Sunday, November 13, 2011

The Problem with Size

The Problem with Size

A significant moment passed by on Friday at 11am. There was the magic (11th hour of the 11th day of the 11th month of the 11th year) and lots of people in Asia decided that it was an auspicious time to get married. The next time we're going to have a magic date will be at 12 noon on the 12th of December next year and then we'll have to wait another century the series of magic dates to go by.

I've always found the 11th of November to be significant. It was Armistice day – the day when the first World War ended. While World War II gets more press, in many ways, World War I was the more terrible conflict. The entire European continent which had given birth to the modern era had descended into a brutal war that bankrupted countries that were centres of empires. World War I ended the reigns of several monarchies and broke apart empires that had lasted centuries (Austria-Hungry and the Ottomans in Turkey were broken apart). The global centre of gravity shifted from Europe to the USA. The British Prime Minister who had administered an empire that the sun never set on became increasingly dependent on the American President for support.

Funnily enough, not very much seems to have changed in a century. Europe is once again in the proverbial shit house. America, the world's remaining super power is tottering on the verge of bankruptcy thanks to misguided military adventures. The world is now looking for an emerging super power to bail it out – this time it's China, which was derided as being the “Sick Man of Asia” a century ago.

The new emergence of China and the very visible decline of Western power is traumatic for Westerners – especially Americans. You just have to listen to the number of times senior American Administration officials complain about “Unfair” Chinese trade practices to get a sense of how traumatised the Americans are by China's rise. There is no other way to describe American complaints about Chinese buying of certain companies as - “Scared Shitless.”

While the fear of no longer being top dog may be understandable, giving into it would be a mistake. The lesson of history have shown that size is a vastly overrated experience. One only has to look at the great powers of the day to see that an obsession with size is usually the undoing of the great power.

China was by far and away the world's leading economy. The Chinese were the most innovative people around. They invented things like gun powder, paper and printing. The Chinese knew about things like decent roads and lived in cities while the Europeans were still struggling to get out of their caves. Then all of a sudden in 1500, the Chinese stopped inventing things and innovation moved to Europe. Suddenly Europe became superior to China. As an ethnic Chinese educated in the British Isles, I can safely say that the biggest shock to the Chinese psyche came during the Opium War. The Chinese had grown up thinking they were the centre of the earth. Then they got their butts kicked by this little dinky island on the North Western Corner of Europe.

The Europeans remained the world's top dogs until World War I. From 1500 until 1914, the Europeans became empire builders. The British were the most successful but they were not the only ones in the game of building empires. The French and Dutch were equally enthusiastic about acquiring colonies. When Bismark unified the German Princely States at the end of the 1800s, the Germans also entered the game. As well as being a family feud between the Royal Families of Europe, World War I was also a conflict of empires.

While America is not an “empire” in the conventional sense, it's become top-dog because its a huge place. America simply had more resources than Europe and so it could play the role of “King Maker” in Europe and later on in Asia. Today America remains the world's super power because it is the only nation that has the ability to deploy the greater number of resources to any single point on the globe.

Let's face it, being big helps. God as they say, is on the side of “Big Battalions.” In a fist fight, the advantage is always with the big guy because he can take more damage and each hit he delivers does more damage.

Size does matter. As such, big nations like China and India will have vast advantages over places like Hong Kong and Singapore. The two emerging Asian giants can deploy and develop resources in ways that smaller nations will never be able to. In Singapore we have to accept that China will always be able to make things cheaper than we can and India will always be able to do the back office stuff cheaper. They simply have more people and space.

Having said that, size is not necessarily everything and an obsession with being big can be a handicap. Why did China fall behind Europe when it had been so much more advanced for so many years?

Simply put, the Chinese got obsessed with size. China as far as the Chinese were concerned, was the centre of the earth, the largest and most advanced place on earth. China was not helped by Confucius who argued that people should place their trust in a strong central government that knew better than anyone else. The so called wise men of their day argued that China was the top dog because it was the biggest block on the street and could easily win by using size. Adventure and innovation were discouraged and then it stopped altogether.

By contrast, Europe was a collection of small states that had no choice but to innovate and focus on doing things well. The collection of states had to either cooperate or compete to survive and to grow their societies. The British ended up building the empire that they did because they had no choice but to venture abroad to grow. While adventurers and innovators in China were regarded as the shit you scrape off the bottom of the shoe, in Europe they became part of folklore – buccaneers like Sir Francis Drake and Sir Richard Grenville (My former school house was named after the man) were heroes in their day and revered long after their death for their daring to take on the conventional wisdom of the day.

These people made Europe great and then the Europeans fell into the same trap as the Chinese did. They believed they were the centre of the world and instead of working together and finding ways to expand and so on – the Europeans decided to kill each other in the competition to be the biggest guy on the block.

