The Platform Company Model

"That’s a key part of your argument in “Our
Brave New World.�? Perhaps you’d best explain.
Louis: Basically, the emergence of the platform company
model has allowed U.S. companies to outsource
manufacturing, the most volatile part of the production
cycle, to the developing world. So if underlying
economic activity comes in weaker than forecast, the
platform companies in the West don’t have to slash
labor and inventories. It is their suppliers that have
to lay off workers etc., while the designers and marketing
people and other service workers in the West
find their services still in demand. Of course, the loss
of industrial jobs in the West is very bad news for
hard hats—and for politicians dependent on organized
labor. But it has actually tended to tame economic
volatility in the West. Put another way, with
services gaining an ever-more-important piece of the
economic pie, the variable of adjustment for Western
economies is no longer employment or profits. It is
imports. Which decreases the volatility in our economy, and has very important consequences. If people
are more secure in their jobs, they feel more confident
taking on big mortgages and basically leveraging
their futures.
I’m not sure that really applies beyond a very
Wall Street-centric segment of U.S. society.
Louis: I disagree. In the U.S. over the past 15 years,
we have moved from something like 22% of people
working in industry, what you would call fairly cyclical
jobs, to only 12%—and that 12% is probably a
pretty sticky number. But that is a great development
because we know that industrial jobs are not as
secure as service jobs. It is just the nature of the
game. Industry is just a far more cyclical game. So
we have written a lot on this new business model,
the platform company, which is a lot less volatile.
Take IKEA as an example. Let’s imagine their sales
slow down in the U.S. this winter because gas bills
are high and interest rates are high or whatever, and
that IKEA somehow failed to forecast the slowdown.
What are they going to? They are not going to fire
the furniture designer in Sweden or the salesman in
New Jersey. They are going to call the guy in Poland
or the guy in Mexico who makes the stuff and say,
“Last month we ordered 50,000 cupboards and this
month we only need 20,000.�? The adjustment will
be taken in Poland or Mexico, not in either Sweden
or the U.S. That leads me to this third point— I am
touching a lot of themes here—which is that as the
IKEAs and Apples and Dells, all the Western platform
companies, basically move out of manufacturing,
their need for capital is a lot less.
It is?
Louis: Let’s again take IKEA as an example. IKEA
never went to the equities market. It never went to
the bond market. Yet its stores are pretty much in
every big city in the world. This is because when you
have 20 designers in a warehouse in Stockholm and
you are basically producing on your suppliers’ balance
sheets, you don’t need much capital. That
brings me back to all the excess liquidity in our system.
What we have now are financial markets organized
to take money from the rich Western saver
and bring it to the rich Western companies. But
increasingly the Western companies say, “Hey,
thank you very much. But I don’t need it. I can
finance myself from my own cash flows or I finance
myself from my producers’ balance sheets.
Companies like Wal-Mart, like Dell, don’t need the
market’s capital. Frankly, the only reason these
companies are listed is to give options to the managements.
So now we have the West’s pool of capital
looking for a home. It goes into housing, it goes into
bonds, it goes into junk bonds, it goes into emerging
markets. It goes wherever it can, to try to find a
yield. That’s why liquidity is everywhere, and given
the reality of this brave new world in which we live,
it’s not going away anytime soon. But I don’t think it
is anything we can bemoan.

welling@weeden DECEMBER 15, 2005 PAGE 13