Thursday, January 21, 2010

Who would have thunk it

A report today in itNews that claims "embattled telco gear makers" are headed for a "shake-out".

While we've watched in some wonder about what has happened to the automotive industry over recent decades it should be noted that similar changes have been happening in other industries.

The car case is well known, that from the heady days of Galbraith being able to write in the sixties in The New Industrial State of how we really lived in a planned economy but the planners were the giant untouchable corporations. A pin-up example was General-Motors followed by Ford.

Then we had Tom Peters in In Search of Excllence cataloguing the failures of the Detroit car makers to open their eyes or windows to see that what they were making didn't fit what people wanted to buy - especially following the sudden move to small cars following the oil price shocks of the 1970s.

On top of that you had Milton Friedman in Free to Choose claiming that the market power of large firms was the only market failure we (or Americans) should worry about and that the solution to that was reducing trade and investment barriers.

As the market became global, so did the car companies as an endless dance started to play out of various alliances and mergers trying to create global conglomerates. Meanwhile, Toyota just kept chugging along, from making slightly tinny cars in the 60s to being a leader in technology and quality.

Now we see in the telecommunications equipment market a similar unfolding story. Back in the 60s there were still a lot of vendors - often spooled out of the country's orignal network provider. We see the same unfolding pattern of mergers and alliances culminating in the Alcatel-Lucent tie upand the Nokia Siemens tie up (the latter originally under my former Telstra colleague Simon Beresford-Wylie).

We also saw the emergence of Huawei, first as a firm renowned for its ability to "backward engineer" a solution but now a leader in the field of R&D of new equipment.

There is another feature in common - both industries make extensive use of outsourced manufacturing (as does the consumer electronics industry).

These are big changes. But what challenged the dominance of the former giants was the opening of markets so the geograhic boundaries of competition changed. That can't keep going. Yes there is still a stage in car manufacturing to play out to see what happens as China, India and others turn their minds to it.

But the magic the Milton Friedman identified as the way to affect the monopoly power of the big US firms isn't available to us once we have global firms in a global market. And while new giants can and do emerge, think Microsoft and Google, the facts are the number of genuinely new technology areas are relatively minor, while the speed with which these new industries emerge with a dominant firm has accelerated.

There appears to me to be no doubt that economic policy makers need to turn their minds again to the determinans of industry structure and question whether some new rules are required to achieve the benefits we expect from "competition".

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