Category: Creative Destruction

Sometimes Progress Requires “Tearing Things Down and Rebuilding From Scratch”

(p. B6) In 1931, glass bottles of sparkling soda began rolling off the assembly line at the Coca-Cola bottling plant in downtown Indianapolis. It’s unlikely that the factory’s architect gave much thought to the possibility that shifting consumer habits would make the glass bottle a relic within a couple of generations.

Instead of slipping into obsolescence, the factory went on to have multiple lives. After the Coke factory closed in 1971, the building was briefly used to house Indy 500 racecars, then spent decades as a school bus garage before becoming a 139-room boutique hotel anchoring a new entertainment district last year.

A century ago, developers didn’t give the future much thought, but today, they don’t have the same luxury. A combination of pandemic disruptions and constantly changing technology has brought the hazy, distant horizon much closer.

As a result, a growing number of projects are racing against the clock as profitability and utility are squeezed into the ever-shortening life of a commercial building. Statistics illustrating the acceleration of building life cycles are scarce, but experts in the industry are starting to take heed.

“The cycle of changing is becoming shorter,” said Jefferson Duarte, associate professor of real estate finance at Rice University. Projects that developers once could have collected rents on for half a century or more don’t allow that anymore.

. . .

Consumer and worker needs are changing more quickly than they used to, driven by technology, shifting supply chains and expectations of greater amenities.

. . .

The core problem is that commercial construction is an industry producing highly durable goods in a world that is asking for greater flexibility with changing tastes and economic conditions, Professor Duranton said.

. . .

“Sometimes the right thing will involve tearing things down and rebuilding from scratch,” Professor Duranton said.

For the full story, see:

Kevin Williams. “The Ever-Shrinking Shelf Life of Buildings.” The New York Times (Weds., February 24, 2021): B6.

(Note: ellipses added.)

(Note: the online version of the story has the date Feb. 23, 2021, and has the title “As Buildings’ Life Spans Shrink, Developers Try to Adjust.”)

Evolution of 5G Will Likely Not Favor China

In the passage of the commentary quoted below “RAN equipment” stands for “radio access network equipment” which is key hardware in the latest 5G broadband technology.

(p. C3) Huawei’s first generation of 5G RAN base stations is a modified version of the older 4G infrastructure that yields faster speeds. The ultimate promise of 5G is an ubiquitous network customized to user needs. Trillions of devices and applications—known as the Internet of Things—using 5G technology will offer new solutions for everything from autonomous vehicles to industrial production management to remote surgery. But the drivers of 5G’s evolution will be semiconductors, software systems and cloud computing—areas in which the U.S., not Huawei or any other Chinese company, is the world leader.

Instead of being intimidated by Huawei, U.S. foreign policy makers should recognize the Chinese company’s situation, which is akin to the dominance that IBM enjoyed during the age of mainframe computing. IBM’s massive scale and proprietary standards and software made it hard for competitors to match its offerings. Only in the 1970s and ’80s, when Japan massively subsidized new competitors like NEC, did IBM falter. But the true decline of IBM and its Japanese competitors came with the rise of the internet. The web’s transparent standards enabled many new firms to “plug and play.” Semiconductors, software and desktop computing eventually led to the apps on your smartphone at a fraction of the cost of such functions 30 years ago.

Today, 5G is at a similar moment. A new generation of technological standards for 5G would allow specialist suppliers—like the Microsofts and Intels of the internet era—to compete against Huawei, Ericsson, Nokia and Samsung. Control via the old RAN infrastructure will be diminished by control via cloud computing and software, which plays to a key U.S. strength. Introducing these standards will take concerted action from U.S. firms, along with targeted U.S. government support, such as the adoption of procurement requirements to embody these new rules.

For the full commentary, see:

Peter Cowhey and Susan Shirk. “The Danger of Exaggerating China’s Technological Prowess.” The Wall Street Journal (Saturday, Jan 9, 2021): C3.

(Note: the first ellipsis is added; the second and third are in the original.)

(Note: the online version of the commentary has the date January 8, 2021, and has the same title as the print version.)

The commentary quoted above is related to the report:

Cowhey, Peter, Chair. “Meeting the China Challenge: A New American Strategy for Technology Competition.” San Diego, CA: UC San Diego School of Global Policy and Strategy, Nov. 16, 2020.

The Duopoly of Intel and AMD Vigorously Compete

(p. B4) While Intel has struggled to move into mass production of its most advanced chips, rival chip maker Advanced Micro Devices Inc. has been challenging the company’s dominance. AMD’s market share in personal computer CPUs climbed above 17% in the first quarter, more than doubling from five years ago, according to Mercury Research. Intel holds almost all of the remaining market share.

