Rolls Royce, Cadillac, Moving Assembly Line, Economies of Scale, VCR, Cell Phones and HD Plasma Television

Posted by PITHOCRATES - January 1st, 2013

History 101

The Moving Assembly Line allows GM to Divide their Costs over more Units than Rolls Royce

Rolls Royce automobiles are very expensive luxury cars.  Of impeccable quality.  It may be the finest automobile ever built.  And I say built not manufactured.  For they build a Rolls Royce by hand to ensure that high quality.  By some of the most experienced and skilled artisans to ever hone metal, wood and leather into an automobile.  Because of this they can’t make a lot of them a year.  They set a record sales total in 2011.  By selling 3,538 hand-crafted automobiles.  The entry price for a Rolls Royce?  Around $250,000.

By contrast GM sold 152,389 Cadillac luxury automobiles in 2011 in North America.  These are not hand-crafted.  The Americans build them on moving assembly lines.  Which is why they can build 43 times as many Cadillacs than they can hand-build Rolls Royces.  The entry price for a Cadillac?  About $33,100.  While a top of the line may cost you around $63,200.  Now Cadillacs are nice.  The name has become synonymous with high quality.  The best quality is the ‘Cadillac’ of something.  The quality may not be Rolls Royce quality but few will complain about that quality when sitting behind the wheel of a Cadillac.  They are glad to settle for a Cadillac over a Rolls Royce.  Especially when it costs 7.5 times as much to get into a Rolls Royce than into a Cadillac.

Why are hand-crafted Rolls Royce automobiles so much more costly than Cadillacs manufactured on a moving assembly line?  Economies of scale.  The higher production levels of the mass-produced cars allows GM to divide all of their costs over many more units.  Bringing the unit cost down.  And the selling price.  With fewer sales the unit cost for Rolls Royce is much higher.  As is the selling price.

As Demand grew Manufacturers were able to Bring Prices Down thanks to Economies of Scale

Rolls Royce pays a price for their commitment to quality.  They can’t sell cars as inexpensively as some of their luxury rivals.  But that’s okay for them.  As the market for hand-crafted luxury cars is large enough to keep them in business doing what they love.  Building the finest quality automobile in the world.  And those who want the best can afford to pay a quarter of a million dollars for an entry-level Rolls Royce.  So they do.  Which is why Rolls Royce doesn’t have to worry about economies of scales to compete against their competition.

Before Henry Ford built the moving assembly line cars were too expensive for the working man.  Henry Ford changed that.  Once they started manufacturing the new driving machine on the moving assembly line Ford was able to reach an economy of scale that greatly increased production rates.  Bringing down the unit cost.  And the selling price.  As new products entered the market place they were typically unaffordable to all but the rich.  But then as demand grew manufacturers were able to bring prices down thanks to economies of scale.  Like Henry Ford did with the automobile.

The first commercially viable video tape recorder was the Ampex model VR-1000 in 1956.  It cost $50,000 (about $421,000 today).  It was the size of a kitchen stove.  And about the only place you found them were in television broadcast studios.  From this early beginning came the technology for the video cassette recorder (VCR).  By the mid to late Seventies schools had one they rolled from room to room.  It cost approximately $5,000 (about $19,400 today).  About a decade later you could buy a smaller unit that could do more for around $2,000 (about $4,000 today).  Just before the DVD player and the digital video recorder made them obsolete you could get a nice one for about $100.  They were so small and so inexpensive that you bought one for every television in the house.

Bringing these Prices Down are State-of-the-Art High-Tech Manufacturers throughout Asia

When the first cell phones came out we called them car phones.  Because they were so big and had no real battery life that they were permanently installed in a car.  Connected to the electrical system of the car.  The first real portable cell phone was something that looked like a brick and weighed in around 2 pounds.  The battery gave you maybe an hour of talk time.  And it cost $3,995 in 1982 (about $9,600 today).  By 1993 the price was down to $900 ($1,400 today) but still weighed in at 2 pounds.  By 1996 the weight dropped to about 3 ounces.  It cost about $1,000 ($1,400 today).  By 2002 you could buy a flip-phone with a built-in high resolution camera for $400 (about $510 today).  And so on until they got smaller and more powerful with longer battery lives.  Today you can often get a pretty nice phone free when you sign a contract for service.

