Business is boring, and that’s coming from a guy who studied it. But sometimes it can be fun to talk about when you ignore all the messy business of finance, and government regulations, and all the businessy stuff.

A concept often looked at among economists (not macroeconomists who are always in the news) is the evolution of an industry, and the company’s involved in those industries. Industries start out as little babies that need to grow. As they do they reach maturity and then decline. It can do all of this in a decade, or a few centuries, depending on the industry. CDs did it in a decade, cars are taking longer. It takes longer for cars because no substitute products come along to replace it. The maturity phase is usually filled with intense competition and low profitability, much like the auto industry we see today.

But what is so great about the auto industry is that it’s so important you’re always going to have people trying compete in it because there is so much money to be made still. So what we have then are different companies rising to the top of the industry, and why they fail to stay at the top is the focus of this post.

Let’s jump back in time 40 years to the 1970s (yes old people that was 40 years ago). American car companies run the show in the US. Then we hit an oil crisis and the American companies find themselves with a lot of gas guzzling cars nobody wants to buy. They failed to see customer demand changing and suffered because of it. Japanese automakers rushed in with small and efficient vehicles and forever established a foothold in American industry. To some degree the American companies recovered in the 90s but did not learn their lesson. They found cash cows in trucks and SUVs with their high margins whilst the Japanese firms seemed happy to dominate the sedan market. Oil prices jumped again and GM went bankrupt, Chrysler was crippled, and Ford was left to fend for itself. Japanese automakers have once again capitalized on this misfortune and control more market than they ever have. But what’s this? Toyota has millions in recalls? Honda losing comparison tests and having among the worst mileage with the Accord? What happened?

It’s called fat and happy. Imagine you’re at the top of your industry. Are you focused on stealing market share from your competitors? No it’s all about milking profits. Taking small shortcuts, lobbying the government, and advertising. You let the young bucks try to come up and compete. This focus on the bottom line instead of servicing the customer usually leads to distraction. By the time the young competitors are on your radar, it’s too late. I bought a Honda a couple of years ago and love it. But I find myself lusting after a Hyundai in the same class because it’s faster, cheaper, more efficient, and has a 100,000 mile warranty. It’s sales are amazing. And just last night I found myself looking at a Kia saying “wow, I like that.” The Kia is a version of the Hyundai (same company) but it’s even cheaper. It’s taking sales from Toyota and Honda as customers are moving on. You may still snub your nose at these cars today, but your parents did the same thing to Hondas and Toyotas a couple of decades ago. And don’t forget about Ford. They’re an up-and-comer in the sedan game. While a few years ago they weren’t on my radar, they are again.

And if you think this phenomenon is limited to automobiles, you would be mistaken. Look at technology. Microsoft practically invented the technology industry. And since the 1990s they’ve tried their hand in a dozen industries and only video games has really worked. Meanwhile their flagship product, Windows, spat out a flop version of the software and has been losing sales to Apple for a while. Apple’s rise has created concerns for many people. People see them someday suffering the same fate.

So how does a company sitting at the top, stay at the top? It’s an interesting question, one I don’t have an answer for. No matter who is running a company, sitting at the top is simply an invitation to be taken down. And they almost always get taken down. How many companies have existed for 100 years? Very few. And the ones that have are a shadow of their original glory. GM recently re-birthed and they can claim it’s the same company, but it really isn’t. The old GM is dead. It actually still trades under the ticker MTLQQ. What happened was the old GM was allowed to die and then a new company that just happened to be called GM bought all that company’s assets at a discount.

Digressions aside, understanding the evolution of an industry can enlighten you to why that company is doing what they do today. It’s fun to watch the auto industry because it has been around for so long and is in the public’s eye so often. And we know the cycle will continue to repeat itself. I don’t know if my next car will be a Kia, it could be a Geely. Haven’t heard of Geely? You will.

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categories: business, cars