As I’ve mentioned before, although the auto industry seems to have stabilized in the wake of the financial crisis (and I see that as a good thing), overcapacity continues to be the major, long-term problem facing automakers (see Auto Industry’s Big Little Problem).

An article in last week’s issue of the Economist reiterated that concern (see Danger Ahead).

According to the Economist:

THE mood at the Detroit motor show this year was very different from the dark days of 2009. Then, bosses of American car companies wondered if their firms would survive. Now, thanks to $60 billion of federal finance and the cold shower of bankruptcy to wash away their debts, General Motors (GM) and Chrysler are still alive, while Ford’s canny financial manoeuvring before the crisis allowed it to clean up its act and roar back to record profits.

Yet the industry’s problems are not behind it. The American rescues averted catastrophe, but they—along with continued European subsidies—have exacerbated the overcapacity that has dogged the sector for years. The car industry can produce 94m cars a year, against global demand of 64m. Unless that changes, it will never return to health.

I agree. Unless massive productive capacity is eliminated from the industry or demand explodes by 50% (not very likely), there will need to be another shake out in the industry.

The interesting thing about the article is that for many years we’ve been told by industry participants and observers that growth in China would help ameliorate the overcapacity concerns. However, as the Economist article astutely points out, it’s not clear that demand growth in China and/or other emerging markets will finally rid the industry of its overcapacity problems. This is because upstarts in those emerging markets continue to add capacity to the industry, and it’s unclear that demand growth in the emerging world will continue at its torrid pace.

Developments in China are likely to make things worse still for rich-world companies. China too has a surplus of car manufacturers, excess capacity and a problem with demand. Annual sales growth is forecast to fall from 30% to around 10%…

And the issues are not limited to the U.S., China, or India. Europe’s automakers face similar overcapacity and productivity problems.

…tough labour laws and government stakes in some firms—a German Land, Lower Saxony, owns 20% of VW, for instance, and the French government owns 15% of Renault—discourage them from shedding workers. As a result, despite the biggest crisis in living memory in the industry, firms are failing to rationalise.

The question then remains: What gives? Where will the much needed capacity rationalization come from??

This has all the makings of a multi-country “my industrial national champion is more important than your industrial national champion” kind of a spat.

BNET recently published a follow on to its Business Blunders of 2010 (to see last year’s list see Business Blunders of 2009). The list was amusing again this year. Some highlights:

Mistake #3: Cruise Visits Haiti Beach

Despite the chaos gripping nearby Port au Prince, Royal Caribbean Cruises forges ahead with plans to drop vacationers at its private beach in Haiti in the aftermath of the devastating earthquake that killed more than 200,000. An article in Advertising Age says the company’s brand could suffer “lasting damage from the visuals of mostly white vacationers frolicking in the sun … while only 60 miles away thousands of people are fighting over food and water.” A headline in the New York Post sums things up even more succinctly: “Ship of Ghouls.”

Mistake #5: Dell’s Customer Service

Documents from a lawsuit against Dell unsealed by a federal judge in November reveal that, after shipping nearly 12 million potentially defective computers equipped with faulty capacitors from 2003 to 2005, the company had provided its sales force with instructions that included pointers such as “Don’t bring this to customer’s attention proactively” and “Emphasize uncertainty.”

Mistake #20: Fraudclosure Gate

As officials from all 50 states investigate shortcuts taken by banks in repossessing hundreds of thousands of homes, it becomes clear that the workers handling the foreclosures were often less than qualified. Among other telling details, a Wells Fargo employee testifies that she was signing 300 to 500 foreclosure documents per day without bothering to read them; a firm hired to review documents for Citigroup and GMAC is found to have outsourced the work to companies in the Philippines and Guam; and at JPMorgan Chase, in-house hires were so wet behind the ears that they were referred to internally as “Burger King kids.”

