PX and Larry - If I may butt in - you've raised very interesting points.
1. Aluminum's problems were reinforced (caused?) by the development of aluminum projects in countries where two conditions were met - access to bauxite and access to cheap power (Brazil, Australia, among others.) These were typically huge projects, low tech with long lead times and each new one coming on stream created a huge (I'm tempted to say quantum) increase in capacity. With no possible product differentiation, competition was reduced to price, down to the cost of production - and below in the case of countries that needed the project's foreign exchange generating ability.
2. The airlines' problems were different and similar. Little product differentiation - in spite of the domestic airlines' commercials, a cattle car is a cattle car is a cattle car. (Some of the foreign airlines have successfully differentiated (Singapore Airlines, for example), but in my experience any real differentiation is limited to first class.) Local market dominance is key - e.g., American in Dallas, United in Chicago, while TWA has no strong hub. TWA bounces from crisis to crisis as a result. Very tow tech, product improvement cycle non-existent (how long has the 747 been around?) Problems that beset the industry were connected with their inability to adjust to de-regulation and avoid periodic bouts of cut-throat price cutting in the largest and most competitive markets. Only the financially strong in strong markets survive.
I haven't followed the airline industry recently (proven by the fact that I told my girl friend to sell her USAir at 37!!) so I don't know whether airlines management has broken the destructive price competition cycle.
A really interesting question that you two have raised. In the DD's, some of the players are similar to the third world aluminum producers in the eighties who disregarded cost of production because it was more important to generate foreign exchange. Will there be a limit to this process in the case of the Korean DD makers set by plant and R&D capital required to maintain product competitiveness?
The obvious differentiation between the DD's and both industries is the pace of technological change. While not many really care whether his/her drive right now is a seg or a qntm or whatever, few would go out and buy the drive that was at the cutting edge even a year ago. The main question is whether the DD makers are doomed to the undercapacity - capacity increase - channel stuffing - overcapacity - margins collapse cycle or whether they will now manage pricing as the airlines appear to have done. There's no sign of it yet. (Which of coure doesn't mean that the longs won't be able to ride the current cycle out of its bottom very profitably - and if there's ever a sign that the cycle has been broken, then multiple expansion should make the sector a hugely profitable one.)
Apologies for the pablum-like musings, and thank you for giving me the opportunity to try to think it thru. |
