Globalisation of the skies

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Many firms have aspirations to “go global”, but this unanimity disguises both differences and confusion.

American Airlines and British Airways plan an extensive alliance. They are only the latest companies to assert that the future of their business is inevitably international. Car component makers and lawyers, biscuit makers and banks, telecoms utilities and pharmaceutical companies, are all united in emphasising that only globalisation of their operations will fit them for the next century.

But this superficial unanimity disguises both differences and confusion. It is unlikely that there is any necessary relationship between what is happening in the market for brake linings and that for securities law, and there is not. Globalisation is a portmanteau term which covers development of many different kinds. A more careful analysis of these trends might lead at least some of these firms to ask whether they need a global strategy at all.

Take the market for crude oil, which is truly a global market, and has been for decades. The petrol you put in your car might originate in the Persian Gulf, flow from the North Sea, or be piped from Alaska, and you don’t know and don’t care which. Despite massive differences in the costs of production in these different regions, the price of oil is virtually the same around the world. A true single market is always characterised by the law of one price – the same commodity sells everywhere at the same price.

Which reminds us that the car market is very different. There is now global production and sourcing. Your car might be assembled in Dagenham, Germany or Japan, and its engine might have been built in Wales or in Spain. But national markets remain segmented. It is not just that Germans long for a Mercedes while Italian’s prefer Puntos and Ferraris.

These differences help to underpin the pattern of market segmentation which means that the world car industry does not face a global market but a collection of distinct national markets.

Moreover it is important to the profitability of the world car industry that these markets remain segmented. Car prices in Britain have been higher than those in Continental Europe for many years. The law of one price does not hold: pricing, sales and distribution strategies in different markets do and must remain distinct. There is a global car industry, but there is no global car market.

Now hotels or car hire, or accountancy are different still. In these industries, production is necessarily local. A car, a gallon of petrol and an aircraft, all come to you. You go to a hotel, you hire the car where the car is. The accountant who audits your British operations is British while your Indonesian affairs are reviewed by someone who is qualified in Indonesia.

Globalisation here is about marketing, not about production. How does a British firm buy a reputable accountant in Indonesia, a tourist know how to find a reliable car on a Greek Island, or an American businessman locate a decent hotel in Bogota? The answer in each case is that you look for a name like Price Waterhouse, Avis, or Marriott. What makes the markets for these products global is not the greater mobility of goods and services – which has created a global car industry. It is their essential immobility, which creates a global market for a local product. If it were otherwise, you would take your professional adviser, your car or your bed with you. There is not, and never will be, an Arthur Anderson audit factory in Chicago which services the world. In contrast to the Boeing factory in Seattle which really does manufacture most of the world’s planes. Like the oil market, the aircraft business is a truly global market served by a truly global industry.

It is easy to confuse these different models, and serious business errors result. Is the legal services industry like Boeing, or like Marriott? In some areas, we have Boeings; the dominance of Linklaters and other London law firms in world securities markets is the legal equivalent of that production facility in Seattle. In others, there may be Marriotts; one way to find a good lawyer in Indonesia may be to look for the name Skadden Arps. But notice how that method of globalisation has to be implemented – not, as in manufacturing industry, by transferring production facilities overseas, but by franchising your name to one of the best local firms, which is what Price Waterhouse, Avis, and Marriott do. And in the course of it, they have to cede most of the returns to the best local firms as well. Many internationalising law firms are uncertain whether they are Boeings or Marriotts perhaps they are neither and would do better to stay at home.

The problem is globalisation has many different causes. Sometimes, as with oil, it is the result of international patterns of comparative advantage. It is cheap to produce oil in Saudi Arabia, and barely possible to produce it at all in Japan. Since oil is a homogeneous commodity and is not very costly to ship around, we have a world oil industry and a world oil market. Aircraft are somewhat similar, with Boeing’s competitive advantage enhanced by the scale economies derived by the dominant producer. Accountancy is quite different. There are no scale economies here, which is why production remains fragmented, but there are economies of scope in marketing which make that very fragmentation efficient.

So what of American and BA? Competitive advantage is promoting globalisation in aviation – which is why firms like American and BA have been gaining from Air France and Pan Am. But that is a reason why these firms will prosper without an alliance, not an explanation of why they need one. And there are no economies of scale worth speaking of in associating American’s hub at Dallas with BA’s at Heathrow. You are thrown back on the merits of common branding and franchising, as for accountants, rental cars and hotel. An argument which would be rather more compelling if American were vouching for the quality of Aeroflot or Guruda than for an airline with a fine established reputation of its own. There again, perhaps it’s just about monopoly.

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