Mistake #22: AT&T Touting its Network Coverage

AT&T sends out a “Special Message” to its wireless customers, thanking them for their business and highlighting the company’s $18 billion investment in its network. Unfortunately, the e-mail also contains a link to AT&T’s Facebook page, which its loyal customers visit in droves to, um, return the thanks. “AT&T is the worst feature of the iPhone and the reason I want to throw mine against the wall on a daily basis,” writes one fan. “I’m only sticking out my contract because I don’t have the money to pay a termination fee,” says another. “Service in Alabama sucks!” says a third, adding: “Seriously though, f### you!” Gushes yet another: “I hate ATT!!!!!!!!”

Mistake #27: Tony Hayward Handling the Gulf Crisis

Two months and roughly 3 million barrels of spilled crude into the Deepwater Horizon oil rig disaster—and fresh off criticism for saying “I’d like my life back” after the accident had cost 11 workers theirs—BP CEO Tony Hayward adds insult to injury by spending the day off the Isle of Wight aboard his $270,000 Farr 52 racing yacht. Stunned reactions to the sailing holiday from environmentalists, U.S. government officials, and Gulf Coast residents range from “insulting” to “the height of arrogance” to “man, that ain’t right.”

Mistake #28: Dow Jones Sustainability Index

In June, at the height of the Deepwater Horizon oil spill, BP is removed from the Dow Jones Sustainability Index, a measure that tracks the financial performance of firms hailed as “the leading sustainability-driven companies worldwide.” Three months later, after a “thorough analysis of corporate economic, environmental, and social performance,” BP’s replacement in the index is announced: Halliburton,the scandal plagued war contractor once run by global warming denier Dick Cheney. Halliburton had been responsible for cementing the seal of the well that had catastrophically blown out at the bottom of the Gulf of Mexico.

There are other good ones in there. To see the full list, click through to Business Blunders of 2010. Some funny stuff!

Interesting article in yesterday’s NY Times (see China’s Race for Patents) echoing my sentiment from several months ago about the dangers for developing countries of falling into a commodity trap (see Taiwan’s Lessons for China).

According to the NY Times article:

As a national strategy, China is trying to build an economy that relies on innovation rather than imitation. Clearly, its leaders recognize that being the world’s low-cost workshop for assembling the breakthrough products designed elsewhere — think iPads and a host of other high-tech goods — has its limits.

Absolutely. I’ve been arguing this for awhile. There’s only so much development that a model based on cheap labor and export-led growth can deliver. As I pointed out in my previous post drawing similarities between Taiwan and China:

Taiwan’s overall economic development over the past 50 years has been nothing short of spectacular. And there is no doubt in my mind that China is trying to emulate elements of Taiwan’s development strategy. However, a strategy centered almost exclusively around manufacturing (whether it be in high tech or other industrial goods) comes with some serious risks.

The problem with such a strategy is that it relegates developing country firms to junior partner status, dependent upon a system in which they manufacture (for export) the designs of others. In the extreme, this results in a commodity trap.

The key for countries like China is to transition, at some point, from an economy that simply manufactures the goods that are designed and developed elsewhere to one in which innovation, creativity, and high value-added services take root. Unfortunately, these transitions are difficult, and take an inordinate amount of time.

As the NY Times article emphasizes:

…can China become a prodigious inventor? The answer, in truth, will play out over decades — and go a long way toward determining not only China’s future, but also the shape of the global economy.

“The leadership in China knows that innovation is its future, the key to higher living standards and long-term growth,” Mr. [David] Kappos [Director of the USPTO] says.

Despite China’s inevitable rise, Mr. [John] Kao [an innovation consultant] said, the United States has a comparative advantage because it is the country most open to innovation. “American culture, more than any other, forgives failure, tolerates risk and embraces uncertainty,” Mr. Kao says.

Many innovative products and technologies, he says, will be made elsewhere. “But America’s future lies in being the orchestrator — the systems integrator — of the innovation process,” Mr. Kao said.

In many respects I agree with Mr. Kao. It will take a long time for developing countries like China that rely on manufacturing for export to close the innovation gap with the West. I have discussed these issues in various blog posts (see Emergence of Emerging Market Innovation, China Attracting High-Tech Research, China Alternative Energy, and Globalization Discontents).

At the very least, China’s leaders recognize, and openly acknowledge, the issue. And the first step in any solution lies in problem recognition.