. . .

Intel’s struggles with seven-nanometer chips mirror delays in designing and producing its earlier generation of chips based on a 10-nanometer process, an industry term tied loosely to the size of transistors that chips use to make calculations. Intel executives have told investors in the past that once the company conquered its challenges in 10-nanometer technology, sizing down to seven nanometers and beyond could happen more quickly.

. . .

There aren’t any “fundamental roadblocks” with the design of seven-nanometer chips, Chief Executive Bob Swan told analysts on a conference call, adding that Intel had found the root cause of the issue and was taking steps to avert further delays. He said Intel could turn more to external manufacturers, perhaps in combination with its own factories, to meet customers’ needs—a significant shift for a company that has mostly relied on its own manufacturing muscle.

The seven-nanometer delay could harm Intel’s competitive position because Taiwan Semiconductor Manufacturing Co., the largest contract manufacturer of chips in the world, is expected to be making processors with even smaller, more efficient transistors by the time Intel comes out with its chips.

For the full story, see:

Asa Fitch. “Intel Gets Lift From Work at Home.” The Wall Street Journal (Friday, July 24, 2020): B4.

(Note: ellipses added.)

(Note: the online version of the story was updated July 23, 2020, and has the title “Intel Reports Profit Surge but Warns of Further Delays on Advanced Chips.”)

Jim Pethokoukis Asks Art Diamond How to Increase Innovative Dynamism

Jim Pethokoukis recently posted an abbreviated transcript of our conversation on his Political Economy podcast about my Openness to Creative Destruction: Sustaining Innovative Dynamism book.

Posted by Arthur Diamond on Thursday, August 6, 2020

Transcript of Political Economy Podcast Interview with Arthur Diamond on Openness to Creative Destruction

The lightly edited transcript was posted on July 30, 2020 on the American Enterprise Institute web site.

Yesterday Jim Pethokoukis posted a lightly edited transcript of my conversation with him on his American Enterprise…

Posted by Arthur Diamond on Friday, July 31, 2020

Houghton Shifted Corning from Cookware to Fiber Optics

(p. A13) When Amory Houghton became chief executive of Corning Glass Works in 1964, the company founded by his great-great grandfather was thriving. Known to the general public for Pyrex measuring cups and Corning Ware casseroles, it dominated the U.S. market for the glass used to encase TV tubes.

But the company, now known as Corning Inc., proved too reliant on those tubes, which accounted for as much as 75% of profit. In the mid-1970s, the company faced a recession and the loss of TV-related business as Japanese imports captured the U.S. market. Profits collapsed, and Mr. Houghton had to chop costs, including at the headquarters in Corning, N.Y. The global workforce dropped by more than one-third.

. . .

“It was tough making these cuts,” he said, “particularly when you lived in a small town where you knew a lot of these people.”

Corning bounced back, unlike many other U.S. manufacturing giants. That was partly because Mr. Houghton made a long-term commitment to development of fiber optics. He correctly saw that hair-thin strands of glass would replace copper wire in transmissions of voice and data. “It’s our turf, with our patents,” he said.

By the late 1990s, optical fiber and related telecommunications products accounted for more than half of Corning’s operating profits.

For the full obituary, see:

James R. Hagerty. “Executive Lifted Corning With Bet on Fiber Optics.” The Wall Street Journal (Saturday, March 14, 2020): A13.

(Note: ellipsis added.)

(Note: the online version of the obituary has the date March 13, 2020, and the title “Amory Houghton’s Bet on Fiber Optics Helped Save Corning.”)

A City’s Prosperity “Can Be Fickle and Fleeting”

(p. 18) As the world pulls up its drawbridges during a time of pandemic and questions the merits of globalization, Malacca is a reminder that such transoceanic exchange has a long history of bringing both promise and peril.

And the city’s ultimate fate may serve as a warning that the prosperity globalization bestows on some can be fickle and fleeting. A city that once stood at the global crossroads can devolve into a backwater, and a once-thriving culture can face extinction.

Malacca’s port, once one of the richest on earth, silted up, and the city became a historical footnote. The spices that drove the age of exploration — nutmeg, cloves and mace — now molder in dusty cabinets, no longer treasured commodities.

And yes, a contagion struck, too, a plague that weakened the Portuguese hold on the city, paving the way for the Dutch and then the British, who favored other entrepôts and left Malacca to its slow decline.

