The car you bought but don’t drive, hurts the economy

While on my evening walk I recently noticed an old Mercedes gathering dust in the neighborhood – the car hasn’t moved in the last 10 years. Or maybe more.

While this rude treatment meted out to the Merc pained me,  I noticed that there were many other cars which had rusted completely just being parked out in the open.

So I asked my economist wife – what is the impact of such reduced life cycle of an asset on the overall economy.

Unused Cars

What I was thinking was this:

  • At an individual household level, this was clearly capital being blocked or even wasted. As the same could have been re-utilized in buying another asset or investing elsewhere.
  • At a more macro level, the automobile industry was not really a loser. They might end up selling more cars if many individual households just buy cars and don’t use them. So where in our country’s GDP calculations would this waste be accounted for.
  • A car that is used regularly results in more spends – on fuel, maintenance, tires etc. All of which stimulates the down-stream industries and hence positively impacts the economy.  Discounting the fuel-price etc. So does it mean that if a society in general fails to extract the true value from its assets,it fails to stimulate the ancillary industries sufficiently? If so, would this apply to apparels and other items we usually stock?
  • The fact that the car was not sold-off meant that the supply was reduced in the 2nd hand car sales market. Does such a trend result in higher prices in the used-cars market? Would selling off an un-used asset lead to higher supply and hence a more vibrant used-assets market? if yes, then maybe a Quickr or OLX should pitch to the finance ministry and get some more funding.

Too many questions and the wifey says that its way too complicated for me to comprehend. So while I work on a mathematical-excel model to quantify this, do share your point of view.

Would our economy have a positive impact if we would learn to extract more value from each of our purchases.

Fuel costs leading to Closed economies ?

Read a very interesting article yday- wherein the author built a case for changes he predicted in manufacturing services due to the increased crude prices. According to him the labour arbitrage opportunities that many companies/countries could exploit previously, would no longer be as profitable. Reason being that historically the increased shipping costs due to shifting of manufacturing facilities to far-off locations was a smaller percentage and the fruits of low labour cost were enjoyed. Now with increased transportation costs- the overall distance that the raw materials (to the facility) or finished goods (to the markets) travel will need to be contained.

The author predicted that this would lead to near-shoring and the likes of Mexico might again become destinations of choice.While I was kind of convinced (though am not sure at what price range will these tough decisions need to take place) with the logic, I was more tempted to take this line of reasoning a little further and see where it goes.

Assuming the crude price keeps soaring and we are unable to find viable substitutes…. this could lead to a scenario where probably one of the top optimization criteria would be to minimise transportation.Areas/regions that have both the raw materials and the market, will become the first choice for locating the production facility. But we all know these are very few… so what would happen to others:

– Create efficiencies in smaller scales also- Companies would be forced to set-up multiple manufacturing facilities- closer to either the multiple sources of raw materials or multiple demand/consumption zones…e.g. Coke already bottles its drink out of multiple bottling plants spread across the country.

– Investing in route optimization- I know from my friends who work in route/transportation optimization, that almost 70% of the players have not even looked at the possible benefits of deploying a routing optimizer.

– Precipitate process innovation- With labour cost arbitrage vanishing , the holders of the brand would be forced to innovate in their processes- to find a viable solution in their high labour cost economies.

– In an ideal scenario where all labour cost arbitrage has been exploited and where the transportation costs are simulatenously rising- the only option is to consume what you produce/process. What I mean to say is that in this scenario- a Chinese car shipped to US would cost the same as a US car, made in China and shipped to US. Now with shipping costs increasing, there would be a point beyond which a US car made in US will be cheaper than both the options above and this in my mind is the onset of closed economies.

Maybe I am wrong here, but I seriously thing that what could happen is that some regions will become closed economic regions. Imagine if India/China and a few SE Asian economies come together to create a closed economic zone/region:

We would have the raw materials (iron ore, coal,grains, meat etc), we would have labour to work on it (China), we would have the process improvements we would need (India, Japan, Korea etc) and most importantly we would have the market for these goods and services.