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Looking for the “New Normal”

Of the $787 billion marked for stimulus spending, the $1 billion “Cash for Clunkers” program is the only success the …

Of the $787 billion marked for stimulus spending, the $1 billion “Cash for Clunkers” program is the only success the administration can point to for lifting consumer spending. The program, which is dramatically more efficient than other schemes, nearly ran out of funds, but it had the salutary effect of coming at the right time—just as auto dealers’ inventories were running lower in the wake of the bankruptcy-related production slowdowns of GM and Chrysler. Interestingly, used car sales are also benefiting. Many in the industry expected that government-subsidized sales of new cars would depress demand for used cars, but it turns out the opposite is happening. The revived demand is firming prices for both used and new vehicles. (The tight supply of new vehicles is helping.)

As a result, car companies and their suppliers may have to raise production, and to do this they will need to raise their manufacturing productivity. But it’s not just car companies. Over the last several years, the economics of production have shifted. More manufacturing companies in the U.S. and around the world are rethinking how they make things. Chastened by a global downturn, rising energy costs and stronger competition from China and India, many CEOs are recasting their manufacturing strategy as they strive to stay lean and create value.

A generation ago, many observers claimed that the trend toward outsourcing had reached a tipping point. At first, mostly low-value-added activities were outsourced, but improvements in communications and supply chain efficiencies gradually allowed more higher-value-added offshoring. Many worried that key manufacturing capabilities were eroded, never to be recovered.

But the “new normal” means that there’s no returning to the status quo ante. After this recession runs its course, companies will be forced to reinvent their business models. Research shows that tough times germinate new ideas and new companies that are on the cusp of creating new markets or transforming existing markets, but haven’t quite broken into the mainstream.

About J.P. Donlon

J.P. Donlon
J.P. Donlon is Editor Emeritus of Chief Executive magazine.