LESSONS FROM OUR FAST-CHANGING WORLD
There are moments in history when a confluence of events brings sudden, piercing clarity to changes that, while deep, are outside the focus of eyes trained on the familiar. This past week was one of them. The surprising prospect of a merger between Daimler Benz and Chrysler, the slow realization that Japan could "go" just like Indonesia or South Korea, the radically shifting regulatory and competitive environments around Microsoft Corp. and Intel Corp. come together to change our perceptions of how the prosperity of recent years was built.
It would be foolish to make hard and fast predictions on the cusp of the 21st century. But recent events challenge the conventional wisdom about the future of globalization: There is now reason to doubt that the global economy is inevitably entering a Pacific Century dominated by Asia. There is now enough information to question whether regional economic groupings, such as NAFTA and the new "Euroland," will fracture the integration of the global economy. Finally, there is a real possibility that the economic cycle may be turning from overcapacity and fierce competition to consolidation and pricing power--as is happening in the airline industry.
The shock of recent events brings these new realities into view:
-- Capital trumps nationalism. That is one message that comes from Daimler Benz's talks with Chrysler and General Electric's purchase of a number of Samsung's core businesses. Prosperity in the U.S., panic in Asia, and unemployment in Europe are eroding powerful attitudes toward "national champions" and barriers to foreign ownership. It would have been inconceivable just a short time ago for the U.S. to sell off one of Detroit's Big Three or for Korea to agree to dismantling one of its chief chaebol. Capital has become more powerful than nationalism today.
-- Consolidation trumps competition. A great merger wave is washing over industry after industry, from banking and finance to pharmaceuticals and autos. Until now, overcapacity defined the world economy, generating intense corporate competition and unleashing deflationary forces keeping prices stable or falling. This may be ending as consolidation begins to dominate, curbing competition and ending downward pressure on prices.
-- Globalism trumps regionalism. The end of communism and the expansion of capitalism globally may be unleashing more powerful forces than the urge to unite with neighbors. Paradoxically, just as Europe adopts the euro as a single currency and prepares to integrate itself more fully economically, European corporations are turning away from the Continent to invest billions of dollars in the U.S., Asia, Latin America, and Eastern Europe. Far more direct U.S. corporate investment, per capita, is moving into Europe and Asia than into NAFTA countries. The new economic dynamism of Europe and America may in fact lead to an Atlantic-centered global economy rather than a Pacific-basin oriented world for the foreseeable future.
-- Efficient markets trump savings. Daimler Benz proved that listing on the New York Stock Exchange and tapping into the soaring value of stock can be far more important for investment and growth than simply piling up savings. Indeed, on a national and international level, it is increasingly clear that the efficiency of capital, not merely the size of the pool of savings, is what counts. This is Japan's current dilemma. Wealth doesn't buy you economic growth unless that wealth is used effectively.
-- Free-market capitalism trumps mercantilism. Daimler Benz's shift to a transparent accounting system, a move that was required by the New York Stock Exchange to list, helped the German auto manufacturer make one of the decade's boldest business moves. Korean, Thai, and other Asian companies are all shifting to a more transparent accounting system to attract foreign investment. Their governments are moving toward rule of law rather than connections, and markets instead of cronies. Even China is shifting away from Korean-style chaebol mercantilism toward the Taiwanese model of individually-owned, competitive companies.
-- Globalization and high tech trump regulation. Overcapacity and hypercompetition allow the markets to deal with winners and losers, innovation and change, without any help from anyone. However, consolidation brings with it problems of monopoly and the proper role of government intervention in the economy. It may be that it is in the high-tech sphere where the issue is now flaring up. But the consolidation issue will soon be highly visible in other industries--airlines, pharmaceuticals, finance, and, yes, eventually maybe in automobiles.
The crucial point is that, at this moment, regulators should not be hasty. They should allow the markets to show their hand. Here the book Titan: The Life of John D. Rockefeller Sr. by American historian Ron Chernow (excerpted on page 64) is instructive. Over a decade before the U.S. Supreme Court broke up the Standard Oil Trust in 1911, a series of new oil strikes by small, independent riggers in Texas, Oklahoma, California, Kansas, and Illinois provided an opening wedge for other newcomers in the oil business. In 1907, Royal Dutch and Shell joined to give Standard Oil its first major competitor around the world. Royal Dutch/Shell went on to make enormous oil discoveries in Asia and elsewhere. The iron control of Standard Oil over the U.S. market began to crumble.
Of course, Rockefeller's Standard Oil monopoly did last some three decades. Microsoft and Intel have been dominant for only one. Should the government move to cap their rule now? Or should Washington wait for the inevitable change in technology and the inevitable erosion of market power?
New questions for a new era where conventional wisdom no longer rules.