eat, let alone make any positive contributions. But there’s always an opportunity to be destructive if your situation is dire.

Now, as much as I’ve been railing against big business, I do think business is the answer. We need to re-align our policies to favor small businesses, and lots of them, to power our way through this mess. Small businesses need to be part of their communities–they can’t just take their jobs to the lowest bidder. Small businesses are much more entrenched in location, and able to make contributions to help their communities. Small businesses provide jobs, solve multiple problems, and are able to think about things beyond merely satisfying their shareholders’ greed–they are able to optimize their business to fit in their part of the economic ecosystem, rather than doing whatever it takes to maximize profits. And small businesses succeed by recognizing that others need to succeed too.

The current barriers to people creating small entrepreneurial businesses that solve real problems are many:

  • A workforce trained to be wage slaves, rather than thinking, and making decisions, for themselves.
  • Crushing costs of doing business: payroll taxes, health care, business operational overhead that is a high cost of doing business.
  • Lack of knowledge/experience in creating a business. Very few people who start a business have done it before, and until you’ve started a business, it’s hard to understand the magnitude of the task.
  • Money. It takes money to get started. It takes money to hire people, provide training, lease space, buy equipment, get insurance, handle bookkeeping and taxes, and obtain licenses, let alone buy the raw materials that become your product.
  • Time management. If you’re a service business, you need to have enough billable hours to cover your costs and make a profit. If you’re a product business, you need to create or manage your products. You need to devote some of your time to marketing and sales before you make any money at all. You need to divide your time effectively between doing the stuff you get paid for, letting the world know you exist, developing the key relationships with partners and vendors and customers, and handling all the little stuff that needs to get done to keep the business running.

The bottom line is, nobody can do all of this alone. To succeed in business, you need help, and lots of it. You need customers who will spread the good word. You need vendors to help with all the operational aspects of your business. You need employees to do the actual work of your business. You need competitors to prove to the marketplace that your product or service is valuable.

So that’s a very long-winded way to get to the point that the vast majority of businesses do not have a monopoly on their product, and do not need “Intellectual Property” (IP) protection to be successful.

Venture Capitalists are always looking for IP: patents, copyrights, trade secrets, or some element that gives a company an advantage over every other potential competitor in the market. They need this because the venture system is based on home runs–they expect that out of 10 businesses, 7 will fail, 2 may break even, and 1 will be successful enough to cover the losses of the other businesses. They don’t know which business will be that home run, so they’re going to invest in the businesses they think stand the best chance.

I’ve spoken with hundreds of people who think their idea is unique, and they don’t want to tell you about it because you might steal it and make a ton of money–or at least be a competitor. The problem is, there are lots of good ideas, and many people come up with very similar ideas independently–the real shortage is the talent to execute those ideas, turn them into a viable business.

One of my biggest challenges as an early open source solution provider was having my potential customers take my solutions seriously. After all, if the software is free, how can it be any good? And if it avoids vendor lock-in, why am I the only one proposing it while they’ve got a dozen vendors pitching Microsoft or Intuit solutions?

While the idea behind my business is wide open, and there’s no prohibitive barrier to competitors setting up shop and doing exactly the same thing, our business is succeeding on execution, on the talent of my employees. It doesn’t matter what your idea is–what matters is whether you can bring it to market.

Systems thinking

To wrap this long meandering post up, we can no longer afford to run businesses that maximize a single factor (profit) at the expense of everything else (people, environment, waste, the future). We need to start optimizing for all critical factors. Our products and businesses need to account for the full impact of what we’re doing, and if it doesn’t make the world a better place in some small way, it shouldn’t continue to exist.

Businesses don’t exist in a vacuum. Businesses can serve a highly constructive role in our society, and help address all of the major challenges we face. But we need to adopt the Unix architecture, create them as small pieces loosely joined, not big monolithic monsters that crush everything in their path.

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