Technology as the tide that raises all boats 5 – but often unevenly 2

This is my fifth installment to a discussion that I initially began as a single stand-alone posting in April, 2012, but that needs reconsidering. I focused in that posting, on a key issue that enters into a determination of how and when change rises to a level of significance so as to qualify as true innovation (see Outsourcing and Globalization, postings 25 and loosely following for Parts 1-4, and Part 1 of that in particular as the foundational urtext for this narrative.)

I wrote Parts 1-3 of this series and much of Part 4 from the perspective of the individual business and its immediate competitive context. And then towards the end of Part 4, I began to pivot this series and its narrative towards a wider context. More specifically, I offered a to-address list, that I repeat here and that I will at least begin working my way through in this posting:

1. The level versus uneven playing field considerations of restricted trade, open trade and free trade,
2. And of regulatory oversight as it arises and plays out nationally and internationally.
3. And to reconsider the closing notes to my April 2012 Part 1 posting on this, I also plan on addressing all of these issues at least in part in terms of economy of scale differences, where capacity for economy of scale efficiencies, in and of themselves are innovation driven and certainly in how competing businesses function and are run.

I begin this with Point 1 of that list and with a currently significant real-world example: China and their iron and steel industries.

• As a matter of basic principle, and as acknowledgment of a point that many take as an automatic given and an all but axiomatic assumption, the fewer and weaker the barriers, filters and restrictions there are to manufacturing and sales, the more effective all participating businesses involved, can be.
• And on a macro scale, this leads to more efficient and productive industries and even entire economies, as the overall benefits to manufacturers spreads out to benefit their suppliers and supply chain partners, wholesale and retail businesses that would carry their products and bring them to market, and end user consumers, who would presumably see reduced costs to themselves for what they buy as more efficient businesses at all levels in this, reduce their prices asked as they strive for greater market share and overall profitability.
• China and their production and sale of processed iron and steel, serves as a meaningful test of the underlying assumptions in all of this.

The above bullet pointed assumptions all serve to suggest that completely open, unregulated free trade is always going to be better than what might be obtained from a more regulated and restricted system – and certainly when considered across entire markets and economies where overall gains and benefits are measured net of any more localized, specific-case losses or break-evens. But:

• This is predicated on an assumption that overall business and economic actions would only be carried out in accordance with specific highly correlated strategic decision making underpinnings in place, that would directly and specifically support the manufacturing, distribution and sales cycles that are under consideration. Think of this as the tightly correlated economic model approach.
• Sometimes, however, underlying governing decision making processes and their priorities are more grounded in outside political, and less directly related economic considerations – where for example decisions to sell, and who to sell to and at what volumes and price points, are determined to meet larger outside perceived needs.

China’s overall economy is in what can best be seen as an ongoing crisis, and for a wide range of fundamental, structural reasons. I have been discussing this in detail for quite a while now, and both for how this crisis has emerged and for how it is playing out. See for example, my ongoing series: China and its Transition Imperatives (at Macroeconomics and Business and its Page 2 continuation, postings 154 and loosely.) China’s iron and steel production industries are tightly controlled by their government and in fact by their one allowed Communist Party. And it is Party and government policy makers who set production quotas, negotiate, or at least control negotiations for sales agreements, and who set prices and price points offered. The assumptions bullet points noted above would presume that China’s production and sale of iron and steel as commodities and as more finished products, would be based upon market pressures and demand and with a goal of achieving and maintaining profitability while offering prices per unit volume of sale that would keep them effectively competitive. But none of that actually applies here and in this situation.

China and their Party and government have decided to operate at an ongoing fiscal loss for their iron and steel production, accepting all of the red ink in their accounting for those industries that this entails, and even long-term if they can meet other needs they see as holding higher value from that: keeping these factories and foundries open and fully staffed, and keeping all of these workers fully employed so as to limit if not entirely prevent the disruptions and dissent that closings and mass layoffs would threaten. China’s leaders see it as an acceptable price to pay to hemorrhage financially here if that is the cost they would have to accept for limiting any possibility of societal discord that could turn into challenge against their government and their political system that underlies it. So China has developed a long-standing policy of dumping processed iron, and basic construction use steel, among other products, on the international market, selling below their cost of production to keep production lines open and busy and fully staffed.

This also has a perhaps side benefit of helping to bring in a steady flow of badly needed foreign currency, when their own Renminbi is weak and uncertain, and when it is being propped up through spending from their national financial reserves. Think of their iron and steel production fiscal losses as limiting what would otherwise be even greater losses to their stability and to their national currency reliability. My point here is that this is a brief and selective but nevertheless quite accurately stated scenario, in which economic decisions and actions are taken that have widespread international impact – here in thwarting and challenging local iron and steel producers in the countries that they sell to, that do not have deep pocket government backing – but that make sense for larger picture reasons to China’s decision makers. And this is a real-world scenario that violates the underlying assumptions behind my above-stated tightly correlated economic model approach.

• Think of China, and certainly in this situation as following a loosely correlated economic model approach. To be more precise here, this approach is one in which options are identified and decisions are made on the basis of non-economic reasons, and on the basis of economic reasons for which it would be difficult to demonstrate direct causal connection to the manufacturing and sales systems under consideration.
• As a brief aside to connect these two approaches to other currently running and recent series in this blog, it might be noted that I implicitly assume effective availability of critical information in these decision making processes, in the above analysis. Economic friction on a macro scale, and business systems friction on a more microeconomic scale serve to blur the actionable, functional distinction between tightly correlated and loosely correlated economic model approaches here.
• In a noisy system, where static drowns out, or at least significantly attenuates and degrades communications signal and valid information availability, a business – or an economy shaping governing body might end up pursuing a loosely correlated approach even if they are in fact trying to follow a more tightly correlated one. This, however, does not apply in the case of China and their production and sale of iron and steel. China’s leadership does in fact know precisely what they are doing there.

I will continue this discussion in a next series installment where I will finish addressing the issues of Point 1 as listed above, at least for purposes of this series. And I will also at least begin to address that list’s Point 2 and regulatory oversight. And in the course of that I will at least briefly discuss multinational and regional free trade agreements.

Meanwhile, you can find this and related postings and series at Business Strategy and Operations – 4, and also at Page 1, Page 2 and Page 3 of that directory. And I also include this in Outsourcing and Globalization – and see that for related material too.