December 15, 2010

A Fable For Our Times...

In the economically struggling free-market democracy of FUD, the airline industry was comprised of four major commercial carriers. Two of the airlines dominated the industry, carrying almost 80% of passenger traffic. All of the airlines relied heavily on two aircraft manufacturers. While there had been a more competitive vender environment in the past, other companies had either shut down, been acquired, or evolved into more specialized aircraft-related industries.

Enter an up-and-coming overseas aircraft manufacturer called 21st Century - based in the economically thriving country of UhOh - which had developed an alternative approach to building aircraft, with a significantly lower cost structure, and yet more advanced technologies, industry-leading safety solutions, and none of the legacy baggage or overhead the incumbent manufacturers carried. While 21st’s approach to manufacturing planes was new and innovative, it relied for the most part on the same downstream supply chain companies, components and inputs as the other two dominant incumbents.

Needless to say, airlines across the globe welcomed the introduction of competition and innovation in the marketplace and were quick to trial and approve 21st’s planes, anticipating significantly lower capital and operating expenses in the future due to the competitive pricing of the 21st Century's aircraft, a direct result of the company's lower cost structure. The airlines looked forward to the opportunity to translate their savings into enhanced service offerings as well as lower costs to their passengers. Their shareholders in turn anticipated higher returns on their investments. 21st Century quickly experienced great success, selling hundreds of planes to major airlines in multiple markets across the globe.

But, the Government of FUD had a range of geopolitical and trade-related concerns, some quite legitimate, others perhaps less so, with the government of UhOh. In fairness to FUD government officials, UhOh was only just emerging from decades of non-democratic rule, and had only just begun to align itself with global trade rules and free-market norms. But the FUD concerns went far beyond those factors, and were colored by lingering economic malaise in FUD, as well as FUD’s cultural, societal and political struggle to accept, in an era of globalization - in large part spurred by FUD’s shining example - a role on the global political and economic stage as a leading peer among peers, rather than a sole super-powered juggernaut. FUD and UhOh were increasingly at global odds with each other, with tensions rising on multiple fronts. In this context, the Government of FUD began communicating perceptions that 21st Century was somehow connected to and a potential tool of the government of UhOh, which, in truth, was not the case.

Nevertheless, the Government of FUD began questioning 21st Century’s business practices, its financing, and, most importantly, the integrity and safety of 21st’s aircraft. FUD officials went so far as to express concerns that, should tensions between FUD and UhOh worsen, the Government of UhOh might somehow exercise influence over 21st Century to somehow endanger FUD-based airlines or passengers. 21st Century repeatedly attempted to explain to the Government of FUD that its concerns were unfounded, stressing, among other things, that 21st’s planes had been carefully inspected and reviewed and had passed major airline performance and safety requirements in markets all over the world.

Even so, select FUD Government officials persisted in attacking the company, ignoring the fact that the incumbent aircraft manufacturers serving FUD-based airlines were also building their planes in UhOh and, should the FUD concerns be real, those other aircraft would be equally subject to those fears, requiring a cross-industry solution, not singling out a single company. Yet, quite stunningly, and without any due process or other respect for national law or global trade rules, the Government of FUD dictated to a FUD-based 21st Century customer that they could not purchase 21st-Century built aircraft. Needless to say, this action – widely reported in the press – had a chilling effect, at least in the near-term, on other 21st Century business in FUD.

It was not long, however, before the real impact of the unfounded FUD interference in the market-based decision-making process was realized.

The Government of FUD hadn’t thought about the impact of its interference in the market in terms of the thousands of 21st Century employees working in FUD, nor the impact on their FUD families. They hadn’t thought about all of 21st Century’s downstream FUD-based suppliers and the tens of thousands of jobs those companies supported related to 21st Century’s billions of dollars in annual procurement. And they hadn’t thought about the multiple other ripple effects that their market-distorting action would create: Chilled much-needed investment in FUD from other UhOh-based companies, the failure of struggling FUD-based airlines that might otherwise have survived via the CAPEX and OPEX savings related to purchases of 21st Century’s planes, lost investments of shareholders in those failing FUD carriers, and, decreased competition in FUD’s airline industry in general – both in terms of manufacturers and service providers, which, of course, translated to yet poorer services and higher costs for consumers.

A sad, sad state of affairs…

The moral of this story: Governments should not express their economic and/or geopolitical fears and woes by mis-using legitimate and industry-wide concerns about issues like safety and security to veil political gamesmanship and/or good-old-fashioned protectionist and illegitimate manipulation of the market-based decision-making process. In an increasingly and forever-globalized economy, such measures are almost certain to backfire, damaging a country’s own best interests, and those of its innovators, workers, and consumers.

(All countries and companies referenced in this fable are fictitious. Any resemblance to real countries or companies are purely coincidental).