Of American Competitve Advantage

At the time of writing this post, the US stock market is perilously close signalling a double dip recession and European debt is hanging like a black cloud over world financial markets. What is to be done ?

The first premise that I want to table is that manufacturing is the primary source of wealth in the modern world, and the American strategy for recovery must have manufacturing anchoring it. Manufacturing creates wealth and every industrialized nation has grown wealthy primarily because manufacturing adds residual value through transformation of materials into products. The much-touted “services economy” was a gross misread of economic history and basic tenets of economics that was embraced by the media, the markets and governments in the late 90s and early 00s. It was a notion that was simply wrong-headed from the start – an attempt to characterise the rising digital communications revolution as a new economic model. Digital communications have turned out to be more of a substitute for travel and transportation (thought not eliminating them) which is services replacing services, none of which creates wealth. Manufacturing creates wealth because something new and more valueable than the inputs is left over at the end of the day. When services are complete, there is nothing new left over. Fundamentally different, and fundamentals matter.

The second premise I offer is the age of price competition as a source of US advantage has ended. For decades competitive advantage has focused on making things cheaper and newer rather than of lasting value. Go into any mall in the US and try to find one a pair of shoes with leather soles that are replaceable, or a chair that is constructed proplerly (the back integral with the seat, not bolted on). Products with these design features (which used to be the norm) are practically unavailable today except at specialist high end stores. The reason ? Cheap sells better than quality. But for consumers there remains the truism that cheap and inexpesive are not the same thing. Since the advent of the BIC pen disposable products have been on the rise, driven by the rapid obsolescence cycles of technology and an ever-increasing drive to lower price as far as possible. The problem is that cheap stuff breaks and has to be replaced, filling landfills with abandoned junk and emptying consumer wallets over and over again for the same goods. This is simply stupid… good shoes last decades ($500 spent on one pair of shoes versus $120 spent 10 times) and good chairs last generations ($500 on a chair versus $80 on one that will break where the seat joins the back, the weakest point in chair designs). Quality is a source of value that offers sustainable competitive advantage in manufacturing. It is more relaible and more durable than innovation or price competition. This is the “secret” of the German economic strength and Europe’s renaissance in general after World War II… compete on quality not price; charge a premium; position as luxury goods – and it works.

My final premise is that the USA can win at this game. Europe suffers from overly socialist government and social norms that fundamentally render their work forces less productive that Americans. Also Europe lacks the raw materials and energy resources that really do still abound in the Americas. Natural advantage still favours the “new world” as the producers of quality goods. But what about price ? Yes quality is not cheap, but does any rational person believe that Americans can compete on price with India, China, Korea and the other Pacific Rim nations ? Have you considered what price competition will look like when Africa becomes a manufacturing powerhouse? THere is no future for America in price competition. Fortunately the nations cited are absolutely awful at producing high quality goods. It is time to get our act together in North America and start producing the highest quality of goods that produces long term value to consumers. Enable them to save their hard earned money by not having to replace shoddy merchandise over and over again. Re-enable the “repair” trades to maintain worthy products over a longer time frame. And even help the planet by reducing the amount of disposable junk that we throw into landfills.

The presecription for rekinding greatness is clear, and it does not lie in the hands of Government to make it happen… business and consumers in America need to rediscover quality and restore it to its rightful place as a beacon of American value. Made in the USA… dare we use this label again?