Twinkies versus cars

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A few decades ago when America faced a previous competitive challenge, an economist asked a core question about the future of the economy: "computer chips, potato chips -- what's the difference." The basis for this question was whether there was a place for a government policy directed at a particular sector of the economy. Well, the answer to that question turns out (and was self-evident at the time) that computer chips are much more important to economic growth and prosperity than potato chips. And government policies toward the technology sector help spark the economy.

Now, the question has reappeared in the form of "cars or Twinkies -- what's the difference between bailing out GM versus Hostess." George Will ask that question in a semi-serious manner in yesterday's Washington Post ("Digesting the Twinkies' lessons").

The answer to that question lies in the type of assets involved, specifically the intangible assets.

The assets behind Twinkies are brand and recipe. As Hostess moves through liquidation, other companies can easily pick up the brand and the recipe and resume production. In fact, Hostess claims that there has been "a flood of inquiries" on purchasing the assets. That is the way the bankruptcy system is supposed to work.

The case of GM was very different. There is a much more expansive set of intangibles assets that underpins the automotive industry.

First is the technology. One Twinkie is pretty much the same as another. And the Twinkie you bought a year ago, or 5 years ago or 20 years ago are pretty much the same as the one you would buy today. Yes, the production process may have been modernized and the original banana flavored Twinkie reintroduced. But the basic product is relatively the same. In fact, that consistency is an intangible asset.

In the automotive industry, both the product and process technology needs to be constantly upgraded. Building and trying to sell yesterday's car is a formula for failure. The technology for Twinkies can sit on the shelve for a while and still be good (like the product itself). But if you dismantle the car companies' innovation process, it will take time and resources to put it back together. And the tacit knowledge embedding in the innovation system could be lost.

The second type of asset is the supply chain. Twinkies pull from a vast existing supply chain to the bakery industry. But that supply chain does not rely heavily on the Twinkies and the Hostess company. Remove that product from the system and the supply chain will continue. And the supply chain can easily reintegrate Twinkies and a Hostess-replacement company into the system.

Not true about GM. Had GM gone under, a vast supply chain would likely have fallen as well. Rebuilding that supply chain would have been a daunting task -- and it is not clear that it even could have been rebuilt in the United States.

Third, there is customer support network. Again Hostess fits into to a large retailing system. Shutting down Hostess means disrupting a part of that system -- specifically the Hostess-specific wholesale system. But that is not major disruption to the entire baked goods wholesale/retail system. GM and the auto industry rely on a company specific dealer system. Dismantling that system and trying to recreate it would again be difficult.

Dismantling the dealer system would eliminate not just the sales but part of the service chain as well. Service is a large part of the automotive industry. Customers don't take Twinkies back to the dealer for repairs. Nor do Twinkie buyers worry that the warrant might not be honored or that parts might not be available if the company goes under. Car dealers play a much more important role in the lifecycle process of the product than the retail stores do with respect to Twinkies.

All in all, it should be self-evident that losing a major part of the automotive industry is very different from a possible temporary lose of Twinkies. One (Twinkies) can easily transfer and use the key intangible assets to restart production. The other (cars) risks very costly disruptions and the possible permanent loss of key intangible assets.

That someone could even think of equating the two (even in a semi-serious way) demonstrates how little understanding there is about how the economic world really works.


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    Note: the views expressed here are solely those of the author and do not necessarily represent those of Athena Alliance.


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