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Saturday, 13 February 2016

Banks and Car companies

Readers of this blog will probably be aware of the author's love of an analogy, technology, finance and cars.

This post will cover all four topics in one...
 
Let's look back to an industrial age Genius, Henry Ford. A quote from an excellent website:
 
"Located a few miles south of Detroit at the confluence of the Rouge and Detroit Rivers, the original Rouge complex was a mile-and-a-half wide and more than a mile long. The multiplex of 93 buildings totalled 15,767,708 square feet of floor area crisscrossed by 120 miles of conveyors.
 
There were ore docks, steel furnaces, coke ovens, rolling mills, glass furnaces and plate-glass rollers. Buildings included a tire-making plant, stamping plant, engine casting plant, frame and assembly plant, transmission plant, radiator plant, tool and die plant, and, at one time, even a paper mill. A massive power plant produced enough electricity to light a city the size of nearby Detroit, and a soybean conversion plant turned soybeans into plastic auto parts.
 
The Rouge had its own railroad with 100 miles of track and 16 locomotives. A scheduled bus network and 15 miles of paved roads kept everything and everyone on the move.  It was a city without residents. At its peak in the 1930s, more than 100,000 people worked at the Rouge. To accommodate them required a multi-station fire department, a modern police force, a fully staffed hospital and a maintenance crew 5,000 strong. One new car rolled off the line every 49 seconds. Each day, workers smelted more than 1,500 tons of iron and made 500 tons of glass, and every month 3,500 mop heads had to be replaced to keep the complex clean.
 
Henry Ford’s ultimate goal was to achieve total self-sufficiency by owning, operating and coordinating all the resources needed to produce complete automobiles.
 
Ford Motor Company owned 700,000 acres of forest, iron mines and limestone quarries in northern Michigan, Minnesota and Wisconsin. Ford mines covered thousands of acres of coal-rich land in Kentucky, West Virginia and Pennsylvania. Ford even purchased and operated a rubber plantation in Brazil. To bring all these materials to the Rouge, Ford operated a fleet of ore freighters and an entire regional railroad company.

Ford’s ambition was never completely realized, but no one has ever come so close on such a grand scale."

https://www.thehenryford.org/rouge/historyofrouge.aspx

So, let's look at this.  An integrated production facility that took raw materials and created finished products all within one house.

Let's fast forward to a modern car company, we'll use Aston Martin but we could equally use Ferrari, Porsche, Bentley, Lamborghini, Pagani or others...

Aston Martin has a production facility in Gaydon.  At this facility is an assembly plant.  They take:
So, as we see, most of the car is made by firms that are not Aston Martin.  Yet when we see one of these cars, we identify it as an Aston Martin.

Let's take this to banks...

Why does a bank feel that it needs to run a risk book and spend tens of millions on running an FX business? Or an equity secondary market business? Or a rates business? Corporate bond business?

Further to If not banks, then who? What's to stop a bank simply outsourcing this to a firm such as XTX Markets? The industrial organisation of car companies has changed radically so why not banks?






 

1 comment:

  1. Like the car analogy, John. Think back a decade or so and car companies where mainly considered dinosaurs. The BCG Top 50 innovative companies had 4 car companies in the Top 10 this year. The only bank was JP Morgan at (if memory serves) no. 43.

    Sharing platforms, components etc. Not a bad model to start thinking.

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