For the full story, see:

Hannah Beech. “A Rich Melting Pot Centuries Ago, a Globalization Relic Today.” The New York Times, First Section (Sunday, April 12, 2020): 18.

(Note: the online version of the story has the date April 11, 2020, and has the title “500 Years Ago, This Port Linked East to West. Its Fate Was to Fade Away.”)

“Very Smart People Doing Things in Half the Time With Great Urgency and Loving It”

(p. A15) As World War II gave way to the Cold War, jet engines and nuclear weapons increased the importance of radar and the strategic significance of countering it. Mr. Westwick fast-forwards through early, tentative attempts to do so, taking the reader to Southern California in the 1970s, where two defense contractors—Lockheed and Northrop—competed to develop modern stealth aircraft.

. . .

“Stealth” is leavened with plenty of anecdotes. One engineer designs a key curve for a stealth plane called Tacit Blue by fidgeting with modeling clay while on a trip to Disneyland with his kids. Another jury-rigs an F-117 by stringing a grid of piano wire over a hollow in its exterior to block incoming radar waves. It was meant to be a stopgap but ended up becoming part of the aircraft’s design. But Mr. Westwick’s main concern is to convey a sense of what it was like to work with such collaborative intensity. As one engineer recalls: “It’s very smart people doing things in half the time with great urgency and loving it. Absolutely loving it and in a way loving the people they work with.”

For the full review, see:

Konstantin Kakaes. “BOOKSHELF; Mission: Invisible.” The Wall Street Journal (Thursday, January 30, 2020): A15.

(Note: ellipsis added.)

(Note: the online version of the review has the date Jan. 29, 2020, and has the title “BOOKSHELF; ‘Stealth’ Review: Mission Invisible.”)

The book under review, is:

Westwick, Peter. Stealth: The Secret Contest to Invent Invisible Aircraft. New York: Oxford University Press, 2020.

Study Claims 77% of Economic Growth is Due to Incremental Innovation

I am surprised by, and dubious of, the claim that 77% of economic growth comes from incremental innovation. That implies that leapfrog innovation, or creative destruction, is not very important. I will need to read and ponder the study that claimed that result.

(p. A15) The comparison of two potential options—known as A/B testing—is now routinely baked into the development of customer-facing software, Mr. Thomke reports. Microsoft, Amazon, Facebook and Google “each conduct more than ten thousand online experiments annually,” he writes, adding that even companies without tech roots (Nike, State Farm) run trials like this regularly. The tests might evaluate, say, the components of a website—style of font, color of background, shape of buttons, choice of words—and continuously adjust them based on user response.  . . .

As much as Mr. Thomke, a Harvard Business School professor, believes that “all businesses should be experimenters,” he wisely observes that “not all innovation decisions can be tested.” A/B testing may not be the best way to evaluate a completely new product or a radically different business model, he concedes, but the approach is the ideal driver of small changes. Though we celebrate disruption, Mr. Thomke urges companies to “tap into the power of high-velocity incrementalism,” explaining that “most progress is achieved by implementing hundreds or thousands of minor improvements.” He points to a study that attributes 77% of economic growth to improvements in existing products and notes that the structured system of incremental improvements that Lego implemented following its near-bankruptcy in 2004 drove 95% of annual sales and helped restore the company to profitability.

For the full review, see:

David A. Shaywitz. “Test, Test And Test Again.” The Wall Street Journal (Monday, March 16, 2020): A15.

(Note: ellipsis added.)

(Note: the online version of the review has the date March 15, 2020, and has the title “BOOKSHELF; ‘Experimentation Works’ and ‘The Power of Experiments’ Review: Test, Test and Test Again.”)

The book discussed in the passages quoted above, is:

Thomke, Stefan H. Experimentation Works: The Surprising Power of Business Experiments. Boston, MA: Harvard Business Press, 2020.

The “study” mentioned above that attributes 77% of economic growth to incremental innovation, is:

Garcia-Macia, Daniel, Chang-Tai Hsieh, and Peter J. Klenow. “How Destructive Is Innovation?” Econometrica 87, no. 5 (Sept. 2019): 1507-41.

“Entrepreneur Sent Our Words Across an Ocean”

Cyrus Field is described as a “project entrepreneur” in my Openness to Creative Destruction book. In the op-ed linked-to below, I celebrate his achievement.

My book, mentioned above, is:

Diamond, Arthur M., Jr. Openness to Creative Destruction: Sustaining Innovative Dynamism. New York: Oxford University Press, 2019.