Chapter 11: Lessons Learned

Situation Summarized

Yankee ingenuity, powered by W3 energy, is a rich American legacy and has been a major influence in the great history of the United States, in its dominant role in the global economy and in the well being of its citizens. It continues to be an important factor in the success of many American endeavors, enterprises and industries. Actually, ingenuity from around the world and the free market forces or modern natural selection, as suggested in Chapter 2, facilitate accelerating advances all around us. While that may seem to be a threat to some, it is really the force that will drive all worthy competitors to do better and better. It is the cause of the rapidly improving human well being, that is, it is life quality and longevity; technology and medicine.

Manufacturing industries, which started it all in the U.S. in the era of the American Revolution, are being selectively de-emphasized in the U.S. today. That appears counter to the direction of other economic powers in the world and in Third World countries as we enter the third millennium.

Stock market analysts will say that the U.S. is shifting from a manufacturing economy to an information economy. The obvious question is, is that a good thing? We can’t eat, wear, or drive information. Obviously, if manufactured goods are no longer produced as they once were by Americans and they are still in increased demand, others are producing them.

The computer, information and telecommunications industries have captured the imagination and attention of much of the American general public. Business, financial, academic, and government organizations are distracted by them as well. Those still-evolving industries do play a vital, even dominant, role in the current and future success of the national economy and global economy.

The stock markets have even differentiated between the two areas of the American economy. One exchange is said to contain the “new economy” or “tech stocks,” while another, or at least its major index of “industrials” contains what is referred to as the “old economy” stocks. While the tech stock index has seen a dramatic reversal from its “irrational exuberance” in its early history, that business segment is expected by some to eventually set the pace for business once again.

As the transformation in the U. S. favoring the new economy continues, the focus and intensity in some of the traditional industries decline. Even their relevance is sometimes questioned. The tougher and tougher global competition in those industries continues to gain momentum, adding to that distress. The transformation, at times, seems to be headed toward exclusion of important industries from the American economy.

The new industries provide a continually expanding array of exciting products, which by their nature are designed to enhance and support other products, services, endeavors and enterprises. The new products are not the tangible things that we surround ourselves with and with which we create our comfortable and abundant lives. Our homes, our transportation, our furnishings, our appliances, our highways and of course much more are those tangible things. Industries such as agriculture, chemistry, and medicine are life-sustaining and critically important as well.

All of these fields of endeavor in the “old economy” are being greatly enhanced by the still evolving “new economy” industries, but cannot be replaced by them, nor should they be diminished by them.

The “old economy” industries are the major users (customers) of the products and services of the “new economy” industries. The new economy industries in turn are prominent among the users (customers) of those enhanced products. The two economies are not mutually exclusive, but are mutually supportive and mutually dependent. It may not be represented exactly that way by financial analysts or financial advisors since their agenda relates to share valuation, which can be dominated by glamour factors and many times, is very transient.

There is another underlying conundrum at work here that distorts the free market environment. The prospect of getting rich overnight in escalating new economy overpriced stock (price based on perceived growth potential) has reduced the appetite of the investment community for the challenge and risk of the old economy stocks including manufacturing of all kinds. (At the time of this writing the trend is now stalled, at least temporarily, by a significant stock market correction. Many believe the trend will resume.)

This circumstance has diluted the energy of the Yankee ingenuity culture in the old economy industries; the ones which hopefully will continue to provide our life - quality and life-prolonging advances. The magnitude of the gold rush to the discoveries in the new economy has diverted the creative talent, energy and capital resources away from the apparently less rewarding old economy. That emphasis will likely continue through some maturity of the new economy and the resulting rationalization of earnings expectation, both real and share value growth.

This area is far to complex and extensive for discussion in this particular book, but it will certainly be a major factor in the success of the composite future American economy.

While other nations continue emphasis on the traditional areas along with the newer ones, has American business become so preoccupied that it has taken its eye off the ball? There is little doubt that while certain other economies, the Japanese, for example, have faltered, they have continued to quietly do their homework and ironically, they may have become the next sleeping giant.

The German manufacturing aggressiveness is obvious in the automotive and the machine tool industries and in others as well. It is depressing to read about the American automotive companies’ deteriorating market share. The lists of models enjoying sales leadership certainly must be discouraging to the American companies as well. In the early days, it was the small, inexpensive, fuel-efficient foreign cars that attracted value-conscious buyers and they ultimately became the sales leaders.

More recently, foreign manufacturers are dominating the luxury and intermediate car market segments as well. Their most recent targets are SUVs and light trucks, where their progress is obvious. This must be depressing to the American shareholders, management and labor alike. Financial security and job security for many may be in jeopardy.

The strength of the overall auto market in a sense masks the real problem because the total sales volumes are still quite high. The market share problem would become more apparent if the market strength cooled and the total sales numbers returned to earlier levels or if an extended recession occurred. It could be a traumatic awakening! A softer market cannot support the current industry capacity.

