How a cloud-based system of extended customer warranties could help consumers, save the environment and unleash the potential of free trade.
They don’t make ‘em like they used to...
When I moved to London, I rented a flat from my aunt. As she was showing me round, she pointed out the vacuum cleaner, observing, “That thing’s older than you are!” I was 22 at the time. For the next two years of my tenancy, the old Miele (‘Made in West Germany’) chugged away dutifully. When I moved on to my next flat, there was no vacuum cleaner. I went out and bought one. Nine months later it was broken.
Every reader will have their own version of this story. Longer supply chains, out-sourced manufacturing, designed obsolescence and so-called ‘value engineering’ have reduced the quality of nearly everything, from Kit-Kats to new build homes.
The trouble is conventional economics struggles to account for this. Imagine an economy that, in Year 1, produces one really good vacuum cleaner that will last 20 years at a cost of £200. The next year it produces two low quality vacuum cleaners, with a lifespan of one year, at £100 each. Conventional economics would tell us that productivity in real terms has quadrupled, with twice as much for half the cost. However, consumers are clearly worse off. Even excluding the inconvenience and ancillary costs, the economic utility has fallen 90%!
The point is that measuring GDP and chasing GDP growth can make people poorer in reality, when the quality and durability of goods is sacrificed. You can grow wealth just by improving the durability of goods. Economic measures need to capture this.
An issue of growing importance
The problem of poor quality goods is only going to get bigger, especially as environmentalism comes to the fore. Low quality goods that have to be replaced regularly mean more environmental degradation, more packaging, more shipping and more landfill.
Tablets and smartphones are perfect examples. These expensive devices are often poorly made, designed to last just a year or two before breaking down. Yet they consume huge amounts of rare earth metals that are mined unethically in parts of the world with poor governance. Further, many of these heavy metals and acids leach into the soil and water system when they get thrown away. If your phone or tablet lasted eight or ten years instead of two (as old Nokia phones used to), we could consume a fifth of the amount, and save on all that shipping, packaging and landfill.
There is also the issue of safety, especially with poor quality electrical goods. Fairy lights are now one of the common causes of domestic house fires. Escape of water is the fastest area of claims growth for home insurers; often caused by modern, lower quality plumbing parts. Losing your living room to fire or flooding is not just an economic drain; there is a huge emotional burden as well.
The Kirkcaldy Cobbler: Why Free Trade is not enough
To understand why product quality is such a modern issue, let’s take an example straight from the Adam Smith playbook: an 18th century shoemaker in Smith’s home town of Kirkcaldy.
What if one day, the Kirkcaldy shoemaker decides to cut corners and save money by making low quality shoes? Within a few months his customers will be stopping him in the streets to complain. They will soon go along to the next village to buy their shoes. As the owner and manager of the business, our shoemaker’s livelihood and reputation would quickly be lost.
Compare this to a hypothetical Far Eastern shoe manufacturer today. The shoemaker will licence a well known brand name, then sell its shoes to an exporter, who sells them to a wholesaler, who sells them to an online retailer. As for the shoemaker itself: the company might be ultimately owned by pensioners in, say, Sweden, who have elected a board of trustees, who have appointed a US consultant, who has appointed a British fund manager, who has bought the shares. The latter’s only concern may be to get the profits (and share price) up in the next quarter.
The point is, globalised and digitised modern businesses have long chains separating the business owner from the customer – far longer than Adam Smith could ever have envisaged. Without a direct trust relationship, that chain can radically misalign the interests of the business and the customer.
How technology can solve the problem and make us all better off
A simple solution would be to legislate for extra-long warranties across the entire range of consumer durables. Phones and computing equipment could be guaranteed for say, 8 years, electrical appliances for 12 years, furniture for 15 years, and (that fly-tippers favourite) mattresses for 25 years.
Prices could also be displayed based on cost per year of use. For example, a £300 TV with a 10-year guarantee have a lifetime price £30/year. A TV for £400 with a 20 year guarantee would have a lifetime price of £20/year.
This could be enforced via an innovative cloud-based system of receipts and warranties. Consumers would be given a QR code that they could tether to their payment methods (including phones and credit cards). We could all say goodbye to the hassle of registering warranties or keeping receipts. The simple act of paying for the product would automatically send the warranty straight to your account.
This cloud-based system could itself be profitable, with the anonymised data sold to manufacturers and retailers. It would be one of the most valuable databases in the world.
Beating the Mercantilists
If everything from your tablet to your wardrobe were designed and guaranteed for decades, we would need to buy far less stuff, leading to more balanced trade with economies like China. We would no longer need tariffs.
In addition, product guarantees could give free trade a better reputation. Selling free trade to the public is not going to be easy. As Donald Trump found, whenever he bashed China his poll ratings went up. Unscrupulous manufactures and pejorative phrases such as ‘cheap Chinese tat’ do not exactly help the situation. There needs to be some sort of quid pro quo that sets the relationship on a more even keel. Greater consumer protection could play that role.
Further, designing products to be more durable and reliable would require more value added services, such as design, materials science and product testing. These are highly skilled jobs that the UK excels at.
And you would need more cross-border cooperation. A manufacturer wanting to sell an electrical item with a ten-year warranty could not just stick it on a ship; they would need to build a relationship with the retailer to fulfil the guarantees. That would involve logistics, IT systems and a nationwide repair network. They would also need more product liability insurance – something the UK excels at, thanks to companies like Hiscox, Beazley, and of course the Lloyds insurance market.
The overall result is that mercantilism would be a far less advantageous policy. Access to cheap labour and materials becomes a less significant part of the value chain. Instead, high-value services such as cutting edge science, innovation, reputation and networks matter more.
Up-time, down-time: How Industry is leading the way
In spite of operating out of expensive and highly regulated labour markets, many European capital goods businesses are thriving. Companies such as Atlas Copco, Schneider, and Alfa Laval know they cannot win on price, so they compete on capability and up-time. Rather than just selling manufacturing equipment, leading industrials are increasingly leasing their equipment with maintenance contracts. This is the same model Rolls-Royce uses to ‘sell’ its aircraft engines.
Under these contracts, customers pay based on ‘up-time’ – how much time the equipment is functioning at full capacity. If the kit breaks down, the customer does not pay. Thus, suppliers are rewarded for making their equipment as reliable, durable and productive as possible. Customers’ and suppliers’ interests are aligned.
One of those rare win-wins
There are few policies in the world that benefit everyone; a cloud-based system of extra-long product warranties is one of them.
- Consumers get value for money and safer products.
- Better consumer protection provides a nice quid pro quo to win over free trade sceptics and deficit hawks.
- It moves more of the value-chain back to the UK, creating skilled jobs for STEM workers.
- Manufacturers and retailers gain access to data that can improve their offer.
- And crucially, it is good for the environment. Longer-lasting goods mean less environmental destruction, less shipping, less packaging and less landfill. This would instantly slash the UK’s imported CO2 emissions.
With the UK busy resetting trade post-Brexit there is a unique opportunity to re-set the quality of goods as well. Yes, we should absolutely bring down barriers to trade, but in exchange, let’s ensure we are trading something that is actually worthwhile.