A Commercial Future ?
July 28th, 2009 | 
Author: 
Of late the Chancellor Mr Darling and Bumble Brown have been banging on about the Banks needing to lend money to get the economy moving again. Whilst I hold no torch for Bankers as such but feel that we need to be sensible here and not ask them to try and participate in political decisions or fund Government Policies it is not what they do.
Yes, we the taxpayer have put a lot of money into “rescuing the banks” but we didn’t do it for them, we did it for our own economic reasons. If there is one lesson that needs to be learned it is that they were allowed to get far too big, so big that we couldn’t allow them to fail, that has still not been addressed and it really needs to be.
The Political Agenda
All businesses need to be aware of the “political environment” that they work in, it is not just Defence Contractors however, the priority is for the Banks to rebuild their balance sheets and Parliament to look very carefully at the framework they have operated in, in the past and how that can be improved for the future. If one wanted to be radical one might retain one of these banks that the taxpayer owns and run it for a profit with those profits going to business development funds rather than shareholders but interfering in commercial decisions across the industry, is not appropriate.
Also one must be very frank and acknowledge that this particular Government is desperate for “successes” that they can point to for the all too soon General Election Campaign, these are not the circumstances under which sensible decisions in the longer term interests of the Country are being made as witness Mr Brown’s constant denials that a re-elected Labour Government would have to cut public expenditure savagely – “investment” total botox !
The Baying Mob
It is easy to pick on any group of people who are currently unpopular, Bankers over the collapse, MPs over expenses and so on but projecting blame will not solve the underlying problems. Also as Nazi Germany showed in the 1930′s with Jews, it is a dangerous game for politicians to play.
The Banks may have been reckless but so too was Brown as Chancellor, neither saw it coming apparently so its a bit rich for one to blame the other. The Bank’s Toxic Loans are matched by the Government’s PFI neither seem to have been doing their jobs properly so let us agree, Politicians should stick to politics and Bankers to banking, both seem to have rather a lot to learn about their respective ‘businesses’.
Our Future Economy
There was an article in today’s Times about China and the current global economic situation, all interesting stuff but I’m not too sure that the basic underlying assumption which though not stated explicitly, that “The Global Economy will return to exactly where it was prior the slump, at some time”, is correct one, it may not.
The problems are very deep seated in the West and individuals trapped in negative equity on their property plus being “maxed out” on their credit may well make a virtue out of necessity and a “Less Is More” economy may well emerge over the next 10 years. The high volume multiple gadget consumer society may have died with the crash. The future may well be lower volume with higher quality and greater product longevity.
In the UK and the USA, the thrust will be to soak up unemployment and a very good way of doing that is via a “Repair rather than Replace” economy which creates more jobs. The whole concept of building loads of motor cars that you can then export to other countries may be just “so yesterday” !
Quo Vadis ?
The problem for Bankers as well as Politicians the World over is simply that they have no idea just how this will pan out and therefore for investors or investment funds, just which horse to back, big or small businesses ?
The probable answer is both and the following may well illustrate the point:
During the 90′s I needed multiple processor PCs for graphics work and although these were available commercial, because it was a niche market, the prices per workstation were prohibitive, it was cheaper, if rather more tedious to build your own from components. Later when time was more valuable than the cash plus, the prices had come down, I bought whole PCs for the same purpose from Dell.
However when 5 years ago I moved down to look after my Parents and cash was tighter, I went back to building my own and I have numerous PCs but the point is, nothing much gets wasted, most of the components get recycled and PCs get cannibalised or if you like “reconfigured”.
A factory to make CPUs apparently costs the total GDP of a smaller nation but sold in volume to the likes of Dell, HP, Lenovo, Acer etc, the money they get per unit is probably 25% of what they might get retail. There are many areas where the R&D costs are very high, motor cars for example but at the end of the day the margins on volume production are low.
Like CPUs and Motherboards in the computer world, Floor Pans, Suspension Units, Drive Trains, Engines etc could still be made in volume but for distribution to small scale manufacturers it would open up a whole range of potential new business opportunities and be quite exciting. Using standard components, totally individual and bespoke car designs and businesses to support them might emerge.
A Sea Change
Thus far the “West” has exported volume manufacturing and the pollution that goes with it to the Far East but perhaps this cycle has effectively ended because that in commercial terms was just doing the same thing in another place using cheaper labour, there was no innovation or a radically new business model involved in it.
If this changed along the lines I have suggested above the implications for China and many other countries in the Far East would be dramatic as far as industrial development is concerned and there may be major political upheavals to be dealt with and the social outcomes that would follow.
The point that I am making is not that my view is “right” but that we are all, Governments and Bankers sailing in uncharted waters and both the West and the East may need to think very differently about the future.
Posted in Business
If man had the ability to control the external climate, what climate would he wish to maintain? In economic terms, which climate would we prefer? Presumably we want inflation, so we feel wealthier, even though we aren’t necessarily. So what, exactly, does “The Global Economy will return to exactly where it was prior the slump” mean? Exactly when? Exactly what?
It would, for me, be nice if it rained only between midnight and 6am, so that’ll be the climate for me. That wouldn’t suit those who work at night though, would it? Nor would it be great news for rainwear manufacturers if most people never had to go out in the rain. What if I was confused by the powers granted to me (as I often am) and it, instead rained all day except between midnight and 6am. Well I’d be in a lot of trouble because I can’t swim, but that aside, I don’t know how to control the climate any more than economists understand economies.
The Bank of England has printed new money to buy debt from banks to release cash for lending. The Chancellor wants the banks to expose themselves to less risk, increase their cash reserves and buy the record amount of new debt issues, so there may be more money in circulation, bit its just going in circles. At the same time, those who have benefited from the lower cost of borrowing are saving their money and those who haven’t been so fortunate continue to struggle to survive whilst fearing for their jobs. Fantastic. So, what economic climate do we really want?
Well we do need inflation to grow our pensions. We would quite like house prices to rise again, but, as they stand a historically high levels relative to earnings, which are probably falling, adjustment is required. That either means prices stagnate as earnings rise or prices fall to redress the balance. Which is more realistic? Do we need to be wealthier at all? Well, considering retirement again, we do need our reserves to grow to continue to provide an income on which we can survive, even if the cost of living in retirement generally falls over time, heating bills aside. So we need inflation, but how much? Can we realistically control our domestic inflation in a global economy anyway? Yes and no, but it’s like trying to score a double 20 on rotating dartboard. You might hit it, but it’ll be more luck than judgement.
If we are to rebuild our economy effectively, it cannot rely so heavily upon services, as that, in turn, relies too heavily upon inflation. We do need muscle applied to recreating our manufacturing industry, not least because these larger industries feed the many smaller ones that are real contributors to the economy. We can’t compete on cost for mass-market, low-priced goods and that is where China will continue to enjoy an advantage, until the age of its population starts to increase labour costs. What we need to concentrate on is more specialised or premium products, where labour costs are less significant and transport costs more so. Globalisation has not killed that possibility, but there’s no point in producing the world’s best Betamax player, is there.
Maybe swine flu will take the global population back to a more sustainable level and we won’t have to worry about anything else. Tamiflu anyone?
Very interesting points and I certainly agree with a revival of manufacturing in high quality niche markets.