It’s also depressing to understand the fate of the American special machine tool companies that have been discussed. The special American heritage, Yankee ingenuity, while as potent as ever in many industries, is not being focused as it could and should be. The automobile and machine tool industries are obvious examples. In reality, what has become known as the “rust belt” is only rusty because we think of it that way. It has not had the attention that it deserves and that the other industrialized nations give it.

The American special machine tool industry leadership of the 1970s has declined to a small fraction of its one-time market share in the global industry. The particular difficulties that the industry has had to deal with may be a problem for other industries as well. (A brief early discussion pertaining to the American standard machine tool industry segment did not elaborate on its status. Unfortunately it is in trouble as well due to many of the reasons discussed).

“But while the industry (auto) as a whole frantically is trying to cut costs in an effort to offset slowing sales and rising incentives, the underlying conclusion of the study (KPMG LLP) is that most excess costs have been wrung out of the supply chain, and future gains will depend on technological innovation.”^[28]

Interpretation of technological innovation: The technology involved in the enabling of competitive production of innovative new products - in other words advanced processes and production hardware.

Where will those advances come from? In their internal cost reduction efforts, the American auto companies have come to rely heavily on their special machine tool suppliers for specific manufacturing engineering capability. In recent decades, they purchase entire manufacturing systems competitively from a single supplier. The best original combination of process and hardware are selected.

Formerly, they would devise and manage the entire detailed manufacturing process as a whole themselves and purchase individual or groups of machines from multiple suppliers. Without that need, that capability is likely to have been greatly diminished. You will recall points made earlier concerning countless advances made possible by the collective imagination and energy of the special machine tool industry realized through the free market competitive bid process.

During the period of decline of the American auto industry and the special machine tool industry, the competing industries from Japan and Germany, as you might expect, have gained strength along with market share. Their machine tool suppliers have benefited from their robust market strength. They benefit in being selected by American auto companies for machine tools as well, certainly with help from very favorable currency exchange. In the meantime, the once great source of imagination and energy of Yankee ingenuity in American special machine tools is underutilized and languishing.

The environments within the American special machine tool industry and in its marketplace have become unfriendly to the culture of Yankee ingenuity. The opportunities for technology advancing value for the user organizations are seriously diminished by retrogressive procurement tactics. This environment discourages free thought with oppressive structure, rules and other paradigms. The industry transition from entrepreneur to public ownership, along with management succession stresses, has weakened it considerably. These are serious problems in any free enterprise system for both supplying and procuring companies.

There is a concern that high tech products are advancing so fast that they overtake their consumer industries’ ability to apply or incorporate them effectively. The products in question are not just the finished PC, modem, scanner, wireless communication devices, or software, but the base components and concepts that will be integrated into the products of others with custom software.

It is reminiscent of the relationship of cutting tools and the machine tools that depend on them: boring tools, milling cutters, etc. In alternating phases of technological advance, machine tools must wait for advances in cutting tools to be able to take advantage of their own capability. Then the opposite is true: Cutting tools wait for technological breakthroughs in machine tools for their product capability to be effectively utilized. There are exciting new technologies originating in the special machine tool industry itself.

The possibilities for application of accelerating technology are limitless. In the past, customers and competitors were the forces driving advances and innovation in most industries. The demand for innovation now comes from a third direction. That force is the pressure to apply the rapidly advancing support technologies. It is intensified by the other two, as well as by others, including Wall Street.

Industries that have been thought of as mature are no longer mature, as they find themselves facing new horizons. In some cases, their paradigm registers have been or will be set back to zero. Remember the Swiss watch industry following successful demonstration of the Quartz watch (it threatened the entire Swiss economy). Many gears, springs, and jeweled bearings, the defining components of a watch are no longer required. Can it really be a watch?

The point is that these industries, and especially the American auto and special machine tool industries, must possess abundant, passionate, and imaginative, engineers, designers, technicians and their enlightened managers and owners to even survive and then to prosper, now more than ever. They must out-think, out-apply, and then outdo their global competition to succeed. It’s major league hardball!

The term “agility” (discussed in Addendum One) has particular meaning in this discussion. To standardize and freeze in time the use of a certain technology in product concept or in its manufacture is likely to be imprudent. It may seem at the time to be the latest and greatest and most flexible, but technological advance tells us that a quartz watch may soon be available. While most Swiss companies were looking for better ways to apply and make gears and bearings, someone “found a way” to eliminate them entirely.

The technology advance worldwide translates into intensified competition. There is a clean sheet of paper, or a clear Computer Aided Design monitor screen, in front of a lot of people these days, in other words, opportunities and challenges. What a great and exciting time in our history for Yankee ingenuity. We must find a better way to use it effectively.

^[28]Drew Winter, Study: Detroit to Continue to Lose Share for 5 Years. (WardsAuto.com, January 10, 2002).