Ca-Ching

Even as the economy shows little sign of recovery and unemployment rockets toward double digits, my progressive friends keep telling me to give President Obama a chance. After all, they correctly point out, it’s been only 150 days since he became President, and “the economy is all Bush’s fault anyway.”

It’s reasonable to assert that to date, Barack Obama doesn’t own the problem—that came on another President’s watch. But he most certainly owns the solution, and that’s what worries me.

Barack Obama, with the help of an overwhelmingly Democratic Congress passed a “stimulus package” that, so far at least, has done almost nothing to stimulate anything. $750 billion, Ca-Ching. He has suggested that we’ll need to spend almost $1 trillion dollars (Ca-Ching) over the next 10 years to “save” medical care in the US, and he’s advocating a ludicrous cap and trade bill whose cost to business and consumers (in a time of deep recession) is difficult to determine, but very, very significant (Ca-Ching).

But it’s his takeover of GM, at a cost of a mere $40 billion or so (Ca-Ching), that provides insight into both his philosophy and his inexperience.

My progressive friends become entranced when they talk about President Obama’s intelligence. It’s as if a Harvard Law degree inoculates someone from making bad decisions. It. Does. Not.

Barack Obama may be smart. But in business matters, Andy Grove is smarter—much, much smarter. In case you don’t know who he is, Andy Grove is the former CEO on Intel, one of the most successful computer companies on the planet. In an intriguing article in The Wall Street Journal, Grove suggests that the auto industry is undergoing a transformation that is analogous to the transformation that occurred in the computer industry during the 1980s and 1990s. He writes:

The transformation of an entire industry does not happen very often. It only occurs when a number of factors align, such as a change in consumer demand, a shift of parts of the major supply chain from one country to another, and the emergence of key technological changes.

This is what happened in the computer industry in the 1980s and '90s. Previously, each company produced its own mainframe computers using proprietary hardware and software. The company's sales force then sold these complex and expensive products.

The PC changed this. In a period of just a few years, the industry was pulled apart and reassembled. The entire industry began to rely on common hardware elements (microprocessors) and packaged software; selling was handed off to third parties. In business we call this moving from a "vertical" structure (where a company handles its own development, manufacturing and distribution) to a "horizontal" structure (where some companies specialize in building components while others integrate them and handle distribution tasks).

The result was that the computer industry became more dynamic as old participants (such as Burroughs and Digital Equipment) faded away and new types of companies (such as Compaq and Dell) emerged.

The same thing happened to the U.S. auto industry, but they failed to react and as a consequence, faced extinction. To the rescue came the Obama administration, taking an ownership position in a failed company, all in the name of saving jobs.

Again, Grove comments:

Imagine if in the middle of the computer transformation the Reagan administration worried about the upheaval and tried to rescue this vital industry by making huge investments in leading mainframe companies. The purpose of such investments would have been to protect the viability of these companies. The effect, however, would have been to put the brakes on transformation and all but ensure that the U.S. would lose its leadership role.

The government's investment in General Motors might be directly helpful if the auto industry only had the recession to contend with. But that is not the case. The industry faces the confluence of a world-wide recession, rising fuel prices, environmental demands, globalization of manufacturing, and, most importantly, technological change involving the very nature of the automobile.

A smart guy like Barack Obama and his team on Ivy league geniuses should pay attention to a guy like Andy Grove. He actually lived through the transformation and came out the other side successfully.

Instead they invested (and will continue to invest) in a dinosaur. Despite all of the glitzy new commercials and the promises of a new GM, the old structure remains entrenched—high burdened labor costs, an unimaginative management team, and a business plan that relies of Chevy and Cadillac in an emerging era of EVs and PHEVs.

Finally, the ex Intel CEO summarizes:

The U.S. government is investing in the automobile industry with the intention of preventing jobs from being lost. This may improve GM's ability to operate within today's structure. But there is no comparably large investment being made to develop the capabilities that could serve the company in a new era of electric cars.

China appears to be making a different bet. It's not clear precisely how the Chinese government influences industrial strategy. But China is putting a great deal of effort into developing and manufacturing batteries. Essentially, it is betting that it can take the lead in creating the foundation technology of what will likely be the new structure of the auto industry.

Which is the better investment strategy? It is too early to say. In the short term, the U.S. strategy will likely save jobs. The long term is much more problematic. We do not yet know when and if the automobile industry will shift into a horizontal structure. The stakes, however, are very high. The strategic bets being placed by each country may determine which one will end up as the world's leader in automotive technology and manufacturing.

Looks to me like the man of hope and change is banking on the “vertical.” He put his money on the internal combustion engine, instead of providing significant incentives for EV start-ups that just might take us into the next era of the automobile.

As ironic as it seems, it makes sense. Barack Obama is a believer in big government as the solution. GM, with all of its inertia and inefficiencies, is eerily similar to big government. Ca-Ching.