Sunday, April 20, 2008

The future of the American Economy

I meet and talk with entrepreneurs on a daily basis, and I read hundreds of business plans a year -so at some level, I feel I have my fingers on the pulse of American innovation. It may not be enough to make some conclusions, but I think one conclusion I feel I can make is that the opportunity of new ideas and new companies is shrinking and NOT expanding. This is not a statement of pessimism, but a statement of change. And unless, entrepreneurs embrace this change and understand the new dynamics in play for building new enterprises, they will continue to beat their head against the "wall" on why their ventures are not being funded.

Let me explain:

1. America can no longer be competitive in the "manufactured" product industry.

The global economy, cost of labor, taxes and the Internet have made it close to impossible for an U.S. based company to manufacture a product, assemble and ship and be competitive on pricing and quality. It is not just China making it cheaper - it's the inability for a local store to compete with the global store. If someone can buy a piece of furniture on the web for 20% less than they can at the local furniture store - it spells certain death for the local merchant. Whether the furniture is made in China or not, there is a clear GAP in operating costs and overhead in running a website versus a 4,000 square foot store front.

So, the next question would be "Can a U.S. Based economy become a distributor for these products?". Essentially trying to leverage outsourced manufacturing, and add value through distribution, sales and marketing. The answer is "Yes, but not for long". In fact, this is what we have been doing for the past 10 years. Many businesses transformed their business model to being more of a middle-man - but this is only life-support for a business and not a long-term business. As foreign companies continue to control the price of product, they will squeeze the profits from the middle-men, and ultimately find cheaper ways to ship direct and market their products through larger outlets (e.g. Walmart, Target, etc). So for the small business, they will not be able to be survive just a distributor. They won't buy enough to get lower costs of goods, and won't be able to compete with pricing and distribution of large outlets.

So, the final question is "Well, sure but what if the US Based company invents the product, and just has it build in China - won't it still make good money since it owns the product?". Sure, for a little while, and if it is successful, China and other countries will copy the product and distribute its own version for less money. Even if you have a Patent, do you have the capital to pursue legal action against a company in China? Probably not.

So in conclusion, there is no business for small businesses in manufactured products. Even if your product is innovative and unique, and you can sell it to millions of people - you will be forced to embrace outsourced manufacturing, lose control of the intellectual property and be limited to distribution which will shrink profits and ultimately lose to a competitive "copy-cat" product built and distributed directly from China or other country.

2. America needs to embrace the Digital Economy.

If there is one industry we can still claim to be #1 - it would be the digital economy. Whether it is content like music or film - or applications like Google and Microsoft - we are not just the leader - but we are the sole innovator in this industry. Despite our leadership and clear success in changing the way we live and work with technology - it seems the U.S. economy still refused to embrace technology as the path for our future. The amount of investment made in technology by our government has decreased, not increased. States like Florida cuts programs that fund technology innovation, but do anything they can to save our Oranges. While airlines, car companies and manufacturing plants are going bankrupt, companies like Google are reporting 30% increase in profits?

The transition to a Digital Economy will be a challenge, and it will mean a dramatic shift in unemployment and a divide will be created between older workers who have expertise in the "old" economy and new workers educated and trained on the "new" economy. Anytime there is an economic shift of this proportion, there is massive pain in change. And the current state of the economy is demonstrating it is not an option - the change is happening now.

In conclusion, America has always been the pioneer in economic shifts, and we should continue our legacy as the dominating economic power by embracing change and position ourselves as the leader in the Digital economy. Not only will this secure our ability to bring our economy back in strength, but also nullify the competitive advantages of foreign countries like China, who will not be able to undercut cost and distribution. They will have to compete on a level playing field.

3. America can make it an easier transition by supporting the Service Industry and investing heavily in Technology.

I don't have all the answers (I am not an Professor of Economics), but I think to make this transition we need to look at our strengths and pave a road that lifts our existing work-force and introduces the new wave of workers over the next 20 years. In order to do this, I feel we need to lessen the burden on services businesses in the U.S. and invest heavily in Technology.

One industry in America that will continue to thrive is the services business. Primarily because services businesses are required to be local and serve the community, and do not suffer (as much) by overseas competition. (You can't buy a beer or get your laundry cleaned by a company in China). However, they still need to improve profits in order to hire new people and expand their business. Therefore, the government needs to look at policies that help local service businesses expand and not just be profitable but keep our economy strong during the transition.

Secondly, I think the government needs to invest billions (not millions) into Technology. It is the only sound path to building a strong economy (digital based economy), independence from an oil-based energy policy, and bridging the gap of education in-equality. Both Federal and State governments need to accept the risks of investing in innovation and technology, and show leadership to the universities, business community and finally (most importantly) to the entrepreneur.


Michael Walsh said...

I couldn't agree with you more on both points.

maureen said...

yes, I agree as well. Yet, I do think there is still opportunity in the US to establish strong design brands ie. Polo, DKNY, Martha Stewart, etc. products made all over the world yet brand persona is US. Granted this will not put masses to work in the US. As an investor I think one can get comfortable with such an investment with the right "branding" mix.

Thanks for all the great posts!
Maureen Quinlan
"voh" the voice of handwork

DiVita said...

I think the best opportunities are in the US. Even if they are India, the US economy still wins big if we export the right stuff and not import the wrong stuff. Why? Because we are Americans. We have the blood of innovation and thats the stuff that makes the world turn. It always has. If we export innovation and import freedom, we will earn world peace and a robust economy.

Oh the part about the "government needs investing billions..." that is the best way to go bankrupt.

I think the government should go out of business. Private sector can do a lot more if the government provides the structure. Private sector will pull us out if gov can stay out of the way.