The recent swine flu has triggered off a thought process. A tiny flu virus, whose sole distinguishing factor is its ability to take on new genetic material and ‘survive’ different environments, now threatens a species that has (till now) proved to be the most survivable on this planet.
Declaimer: This article written was originally in March 2011 and some of the data points may be outdated.
If I were a biologist, this would be intriguing to me. Being an economist, I simply say a short prayer before getting onto an international flight; but for you, I want to draw parallels between this little (survivable) virus and the organizations of tomorrow.
I work for a leading Private Equity firm that specializes in ‘buying caterpillars and building butterflies’. The process of building (value-creating) processes is one of exploration: just how do you keep trying new things, till you get it right? And when you are tired of getting it right (or you get it wrong), you sell it off.
Compare this with what I just saw in Germany/ Austria. Deep in the Rhine hinterland, you can turn off almost any autobahn into a small, winding road that takes you to an alpine village (pop: say, 7000). The village is concentrated around a community of about 1000 workers in a not-so-small company (turnover varies from $300 mn to $3 bn, but all of them are world leaders in their respective businesses). The co is typically 80-120 years old, managed by its 3rd generation, with simply mind-blowing technology leadership and continuous innovation that sets it apart from the rest of the world.
Now consider this. Just what is it about a nation that allows anybody from its myriad alpine villages, to pick up 1000 villagers from nearby, and create a SYSTEM that outmaneuvers the rest of the world at pretty much every engineering endeavor: from auto components to metal-working, glass–making to metallurgy, solar panels to nuclear cores. No kidding, this is exactly the range of world-beating skills that I saw in just 3 villages picked up randomly from the A9 autobahn in Germany. It does say something about the DNA of a nation, its individuals, and its organizations if what I saw is not a random phenomenon.
My intention here is not to point out a pattern in the creation of Germany, but the challenges to its survivability. But still, let me record just what I think that DNA is: Germans seek excellence for the sake of it. Their farms are landscaped (yes, LANDSCAPED) for beautiful aerial views, and they spend huge effort to keep EVERY farm straight in its contours. This behavioral pattern goes right down to the way they serve their dishes, plan their menu, and even the way they park their cars.
So Germany became what it is, by pursuing perfection for the sake of it. And when EVERY German starts to do that, you create a ‘network of intelligence’ that ensures that your next-door neighbor (or alpine village) also benefits from your progress. In one spectacular case, I saw one co that had got so good at understanding how steels behave with non-steel substances, that it built excellent skills in welding metal with glass. It also replaced high-priced metals like Nickel, etc with other metals without any change in performance. The peculiar thing was that next door came up with a co that used precisely the 2 skills that this other co was replacing, i.e. a Nickel-plating co came up in the next alpine village, specializing in keeping Nickel yields high and removing the need for complex welding altogether. Needless to say, both cos are world leaders in their respective businesses. At the town pub, you can learn more about welding technology than you can at any advanced Materials Course in the world.
The earlier Germany made products for people like itself. Its markets were the sophisticated OECD markets with high purchasing power; they built good products for high margins and then went and bought high-value products that gave other people great margins.
This was a great life. It meant that these cos had stable, long-term businesses with good margins, low debt, and no need for public equity. The owners became paternalistic with huge community linkages, which created the pressure for the high social costs that you see across Europe; the important thing to notice is that these obligations are not often mandated by law, but simply followed in practice.
Then came change.
Along came to Asia, and for various reasons, these cos suddenly find that their earlier Hedge Fund buyers (for their fancy products) from across the Atlantic had gone home to nurse their wounds. The only people left in the market were the poor Asians, with their commoditized technologies, their cost-focused competition, and their cut-throat costs.
These German cos are now at a crossroads. They now have to make cost-quality trade-offs that they are not used to, and which go directly against everything that they stand for. It goes against their German DNA to unravel the very quality standards they designed, to reach cost levels and price targets that they never cared for.
Some of them continue to sit on their high horses, refusing to bend and preferring (sometimes) to break. Capacities are running at 30-40%, but they are not willing to relent.
The Nano is a good example. The car is conceptualized on the principle that the cumulative value-add in the car is about 97% of the Selling Price of the car, i.e. if you crunch a car to scrap, then take the original raw material in each item (e.g. iron ore for the metal scrap, base petroleum for the plastics, etc), you would find that 97% of the value of the car has gone to some ‘value-adder’. Of course, this concept is misleading because it does not include energy costs, which are tangible and inflexible, but you do get the gist of the point, don’t you? Tangible raw material and energy costs are a very small part of the cost of the car; the major costs are people, design and intellectual property, interest, and depreciation (for Fixed Assets and inventories). The actual number is not important, but the concept is.
If you can commoditize the ‘value-add’ in the car, there is a long way to go (down). And thereafter, C.K. Prahlad’s idea of scale following dramatic cost reductions will take over.
But to get back to what this idea is doing to the old Germany; it is killing them. They are simply walking away from such large markets, even as they lose 4 mn cars in the OECD (gross over-capacity is estimated at a whopping 20 mn cars). But the new markets of an estimated 5 mn cars coming up in Asia will go to Asian cos, who are following this burgeoning demand. It will happen with new paradigms, and the search is for VFM (value for money).
The Germans are hoping that people will finally ‘come round’ to accept better quality for higher prices, which can afford their high currency rates. What they forget is, the Asians CAN’T, simply because these markets do not have the purchasing power the Germans are used to. Some Germans realize this but are unable to accept it, or even learn how to handle it. How can you be German and then learn to NOT be German?!
To be fair, some of the top cos are already talking this language. I met with some big co-CEOs who are at least realizing the problem. And in one case, a CEO was looking to natural processes to decide which way to go….at least, they are speaking the right language.