Crises always drive rapid change, and this Corona crisis will prove to be no different. Many enterprises will flounder and disappear, but others will emerge, not just to take the place of the dead, but to build value in different ways.
The law of diminishing returns that had held true for most of the 19th and 20th centuries turned around, beginning in the 1990’s with the flattening of productivity increases. Slowly, scale had become its own worst enemy, as it outgrew the ability of the corporate bureaucracies that evolved to operate productively.
Manufacturing became organisationally top heavy, and productivity improvement became very hard to extract in anything more than small steps.
Even harder to find is relative productivity improvement. When everyone is increasing productivity at around the same rate, along a predictable curve, there is no net competitive improvement.
We had the early stages of the digital revolution in the mid 1990’s, culminating in the enormous profits of the so called ‘unicorns’ that emerged in the early 2000’s. These defied the rules of diminishing returns, and grew on the back of network effects and negligible marginal costs. In the process, they made their owners multi billionaires and rock stars.
Perhaps we have reached a tipping point, where the dollars flowing from the digitisation of our lives is starting to reach its limits?
Despite the enormous wealth and power delivered by the digital platforms, they still supply only a small part of what we need, and do not supply any of the basics, food, shelter, or clothing. They just make these things easier to get, and sometimes cheaper.
However, the application of digital capability to the manufacturing processes that deliver the things we need to live, may be in the nascent stages of reversing some of those limitations of scale.
Over the last decade, most of the unicorn wannabee’s have floundered, with a few notable exceptions. Their market valuation tanked, and in the recent case of WeWork, blowing up in spectacular fashion. Meanwhile, the market value of manufacturing businesses, those that produce the things we need to live, have not been as affected. However, when compared to the valuations of the digital platforms, their performance looks tepid at best. This comparison has sucked the life out of manufacturing investment, as investors seek quick wins.
Productivity increases, soaring in the latter quarter of the 20th century have flattened out, despite the ubiquity of software.
It was not supposed to happen like this.
Partly this flattening is because the barriers to entry have been radically reduced, and in many cases, removed. Meanwhile the benefits have moved very slowly from the owners of the software to those that use it.
Our productivity will rise again, as digital tools are developed and deployed into the production of the physical things we need and want to live comfortable lives.
The future is digital, but the emphasis will be in different places.
The evidence is all around if we look.
Tesla is just a car, re-imagined with a digital heart, Apple became the most valuable company in the world by adding a physical retail arm to their digital portfolio, and Amazon purchased the physical supply chain of Whole foods for US$16.5 billion, and got their money back overnight with the increase in their stock value.
Locally, the response to the Corona bug in manufacturing forums has been all about the deploying of digital capability to the production of physical things. This is together with the recognition of the importance of a sovereign manufacturing capability.
We are, maybe, approaching a huge inflection point.
A few weeks ago, I watched the Prime Minister speak at the National Press Club. If even a modest part of the rhetoric converts into action, we will be better off. When talking about the technical education system, he used the same phrase several times: ‘Why pour more money into a dud system?’ This is an overt acknowledgement that the current system is absolutely broken, and needs to be fixed if manufacturing jobs, with the social stability they generate, are to re-emerge.
What do you think?