Things people like and demand can accelerate this process of quality improvement and lower prices.  For half a century the television has been a fixture in most American homes.  So technology buffs with money were always ready to spend a lot of money on the next best thing.  And when high-definition plasma televisions hit the market it didn’t take long for economies of scale to bring prices down as demand exploded for these beautiful things.  A Panasonic 42″ high-definition plasma television cost around $2,500 in 2004 (about $3,000 today).  About 4 years later you could get a slightly better set for about $700 (about $750 today).  Today you can buy an even better 42 inch plasma set from Panasonic for as little as $400.

Bringing these prices down are state-of-the-art high-tech manufacturers throughout Asia (Japan, South Korea, etc.).  They can mass produce cell phones and televisions and other high-tech goods at remarkable production rates.  Filling ships with their goods to export around the world.  They bring together high-skilled labor and the best in automated production equipment.  They can retool and begin new production so fast that they can fill the demand for the next big thing without missing a step.  And quickly ramp up to an economy of scale wherever they see growing consumer demand.  Bringing down unit costs.  And prices.  Making a lot of happy consumers around the world.

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FT135: “If corporations aren’t people than neither is government.” —Old Pithy

Posted by PITHOCRATES - September 14th, 2012

Fundamental Truth

Corporations get Wealthy by either Pleasing their Customers or Pleasing Government

Mitt Romney said during the Republican primary campaign that corporations are people.  And the Left castigated him.  While late-night comedy made jokes with that snarky, all-knowing condescension.  Because everyone on the Left knows that corporations aren’t people.  They’re evil, soulless entities.  Unfeeling and cruel.  Who care only about profits.  While poisoning our environment.  Everyone on the Left will agree with this.  And those CEOs?  They’re the worst.  A bunch of greedy, old, white men.  Except those women who shattered the glass ceiling.  Who the Left celebrates.  Even though they run evil, soulless entities.

So what is a corporation?  Other than something that comes from the bowels of hell?  Well, perhaps the simplest explanation is this.  A corporation is a business structure that lowers consumer prices.  Which reduces the cost of living for poor and middle class families everywhere.  Huh?!?  No.  That can’t be right, you say.  Because corporations are evil and soulless.  On top of that they’re not people.  So why would some evil, soulless non-humans do something that is very beneficial to humans?  In a word, greed.

There are two ways corporations can get wealthy.  Either by pleasing their customers.  With high quality, great selection and low prices.  Or by pleasing government.  Allowing them to give their customers lower quality, poorer selection and higher prices.  Because their friends in government limit competition.  So they don’t have to please their customers.  Wal-Mart is an example of a company getting rich by pleasing customers with high quality, great selection and low prices.  Wal-Mart shoppers enjoy going to Wal-Mart.  The American auto industry is an example of companies getting rich because of government.  Which restricted free market competition as much as possible in the auto industry.  Raising prices and lowering quality.  Because of this auto shoppers don’t enjoy buying American cars as much as foreign imports.  Which has made Toyota the number one car company.

The more Corporations Pursue Profits the more Choice, Quality, Variety and Lower Prices Consumers Have

Selling a large variety of high quality goods at low prices will attract customers.  And increase sales volume.  That leads to profits.  Which is what those greedy corporations want.  And one of the best ways to do this is through economies of scale.  Growing larger to have greater purchasing power.  And selling so many units that you can charge less per unit to recover overhead costs.  Thus allowing you to sell at lower prices.  And the bigger you get the more you can lower your prices.

But to get big you need to take a lot of risks.  And the biggest risk is borrowing enormous sums of money.  Because it takes money to make money.  The kind of money one person typically doesn’t have.  So how to get it?  By incorporating.  Becoming one of those evil, soulless entities.  So you can give your customers a large variety of high quality goods at low prices.  When a business incorporates a few things happen.  First of all the business becomes a legal entity.  Which protects the people running the business.  By diversifying risk to its numerous shareholders.  Who assume that risk in exchange for ownership.  Incorporating also opens the capital markets for them.  Where they can sell bonds to finance growth.  Or sell stock.  Allowing them to raise the large sums of money to open more stores/plants.  Hire more people.  And achieve economies of scale.

The more corporations that do this the more choice consumers have.  The better quality.  And the lower prices fall.  Just think of something you’ve bought recently.  And the choices you had.  The stores you visited.  The websites you visited.  How you found exactly what you were looking for and paid what you thought was a fair price.  And how you enjoyed the whole process.  Now compare that experience with, say, renewing your driver’s license.  Where you have no choice in quality or price.  Compare the friendly faces at your favorite store with the joy of waiting for them to call your number at the DMV.  When the number being served is 76.  And you have number 12.  Worse, when you make the “I have places to go look” to the civil servants behind the counter working at a snail’s pace you don’t get a friendly smile in return.  You get a look of contempt.

