Wednesday, June 10, 2009

The Perils of Hyper-competition

On Monday June 1st, General Motors, the doyen of the American auto industry filed for bankruptcy. Shockwaves went through not only the US but also the world economy. Commentaries abound on the cause of the demise of such a big and powerful player in the global auto industry. Hopefully for Malaysians we can learn some important lessons, not the least on how to prevent our own national car company from meeting the same fate.

Angela Merkel, the German Chancellor, put the blame squarely on `mismanagement’, which may mean anything you want it to. Others attribute GM’s fall to its inability to come up with effective strategies against low-cost auto manufacturers from overseas, namely from Japan and Korea. Some put the blame on the unions which allegedly was the stumbling block against efforts to reduce huge labour costs which included pension liabilities and health-care costs. Some blame the American government for not supporting the company in its tough battle against foreign competition, through either greater subsidies or the imposition of higher tariff barriers. And yet others blame the American consumers for fickle-mindedness and lacking in patriotism in their buying decisions.

However, on deeper examination, one will realize that the aforesaid ‘causes’ are rather simplistic and does not address the complexity of the problem. For example, if we put the blame totally on management, we ignore the fact that the GM management has been trying for decades to increase the company’s competitiveness. It took measures such as absorbing Toyota's manufacturing methods, improving car styling and design, investing in hybrid technology, integrating the company’s operations and centralizing management to reduce costs and persuading the United Auto Workers (UAW) to agree to cost cuts. So much so that by early 2008, analysts concluded that GM had successfully transformed itself.

And the unions? Are they responsible for making GM uncompetitive by their demands for improved pay, working conditions and benefits? Who else would do this for the workers if not their unions? Moreover, many of the requests put forward were inarguably reasonable and necessary in order that members get living wages which are able to meet life’s basic needs.

Blaming the American government for not helping GM in its struggle against foreign competition betrays a lack of understanding of the nature of international business. US trade policy seeks to ensure that international trade remains free from both tariff and non-tariff barriers. Tariffs on imported cars or subsidies to GM will undermine US government’s efforts to encourage other countries to remove trade barriers. Furthermore, member countries of the WTO are agreement-bound to refrain from taking protectionist measures. Breaching the agreement can damage trading links with other nations.

Also, if the American government is considered obligated to rescue GM, the next logical question is why only GM needs to be supported and not another company or another industry which is also suffering from international competition. This is why Malaysians must be very careful when they call on their government to support Proton.

The essential truth is that GM actually is a victim of `hyper-competition’ in the car industry. Competition is good to the extent that it leads to the efficient operation of the market mechanism resulting in benefits such as the efficient use of resources and improvements in goods and services being offered to the customer. However, beyond a certain level where competition gets too intense, dysfunctional outcomes will follow. Competitors will behave ruthlessly and the losses suffered by the losing parties will no longer be optimal to society.

As an analogy, let us imagine two men wrestling in a ring according to the rules of Greco-Roman wrestling. They will do their utmost to defeat each other but at the end of the match, there is no physical injury to either wrestler other than a bruised ego. But what if the spectators decided they want a more exciting competition between the fighters and decided to throw swords and knives into the ring and force the fighters to use them? Greco-Roman wrestling will turn into mortal combat like those of the ancient Roman gladiators in the coliseums. The defeated one dies whilst the winner survives but with serious injuries.

The fatal mistake was to give competitors weapons which they in the first place did not need. The weapons of modern day corporate competitors come in the form of loans obtained from the lending industry. A few hundred years ago, business concerns competed using their own money and therefore the level of competition was relatively low. The overall outcomes of the forces of competition were positive and that was the main reason Joseph Schumpeter came up with the notion of `Creative Destruction’ in describing the benefits of competition regulated by a functioning market system. But with the legalization of usury by the Europeans, the financial industry began to grow. Thus began the throwing of `knives’ into the hands of business competitors. The lending industry is now huge and they are now throwing samurai swords, axes, and even bazookas and RPGs into the ring for business competitors to use to fight each other. So it should not surprise anyone to see GM lying on its back in the ring, mortally injured, whilst in the other corner we can see Toyota sitting on the floor looking dazed with horrific body wounds and some limbs missing. For those who are unaware, Toyota recently announced its worst ever annual loss of 436.94 billion yen for the full 2008 fiscal year and a projected a net loss of 550 billion yen for the following fiscal year.

The combat is unending as other gladiators from Korea, who during the 1997 crisis also nearly died from horrific injuries but were given mouth-to-mouth resuscitations, are now back, looking energetic, with new financial `weapons’ in hand. So don’t be surprised if in the coming rounds we see Toyota meeting the same fate as GM. The question to ask of ourselves is how much weaponry are Malaysian taxpayers willing to supply to our own gladiator Proton and when it eventually succumbs to vicious competition, what will be the extent of the injuries i.e. how much money and how many jobs will be lost? Or should we start telling humanity that the competitive situation is unsustainable, untenable and dysfunctional and that we should go back to organizing Greco-Roman wrestling rather than allowing the gladiatorial fight-to-the-death series to continue?


2 comments:

  1. The analogy of 'mortal combat' scenario offers a clearer and more vivid explanation in the context of hyper-competition as compared from your book. Nice upgrade. hihi.

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  2. this was very useful information as im atempting to do my final year project, on making proton capable of being a global competitor.

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