The Americans it seems are falling into the same trap as the Chinese and the Europeans before them. We all know that America and Americans have been focused on being bigger and better than anyone else. However, the focus in the last decade seemed to be on being bigger rather than better. Flick through magazines like Forbes and you'd find glowing references to how America had the “biggest” banks, oil companies, manufacturing plants etc. Follow the American media and you'll get the sense of trauma whenever someone has something bigger than can be found in America. Life for America and Americans was comfortable when the nearest rivals were Germany and Japan – which had economic but not military clout. Things are different now that the “rivals” are China and India, which are not only becoming wealthy but they are militarily independent of the American military umbrella.

I think the Americans should take a leaf from Europe and lose the obsession with size. Europe had lots of giant empires that thought they were the centre of the world. They became so obsessed with size that they forgot about everything else. The crowned heads that ran Europe fell out and we got World War I. The rulers of Europe didn't learn their lesson and we got World War II. It was only with the trauma of two World Wars that the Europeans decided to focus on being good and today, Europe is home of some of the best things that the world has to offer.

Look at Germany as an example. The Kaiser wanted to catch-up in the quest for Empire building and so he ran into opposition from the established Empires in Britain and France. The result was World War I. The Hitler decided that Germany needed more “Lebensraum” (living space – he needed to be bigger) and we got World War II. Then all of a sudden the Germans got partitioned into West and East. The world would not allow the Germans to be big and so they focused on being good.

Today Germany makes the best cars in the world (Mercedes, BMW, Porche, Volkswagen) and despite the high cost of doing business in Germany, the country is funnily enough the world's largest exporter (ahead of China, which is the workshop of the world). How does Germany with the highest labour cost in the world out export China with its advantages in cheap labour and land? Germany has a sector of small companies that happen to be the best in the fields they're in.

The same is true of France and Britain. London no longer controls an Empire where the sun never sets. It is however, a world city in things like finance. Like the Germans, the British and French have become less obsessed with size and more focused with being good.

The EU is admittedly in deep shit – however, let's look at the area of where Europe has fallen into the toilet bowl. The answer is simple – these were the areas where the Europeans returned to being obsessed with size. I believe that the EU is on balance a force of good. However, the Europeans became so obsessed with having the world's largest trading block they admitted countries that were simply not ready. Greece never had the fiscal discipline of its Northern European neighbours before it joined and it should be no surprise that it has become the nation that will pull the entire frame work down.

The idea behind the EU was to create the USA on Europe. In theory this is good. America has thrived for so long because it was successful at combining the advantages of being small and big at the same time. America is a big monolith in International affairs. However, most Americans are free to act as small individuals living in their small towns. In the corporate world it has been shown that the most innovative companies are usually small clusters. America is a collection of small clusters.

Unfortunately, somewhere along the line, American culture lost this ethos of being about small but clever groups. Suddenly, it was all about size and being big. Look at General Motors, which was for so many years the world's largest corporation. The company was all about being 'big,' that it forgot about being good. Even when its finances were being pulverized by competition from the likes of Toyota and Volkswagen, the company was obsessed with size – ie we make more cars than anyone else haha – erm what's the point in making lots of cars if nobody wants to buy them.

The reemerging China and India should draw lessons from this. China has been especially guilty of promoting state-owned giants to drive its economy and presence on the world stage. The Chinese Government seems to have forgotten that the “real” success of the Chinese economy is to be found in villages and cities. These small companies lack the resources of the state owned giants and so they have become remarkably efficient. China needs to stop focusing on “big” and look at finding ways at bringing up the guys who are “good.”

India has been blessed with rotten government and this has helped the development of its dynamic IT sector. While the IT sector has produced some giants like Tata Consultancy Services, Infosys and Wipro, the industry is in fact driven by many small dynamic companies. I think of companies like Polaris, Nucleus and MphasiS that have found a niche for themselves. These companies focus on being good rather than on being big.

Being big helps but being obsessed by size is a problem. The most successful companies and countries are usually those that find ways of being big without being obsessed by size. The best 'business model' is the 'cooperation' model rather than the “top-down monoblock.”

Look at the UK as an example. You have London, which is a collection of village. There are the Oxbridge Universities which are in reality a collection of small specilialised colleges working together. The British may not run an empire but London is a “world-capital” and the Oxbridge Universities are constantly amongst the world's best.

America endured over the Soviet Union. The Soviet Union and the Warsaw Pact were a huge monoblock controlled by Moscow. The USA is a collection of states working for a common purpose . In the end the USA prevailed because its people and its allies believed in the system that allowed them enough room to be individuals but gave them the security that size brings.

America has prospered for so long because its been about being a good place that happens to be big rather than about being a big place. As Americans worry about being overtaken as the biggest dog on the block by China and India, they should remember that what made America was not its size but the fact that it was a good nation.

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