People in Corporations put on a more Human Face than Government Workers because they Want to Please You

When you get poor service at a store you will complain.  You will talk to management.  You will threaten to take your business elsewhere.  Or you will just take your business elsewhere without telling anyone at that business.  Giving them no chance to correct a problem that will discourage customers shopping with them.  Which is the worst thing that can happen to a business.  Because they can’t fix a problem they don’t know about.  But if they know about it they will fix it.  Because if they don’t you will take your business elsewhere.  The last thing they want you to do.  So they will strive to make your experience a good experience.

If you get poor service at the DMV, though, you don’t want to get the people who can make you wait forever angry.  Instead you smile and tell them what a great job they’re doing.  Because you can’t go anywhere else.  Which is par for the course whenever you have to deal with the government.  Where customer service is not in the employee handbook.  Which is why people usually feel fear and/or dread whenever they have to deal with a government bureaucrat.  Especially the IRS.  Which is why the dark world George Orwell wrote about in Nineteen Eighty-Four was about the oppressive world of socialism.  Not an oppressive world where corporations take over.  Because they could never do that in a free market economy.  They could only do that in a world where government chooses winners and losers in the private sector.  Which would be a world without competition.  Where there was no large variety of high quality goods at low prices.  But the grey world that Orwell wrote about in Nineteen Eighty-Four.

So what’s the difference between corporations and the government?  The people.  The people in corporations put on a more human face because they want to please you.  Because they have to please you to stay in business.  The people in government, though, don’t.  Because government doesn’t have to please you.  And don’t try to.  For where else are you going to go?

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Free Market Competition

Posted by PITHOCRATES - July 2nd, 2012

Economics 101

Competition makes Everything Better for Consumers

Let’s go back a hundred years or so.  When the railroads were making their way west.  Through barren and unforgiving country.  Where a depot is built in the middle of nowhere.  One day it will become a city but now is just a shack or two.  And a water tower along the tracks to replenish the steam locomotives.  This is the closest thing to civilization for hundreds of miles.  Railroad building supplies head west on the new track to continue the track further west.  And the trains stop to fill their locomotives with water.  You look at all that traffic passing that depot and decide to open up a diner/saloon to replenish all those people.  Who are earning wages.  But have nothing to spend them on for hundreds of miles around.

There’s no electricity yet.  Or ice.  So the meat shipped to the diner may not be the freshest.  But you can cook it with a lot of spices to hide any bad taste in case the meat is rancid.  Liquor comes out without any spoilage.  It’ll last so long that you can keep watering it down to make more money per bottle.  Your diner/saloon can be dirty and overrun with bugs.  You can just throw the bugs into the pot to make the meat go further.  It doesn’t matter.  Because for most of your customers this is the only place to come to eat and drink.  Even if they get ill from eating bad meat they’ll keep coming back.  Because where else are they going to go?

Your costs are low.  And your prices are high.  You’re doing very well.  It’s nice being the only diner/saloon at this depot.  But then a town starts growing around the depot.  And another diner/saloon opens.  It’s cleaner.  They serve fewer bugs in their food.  Their meat is less rancid.  Their liquor is less watered down.  And their prices are lower.  Everyone who eats and drinks at this depot-town eats and drinks there.  Not at your filthy shack.  You quickly go from making a lot of money to making nothing at all.  Because this new competition in town took away all of your business.  For competition makes everything better for consumers. 

When the Government Interferes with the Free Market there is no Incentive to Please their Customers

Competition is key to the free market economy.  And it’s the most important thing.  Even more important than government regulation.  Because with competition you don’t need regulations.  You don’t need inspectors.  You don’t have to file complaints.  You don’t have to wait for corrective action.  Because if you have competition you have something that works better.  And faster.  Pleasing customers.  If you don’t please them more than your competition then you will lose your customers to your competition.  This is a powerful incentive to lower your prices.  Improve the cleanliness of your establishment.  And to improve your quality.  Competition makes businesses try harder to please their customers.  On their own.  Without compulsion.

In the above example the first diner/saloon owner could have appealed to the government.  Asked the government to prohibit the second establishment from opening.  Saying that it was destructive competition.  That they were dumping lower-priced food and drink onto the market to put the first establishment out of business.  So they could raise their prices higher and lower their quality when they do.  That the market wasn’t large enough to support two businesses.  That their lower prices mean they will pay their employees less.  And a whole host of other bad things that will follow if this second business opens.  Of course the second business has none of these complaints.  Because they offer better quality at lower prices.  They don’t need the help of government.  Just a competitive free market.

