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The Internet is the basic tool of the new economy. Firms can use it to reduce the costs associated with gathering and disseminating information, and also to aggregate buyers and sellers, thereby creating new, and improving existing, markets. As such, the Internet can enhance productivity, reduce costs, increase competition, and improve the functioning of price mechanisms. Managers are quickly reorganizing value chains to exploit these commercial advantages.
In the automobile industry, Goldman Sachs estimates that the full exploitation of the Internet could reduce production costs for the average $26,000 new vehicle by over $3,600, representing industry savings of nearly $62 billion per year. Furthermore, the estimated gains from business-to-consumer (B2C) e-commerce alternatives are also substantial: Goldman Sachs estimates e-tailing alternatives could generate savings of between $1,048 and $2,579 per vehicle, or between $18 and $44 billion annually.
Before those gains can be realized, however, policy impediments must be addressed. Most significantly, incumbent franchise dealers have successfully lobbied state legislators to strengthen laws limiting the sale of vehicles directly over the Internet. Such franchise laws, however, needlessly sustain costs, inhibit competition, hinder innovation and, as a result, harm the interests of both consumers and the broader American economy. There is, therefore, a national interest to rationalize, if not overturn completely, these anticompetitive laws.
Toward this goal, the Federal Trade Commission (FTC) can play a natural role. In February 2000, General Motors, Ford and DaimlerChrysler co-founded Covisint, a business-to-business (B2B) exchange for automobile production. Within weeks, FTC officials initiated an investigation of Covisint to consider its anticompetitive implications, with a wider view on B2B exchanges in general. By September 2000, the FTC announced that it would monitor, but not interfere with, the Big Three's innovative proposal for organizing their commercial transactions.
The FTC should complement its investigation of Covisint with a thorough review of recent changes to state franchise laws in the new-vehicle retail sector. Congress, moreover, by virtue of its oversight of interstate commerce, has an important role to play in counteracting such laws. That is, if state legislators are adopting restrictive laws to protect dealers at the expense of competition, Congress must respond with laws to protect consumers at the expense of protected franchise dealers.
Such steps would encourage modular manufacturing, in which manufacturers would develop a built-to-order capacity for vehicles, similar to that which Dell Corporation pioneered for personal computers. Before establishing such capacity, however, manufacturers will have to achieve greater accommodation with unions that have heretofore viewed modularization with deep suspicion. While headlines during the 1990s conditioned most to equate technology itself with competitive advantage, competitive advantage among old economy industries will need to be a function of harmonious management-labor relations, with management working to earn the trust necessary to facilitate the diffusion of productive technology.
For their part, unions will have to accept new roles and accommodate new methods for accomplishing the familiar task of producing automobiles. If they do not, North American autoworkers may face the prospect of continued movement of manufacturing jobs overseas, where many of the initial experiments with modularization have taken place. Unions will be better served if they embrace the innovations afforded by new economy tools in order to strengthen the manufacturing capacity on which their continued livelihood depends.