2/1/2001 | 3 MINUTE READ

Dot- (dot-dot/dash-dash-dash/dot-dot-dot) com

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One of the puzzling aspects of contemporary society is the way that various Internet-related companies are valued so highly by Wall Street while the companies that are involved in actually producing things tend to be less appealing from an investment perspective and which, consequently, deflates a company's business plans and leads to all manner of unpleasant things, from sell offs to layoffs to phase outs (vide Olds) to the launch of vehicles that shouldn't have escaped from styling studios. Certainly, there is something to the fact that a dot-com company essentially needs an array of computers and an assortment of clever people whereas a durable goods production company needs an array of computers, an assortment of clever people, and machinery, equipment, factories. . .and a whole lot more stuff, all of which is expensive. And because the dot-com company is based on intellectual capital and not on physical capital, because there is the potential of providing value with digits rather than molecules, because there is little in the way of bricks and mortar, there is a certain investment liquidity that the dot-com has over the traditional manufacturer in this age where everyone is anxiously awaiting the Next Next Thing.

Of course, the buzz has turned into a groan in the dot-com world, with the valuation of some of the companies zooming down faster than a skier on Everest. OK. So maybe the groan is a scream. Not only have the on-paper zillionaires found themselves with, well, paper, but there are the aforementioned sell offs, layoffs, and phase outs (with these happening at Internet speed) now in the dot-com arena, as well.

All of this would seem rather amusing for those of us who aren’t invested in a dot-com if it weren’t for a couple of troubling things. One is that many of the auto companies are imagining themselves to be Internet companies, which would be ludicrous if it wasn’t so dangerous. Second is that the fabric of the U.S. economy has become woven with the dot-coms to the extent that their unraveling can have profound consequences on all of us, or so Business Week economics editor Michael Mandel persuasively argues in The Coming Internet Depression: Why the High-Tech Boom Will Go Bust, Why the Crash Will be Worse Than You Think, and How to Prosper Afterward (Basic Books; 166 pp.). And let me hasten to point out that the “How to Prosper Afterward” is not the most convincing or compelling part of this comparatively brief text.

In light of the way that the auto industry seems to be teetering on the edge of a sales precipice, it is interesting to note one parallel that Mandel delineates in his book: “In terms of its importance to the economy and the market, the automotive industry in the 1920s was the equivalent of today’s high-tech sector. The tripling of auto production was the single biggest force for growth in the 1920s, and it helped drive a similar expansion in related industries such as steel, rubber, and highway construction.” But as you may recall from history books, the decade of the ‘20s ended with 1929, the year of the Crash. And according to Mandel, “the first precursor of the coming storm”—a.k.a., the Depression—“was a simultaneous slowdown in auto production in the spring of 1929 and a fall in the auto stocks.”

If there is a bright spot on today’s cloudy horizon, it’s this: although there will be a slowdown in auto production in the spring of 2001, auto stocks weren’t doing comparatively well when the market was booming so the past won’t be prologue—at least the auto industry won’t cause the plummet this time.

(By the way: to put Mandel’s argument in a concentrated packet: He sees a profound reduction of venture capital investment in high-tech companies, which will cause a decrease in innovation, and which will lead to a fall in demand, inflation. . .and you can guess the rest. Well, perhaps what this means is that just as Hewlett and Packard got their starts—as did Jobs and Wozniak—in garages, the people who will do the next wave of innovation won’t be in those dot-com high rises that you can see along Highway 101 south of San Francisco but in, well, garages.)