If the first business should prevail in their request for government help the government will take action.  Force the second business to shut down.  Make them sell their food and drinks at higher prices.  Charge them a special excise tax on all their sales to raise money to transfer to and help the first business.  Or some other action to make the market ‘fair’ again.  Which means allowing the first establishment to continue to sell lower quality at higher prices.  Which they would.  For with the power of government helping them they have no incentive to please their customers.  So they don’t.  So people with no choice have to pay more for lower quality.  And this is what happens when the government interferes with the free market.

Free Market Competition delivers High Quality at Low Prices with the Most Efficient Allocation of Resources 

Competitive free markets also guarantee that businesses use resources in the most efficient manner.   As they try to sell the highest quality at the lowest price they will buy very carefully.  They will buy only the things they can sell.  And only enough of them to meet their demand.  For if they buy more than they can sell it will only raise their prices.  As those prices have to pay for the things they sell.  And the things they can’t sell.  So there is a very strong incentive to buy only what they absolutely need.  Leaving things for others to buy.  Which is much better than having some government bureaucrat allocate resources.

Suppose the government owned the railroad and all the depot-towns along the line.  And each depot has a diner/saloon.  Each depot-town is about the same size.  So the government bureaucrat ships the same supplies to each depot.  One barrel of flour.  One barrel of cornmeal.  One barrel of salted pork.  Two sacks of beans.  Four sacks of coffee.  Five cases of whisky.  And so on.  But the people don’t eat and drink the same in each of these depot-towns.  Some drink more liquor than others.  Some drink more coffee than others.  Some eat more meat than others.  Some eat more beans than others.  Depending on the season.  The cattle drives.  Whether the farmers are sowing or reaping.  The religious pilgrimages.  The weather.  Etc.  The local diner/saloon owners are in tune with the rise and fall of demand.  But the government bureaucrat 2,000 miles away isn’t.  So some receive more than they can use.  Others run out before the next shipment.  Making the allocation of resources inefficient.  Leading to waste.  And higher prices to pay for all of that waste.

Free market competition always works best.  And the more problems that we solve by creating more competition the better the solutions are for the people ultimately paying the prices.  The consumers.  As free market competition delivers high quality at low prices with the most efficient allocation of resources.  Giving us things like the high-definition television.  The smartphone.  The tablet computer.  And our morning coffee.  Where quality just keeps getting better while prices keep falling.  When we don’t use free market competition we get high prices, poor quality and inefficient resource allocation.  From cable television that increases rates while lowering quality (we’ll be at your house either sometime in the morning or sometime in the afternoon tomorrow or the day after.  Please have someone available at your home to meet our technician).  To waiting in line to renew your driver’s license.  Which is about as enjoyable as a root canal.

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FT116: “Free stuff is rarely good stuff.” -Old Pithy

Posted by PITHOCRATES - May 4th, 2012

Fundamental Truth

Free is Nice but Sometimes it’s just worth Paying for Something Nicer

Often times when someone offers us something for free some of us say, “If it’s free it’s for me.”  Because we like free stuff.  Who doesn’t smile when they see the free samples in a grocery store?  Who doesn’t like getting the free swag from a visiting salesperson?  Sure they have a corporate emblem on them but free flashlights, pens, coffee mugs, baseball hats, etc., are nice.  Because they’re free.  But not everything free is nice.  Those free samples in the grocery store are.  Because they want to get you to buy some of that stuff they’re giving away free.  And if it doesn’t taste delicious that isn’t going to happen.  But the swag is often not high quality stuff.  Or something you would not necessarily buy yourself.  Sure, you’ll use a coffee mug at work with a corporate emblem on it.  But if you have to pay for that mug chances are you’re going to get something you like.  And when you do chances are it’s not going to have a corporate emblem on it.

While traveling in Tennessee once I stayed at one of those hotels that is just a little more than a motel.  One of those multi-floor things that’s longer than it is tall.  One of the hotel amenities was a free continental breakfast.  Consisting of coffee, tea, orange juice, rolls and jam.  Mmm.  Good.  But I passed.  Because within walking distance from this hotel sat a Waffle House.  And if you’ve ever eaten at a Waffle House you’ll know why.  The All Star Special breakfast.  With Pecan Waffles.  And, of course, hash browns scattered ‘all the way’.  Enough to put you into a food coma.  A comfortable food coma.  And I chose to pay for this delicious breakfast instead of eating the free one.  Why?  Because on a scale of 1 to 10 the free continental breakfast is about a ‘3’.  While Waffle House is a consistent ’11’.

