Wednesday, August 29, 2007

Economies of Scale in Autos and Computers

Tuesday's Wall Street Journal's Marketplace Section featured two seemingly unrelated articles- Acer's purchase of Gateway, and Chinese auto manufacturers making inroads in Africa.

On closer examination, however, I believe the two share an important link and lesson. They both embody some elements of Schumpeterian dynamics.

In the case of Acer, this Asian computer maker has wisely taken the opportunity to buy market share and brands by scooping up the number three US computer manufacturer, Gateway. By combining supply chains and brands, Acer hopes to, and probably will, gain some margin room while obtaining new branding and price-point flexibility. Clearly, Acer understands that the computer manufacturing game is now largely a commodity one, with a few exceptions, such as HP's recent Pavillion line.

However, for large parts of the market, Acer's ability to provide competitive functionality at lower prices may help it drive Toshiba, Lenovo, and others into less tenable market and profitability positions.

The focus of the other Journal article is the emerging market for new cars in West and Southern Africa. Whereas these areas historically were dumping grounds for used European models, the Chinese have arrived with new cars so affordably priced as to compete favorably with the used car stocks.

What's amazing is that all of the new entrants are Chinese, and no American, or even European names, are to be found. Nary a Ford, Chrysler or GM nameplate.

The article suggested that these auto makers can't really afford to aim so low in price as to compete with the Chinese in Africa. However, at least one Chinese manufacturer warned/promised that they would be moving upmarket, and into richer countries, on the back of the African experience and volumes.

I can't help but think that, a decade hence, we'll read various tomes from the likes of BCG, Bain or McKinsey consultants dissecting the final mistakes of the American auto makers. Can it really be so benign to allow the Chinese to gain a vehicle production foothold, uncontested, in an entire continent? Granted, it's Africa, but, still....

You can just see the Chinese lowering costs along expanding volume curves, gaining manufacturing experience and improving quality, as well as the ability to target small, profitable niches in Africa. Then turning these newly-acquired skills on the low end of the American market.

If you needed fresh reasons to explain the slow, inexorable death of US auto production, here's another one. Complete denial on the part of Detroit that a clutch of rising Chinese vehicle manufacturers can use Africa as a springboard to enter the US with small, efficient, low-priced cars and steal another potential market before American producers can respond.

It's been the way most prior Asian auto producers have entered. Plus, with fuel economy and environmentalism running rampant these days, it would be reasonable to expect the Chinese nameplates to be more than competitive on fuel consumption, weight, size, etc. They've got a large market with which to experiment, getting smaller, less expensive cars 'right' before shipping them to the US.

Alan (Mulally), Rick (Wagoner), Bob (Nardelli)? Anyone looking east to see the source of your next competitor?

Ironically, the three blind mice probably won't take note of Acer's recent move, and consider how scale and creativity, together, can both protect against further share erosion, as well as be the basis for new growth and profitability.

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