While much of the world focuses on the global manufacturing war under way, the savvy investor should focus on the next hot spot: the new international design war brewing in the auto, wireless handset, airline and PC industries. Look at the auto industry to see what I mean. After years of lagging behind, General Motors ( GM) has pretty much eliminated the productivity gap between its car factories and the North American plants of the Japanese car makers, according to the 2004 Harbour Report on North American auto factory productivity. But GM makes just a scant $178 profit per vehicle, while Toyota ( TM) rakes in a profit of $1,742 per vehicle and Nissan ( NSANY) is even more profitable at $2,402 per vehicle. The bulk of the difference comes down to rebates: Detroit has to pay consumers twice as much to buy its cars as Japan's automakers do. And that's because Toyota, Nissan and Honda ( HMC), which once far outpaced Detroit in manufacturing efficiency, are now winning the design wars. They are doing a better job of designing cars that customers want and will pay more for.
Kelley Blue Book Web site, I found rebates for a 2004 Chevy Malibu that began at $2,000 and went up to $4,000. Rebates for the 2004 Cadillac CTS began and ended at $2,000. By comparison, the highest rebate I found on a 2004 Toyota Camry was $1,500.
Of course, no rebate is more profitable to the car company than even a small rebate. On the Kelley Blue Book site, I couldn't find any rebates for Honda's Acura brand. The biggest incentive I found for a 2004 Audi A8L Quattro was a 4.65% auto loan. No cash back and no 0% financing. In a commodity market, Audi has been able to differentiate its cars and convince consumers to pay a premium price. The premium isn't simply a function of market segment, either. BMW has also created products that command premium prices even as the company has moved down market to the Mini Cooper. How do they achieve this? With designs that hit a hot spot in the market, such as the way that the Mini perfectly fits what auto industry marketing consultants call the "third-car" market, or the way that the hybrid gas-electric Toyota Prius fits the current mood to "do something" about high gas prices -- without giving up anything, of course. Did I mention that the Prius has a waiting list of buyers in many parts of the country and sells at a premium to the sticker price?
In the PC business, where the world is awash in commodity components that you can find inside just about every PC, design has been helping drive sales for some time. Companies in these industries have responded in three very different ways. First, some companies have simply ignored or missed the shift. Second, a few companies have decided that they can be the low-cost leader in a commodity industry. Dell ( DELL) is a prime example of a company that successfully pursued this strategy. Dell is built from the ground up around falling commodity prices; it is not simply a traditional company that has retooled its manufacturing and outsourcing. Third, some companies chose to become a world-class manufacturer first and go for the design premium second. That was Nokia's ( NOK) path to the top of the wireless-handset heap. The company was ahead of competitors such as Motorola ( MOT) in understanding that handsets were now a design and marketing business. This third alternative is indeed the wave of the future. The globalization of commodity manufacturing will drive companies to design as a way of increasing profit margins. The companies that master the process will deserve a premium from investors in the stock markets.