I owned a full-size sedan that was pretty loaded.  It wasn’t a luxury car but it pretty much had everything a luxury car had in the way of comforts.  One day I had to take it back to the dealer for some warranty work.  Being a new car under warranty they gave me a free loaner to use while my car was in for service.  Talk about service.  The car they gave me, though, was a subcompact with no amenities.  Unless you call a roof and a couple of doors amenities.  This car didn’t have power locks or windows.  Or air conditioning.  And it only had an AM radio.  Which made for an unpleasant 45 minute commute one way during the dog days of summer.  I returned the free loaner the next day.  And rented a car with air conditioning.  It cost more.  But for me it was worth it.  Because I didn’t like getting drenched in sweat on the drive in to work.  Free is nice but sometimes it’s just worth paying for something nicer.

For-Profit Utilities pay Premium Wages for Electricians to Go Out in Storms to Start Repair Work for Profits

They say you get what you pay for.  They say that because you do.  Things you pay for will always be better than the things you get for free.  As noted above.  But in other ways as well.  Take your electric utility, for example.  Some people would like to get free electricity.  To have the government nationalize our utilities.  Then tax the rich to pay for both the installation and the maintenance of the electrical infrastructure.  So we the people can get free electricity.  But let’s take a closer look at this idea.  And see how free electricity can be worse than the kind we pay for.  By looking at something that happens all too often.  The electric power outage.

Consider two electric utilities.  One owned and operated by the government.  And one by a for-profit utility.  Which one do you think would have a greater incentive in getting that power restored?  The one that pays for that utility with taxes whether you use it or not?  Or the one that will lose money when those electric meters stop turning?  The one charging by the meter, of course.  Because they lose money during an outage.  Unlike the government.  Where the electric utility is just one of the many things they pay for with the taxes they collect.  And if they roll those taxes into your property tax bill you will pay those taxes at most twice a year.  Well, most of us.  Which means there will be no correlation between paying your taxes and using your free electricity.  Unlike with the for-profit utility. 

If the power goes out for a large section of the for-profit utility’s customers there will be an immediate interruption to their revenue stream.  So much so that they will pay premium wages for electricians to go out in storms to start the repair work.  To get those meters turning as soon as possible again.  Because time is money.  And the more time that passes with those meters NOT turning the greater the lost money.  Money that they can never get back.  Because people don’t have to buy extra electricity to make up for the electricity they didn’t use while sitting in the dark.  So people are much better off with a for-profit utility.  Because the for-profit utility and the people both want the same thing.  To restore that power as quickly as possible.  Albeit for different reasons.

The People Paying for Free Stuff have no Incentive to Pay for High Quality

Beggars can’t be choosy.  If you’re getting something for free the people giving it to you expect you to be grateful.  And they don’t want to hear you complain.  For however bad the quality is that they’re giving you it sure is a lot better than what you had before.  Nothing.  Worse, you’re now in their debt.  If they ask you for a favor it’s hard to say no after they’ve given you something for free. 

If you’re buying something for your family you’re going to make sure you get the best quality your money can buy.  If you’re barbecuing for your family it may be steaks and Italian sausage.  If your nieces and nephews are coming over it may just be hot dogs and hamburger.  If you’re buying for the kids in little league you may just buy the hotdogs.  Or volunteer to bring snacks.  And show up with one large bag of potato chips.

When it’s free you get what you pay for.  Not great quality.  Which is why free stuff is rarely good stuff.  Whether it’s swag, breakfast, a rental car, electricity or food at a picnic.  The people paying for your free stuff have no incentive to pay for high quality.  Which is why we should never expect high quality for anything we don’t pay for.  Including public education.  Public housing.  And, of course, public health care.  To name a few.  Each of which has a higher quality private counterpart.  For when we pay we have choice.  And because we have choice the private sector competes for us by offering higher quality.  Why?  For the same reason a for-profit utility provides better quality than a nationalized utility.  Because profits make things better.  And making a profit is the only thing that will get an electrician to climb a pole during a thunderstorm to restore our electric power.  Something we’re all grateful for.  Especially if you’re taking care of a sick child in bed.  Or a parent.

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