The world is in the grip of superfluity, or too much stuff. The unsold cars and trucks piling up at dealerships and assembly lines as consumers cut back and auto companies scramble for government aid are just two signs of the problem now stopping economic recovery. Suddenly, the world is suddenly awash in goods. Everything from flat-panel televisions to mobile phones, from Barbie dolls to cars. And with consumer tightening their belts and an oversupply of suppliers, business in areas ranging from pharmaceuticals to consumer electronics are grappling with the problem of bringing supply in line with demand.
Witness, for example, the way the Japanese economy is contracting with global demand evaporating for Japanese cars and electronics. Similarly, the European car industry has about 35% more production capacity than it needs, despite cut backs, and the US auto industry is struggling with similar constraints.
The problem of superfluity, or too much stuff, was captured in the 1984 Paul Mazursky film, Moscow On The Hudson. In the film, Robin Williams plays a Russian saxophonist Vladimir Ivanoff who defects while on tour in New York. The sax player is taken in by a family and he offers to do their shopping. Accustomed to queuing in the snow to buy anything from toilet paper to chicken, he is unprepared for what confronts him in the supermarket. When he gets to the coffee aisle, he has an anxiety attack and passes out.
Almost thirty years later, brand clutter is now the big management problem for manufacturers. Some have turned to brand euthanasia as a solution, others to innovation. Both have their risks, from consumer backlash to costs.
Part of the problem is that while overcapacity and oversupply have become the standard for many businesses, it doesn’t necessarily mean more choice. As Ivanoff discovered to his horror, the paradox when there’s too much stuff is that the products and services are more similar.
Commoditisation has become a norm and unless their brands have relevance or value, suppliers risk becoming price-takers.
The automobile industry is the most telling example of over capacity. CSM Worldwide, an automotive-market consultancy, estimates that the world could produce about 94m cars a year. That would be about 34m more than it is buying. In North America alone, capacity exceeds demand by around seven million vehicles. In other words, too many vehicles are chasing a market that isn’t big enough and endemic overcapacity is a key feature of the auto industry.
The population statistics and consumer trends tell the story. Consider for example that the United States population roughly doubled from the 1960s, going from 160 million to just over 300 million. But the number of active players in the US car market more than tripled during the same period. In 1970, General Motors had about 50% of the US car market with Ford and Chrysler each having about 20%, At the time, few were buying Toyota, VW, Honda and Nissan. Car brands like Mercedes, BMW, Audi and Volvo were regarded as exotic curiosities. For family sedans, there were three or major contenders in the 1970s. Now there are more than a dozen and the buyer pool has not increased.
During the global financial crisis, GM and other U.S. automakers made dramatic cuts to reduce overcapacity. But a survey of auto executives in early 2010 suggested the industry was still producing too much inventory, even despite years of cutbacks.
Research firm Wards Automotive has estimated that recent plant closings made by the respective reorganizations of General Motors and Chrysler, along with additional closings by Ford and Toyota, reduced North American capacity by about 1.5 million vehicles in 2009, down to 18 million units. But it appears those cuts might not be enough.
Analysts say the North American auto market still probably has 10% more capacity than it needs and that it will be in an overcapacity situation until 2012.
According to KPMG’s 2010 Global Auto Executive Survey, which queried 200 senior leaders at automakers and suppliers from around the world, 88% of respondents said overcapacity was still a problem despite numerous closures and tens of thousands of recent layoffs. Respondents were saying that overcapacity was significantly higher than last year. As a result, much of the expected restructuring of the industry may still lie in the future. Alarmingly, respondents had strong concerns over the emergence of automotive overcapacity in the BRICs (the acronym that refers to Brazil, Russia, India and China) Companies said they believed the automotive industries in both Russia and Brazil would be overbuilt in the near to medium term, and that China would also have significant overcapacity not much later. At this stage, concern over near-term capacities is highest in Russia, with about 12 per cent of companies believing that overcapacity is already emerging and 19 percent believing it will emerge within two years.
One reason for the overcapacity is uneven economic development around the world. From the 1970s, new manufacturing powers were entered the world market, starting with Germany and Japan. These were followed by the Northeast Asian newly industrializing countries such as China, Taiwan, Korea and Hong Kong. These later-developing economies produced the same goods that were already being produced by the earlier developers but they were doing it cheaper. The result: too much supply compared to demand in one industry after another. This forced down prices and profits. The corporations that experienced the squeeze on their profits tried hold on to their place by falling back on their capacity for innovation. They increased investment in new technologies. Overcapacity however got worse, resulting in smaller surpluses from their investments. As a result, they slowed down the growth of plants and equipment and employment. At the same time, in order to restore profitability, they held down employees’ compensation.This in turn resulted in a long-term problem of aggregate demand.
As a result, manufacturers are producing shoes, cars, mobile phones and steel than consumers need. This is likely to continue for some time, unless the business models are changed.
In a speech delivered in July 2009, World Bank chief economist Professor Justin Yifu Lin said that with excess capacity, economies get trapped in a vicious cycle because companies cannot find viable investment opportunities. And this can result in the economic crisis becoming protracted, and even extending. “If the excess capacity in the developed and developing countries is not eliminated, the financial sector in the developed countries may require more rescues in the future and the financial crisis may erupt in some developing countries,” he said.
The problem is that the economic crisis could be making it even worse. The Organization for Economic Cooperation and Development (OECD) has forecast that, despite global production cutbacks, the situation is actually getting worse because the recovery will be weak.
Many economists believe overcapacity is also being driven by a profound shift in consumer spending patterns. Frugality is the new chic and people are spending less to pay down or control debt. Spare capacity may never come back because total demand might remain depressed for many years. As a result, factories in some crowded sectors will have to be permanently closed or retooled to make different products.
The only way out of this is for governments to maintain stimulus spending to boost demand, something that is politically fraught.
Another answer is retooling. Germany’s Volkswagen, for example, is converting part of a car-engine plant to produce “green” electrical generators. Indeed, green manufacturing offers opportunities for retooling. Similarly, aeronautical and auto manufacturers could start building trains, tracks and parts.
A more obvious and less costly solution to oversupply has been the increased culling of weaker brands that distract management and clog up production lines and marketing strategies. One of the most prominent companies to give some of its brands the chop has been the Anglo-Dutch multinational Unilever, the company behind Omo, Lux, Sunsilk and Lipton Tea. It has reduced itself from 1600 brands to 400, with most of its sales coming from just 40.
Similarly, there may be pressure on auto makers not to bring out a new model every year but that would require a radical rethink of the business model.
Overcapacity is an endemic crisis. Unless it is addressed, the global economy will be constrained. With demand likely to be lower than it has been in the past, producing widgets in a world that has too many of them is no longer the solution. Companies and governments will need to come up with creative new solutions.
