Tag Archives: outsourcing
Traveling as do, I have literally circled the globe a couple of times each year over the last several decades. In fact, travel has taken me overseas for three of the last four weeks to Asia and Europe to conduct business; doing my part in growing the business of a large multi-national corporation. It is an experience that has produced a world view that is seasoned and uniquely mine.
The United States is an island nation. Our east coast abuts the mighty Atlantic Ocean. Heading westward, as our pioneer ancestors did, brings us to the vast Pacific. America has been blessed with abundant natural resources that, for most of our existence, made us self-sufficient and blissfully isolated in a world that long ago relied upon delicate interdependencies and alliances. We avoided colonial aspirations and fiercely resisted entering global conflicts in Europe and Asia until dragged in by grievous circumstance.
And when the dust settled after the Second World War we were still standing. The industrial might of the nations of Europe was destroyed and Japan laid waste by nuclear attack. The Arsenal of Democracy became the Factory of the World. The Marshall Plan rebuilt Europe and MacArthur oversaw the rise of a democratic Japan, each dominated by American industrial might.
Ironically, we created the monster that ate the American factory. Our efforts to restore stability and prosperity to a war torn world led to great infrastructure improvements. Germany and Japan built new factories and highways that were more efficient than the aging behemoths in the United States that just a few short years earlier produced the war material that defeated the Fascists and the Nazis. Taiwan and Korea built ships that Henry Kaiser, the father of the Liberty ship, would envy. Year by year, the newly industrialized world nibbled at the heels of American industrial dominance.
Slowly but steadily, American businesses grew weaker. Large industrial employers began to ship production elsewhere for better efficiencies and labor costs; first to the Sun Belt, then abroad. In 1960, 9 of the top 10 employers in the United States were industrial companies. Today, 7 of 10 are service providers. Here’s the rub: the job multiplier for industrial companies, such as automotive and steel, are much higher than for service industries such as retail or healthcare. For every 1000 jobs created in the steel industry, an additional 11,000 jobs are created elsewhere as a direct result. In retail, the same 1000 jobs create only an additional 240.
The bottom line effect is that losing 1000 steel workers has an impact that cannot be offset by creating 1000 jobs at Wal-Mart. Not by a long shot. America needs to retain, create and repatriate industrial jobs in order to preserve the post-war economy that ushered in the era of Pax Americana. And it needs to do so fast.
The erosion of domestic American business accelerated once Most Favored Nation status was conferred upon the People’s Republic of China in 1999. Since then, foreign direct investment has grown geometrically as a vast low cost labor market became available. Our balance of payments deficit has ballooned from $89 billion in 1999 to a level three times higher today.
And with all the wealth sprung from wildly successful businesses built in newly built cities in China, more than one third of the 1.3 billion Chinese live on two dollars a day. Human Rights and Workers Rights have not kept pace with the pace of change. Environmental respect long ago yielded to unbridled development. The cost of environmental stewardship is not passed along to producers.
These factors greatly enhance the competitiveness of Chinese businesses. They are not likely to change unless the world cries out for change. And we are held hostage by the addiction we have to low, lower, lowest cost manufacturing and the consumerism that drives consumption in America. We have failed to hold China accountable for their lack of responsible leadership in the face of the dynamic change their society is undergoing.
We can talk about leveling the playing field against unfair tariffs, product dumping and currency manipulation but until we begin to exert pressure on the Communist regime to act in a responsible way towards their society and our environment, the United States is a willing co-conspirator in our own industrial demise and the erosion of our moral leadership.
President Hu will shortly be visiting the United States. Who in our government will exhibit the courage to lead against this nascent economic giant? And in so leading, do we not gain a chance to reclaim a stronger economy in the process. The whole world should be watching.
My recent trip to China gave me an interesting perspective on how the world’s fastest growing economy, the People’s Republic of China, views the economic heavyweight champion of the world, the United States of America. It is a perspective gained over lunch. Multiple lunches in fact.
Our hosts were eager to entertain us in a manner that they have come to equate with successful American businesses. On successive noontimes, out came meals from Subway, Kentucky Fried Chicken and Papa John’s Pizza. We swilled this down with Starbucks coffee, of course. That part was my idea.
Has fast food suddenly become a leading economic indicator? Not in the classic sense. What it does indicate is an emulation of an American lifestyle. It is the impact of Western television and Western advertizing in a context of doing business in ways that have proven successful in America for a century.
I toured industrial parks that measured two hundred square miles. The government leveled rice paddies and poured concrete without looking back. I toured factories in excess of 600,000 square feet. That’s a big factory under one roof. And there is not just one of these factories or one of these industrial parks. The fact is that there are scores of these facilities in China. They are brimming with work. My tour took me to factories that manufactured medical devices, printed circuit boards, electronics, cable assemblies and sophisticated semi-conductor test equipment.
What I saw went beyond what I had previously seen outsourced to China. There is a growing level of co-development taking place. Engineers are working together to develop next generation products sourced in low cost countries. Once those seeds are planted it grows increasingly difficult to uproot that business. Supply chains grow out of assembly operations and special process clusters spring from those supply chains to support them. The same is true in reverse. As products leave America, so leave their supply chains.
When it comes to manufacturing, China is not a Paper Tiger nor is it omnipotent. China may looks invincible on paper but in actual practice it will be difficult to maintain the momentum necessary to eclipse and distance itself from the US economy. China is a difficult place to navigate. Language and infrastructure conspire against success. For every high speed train there is a congested highway; for every coastal city with unfettered access to distribution networks there is an inland city with difficult access. The largest manufacturing centers need to import workers from the interior. They dwell in company dormitories and live in circumstances that Americans cannot comprehend. Huge contract manufacturers like Foxcon have experienced worker suicides and just last week, a suicide pact among 300 of its workers over wages and conditions.
Chinese New Year is a two week celebration in China. Workers begin multi-day trips back to their homes only to turn around and repeat the sojourn in reverse. So tedious a lifestyle it is that as workers depart for the Chinese New Year, they are offered bonuses to ensure return, such is the lure of staying back at home.
So what did I learn from my quick trip to China. What lessons are there for America in all of this?
Lesson one: China acts first and asks permission later. Our dithering on the Keystone XL Pipeline project would never happen in China. There is no compromise on economic progress, no compromise with the environment. Economic stimulation is all that matters and the Chinese have a long range vision for their economy. Can that be said of America?
Lesson two: The Chinese worker will eventually revolt. They will demand better wages and better working conditions that will translate into decreased operating margins. The effects of inflation will begin to erode the labor advantage that China enjoys today. Chinese workers will need to organize in protest short of threatening mass suicide. Workers rights in China ought to be where the AFL-CIO and Teamsters should focus their growth opportunities. Really.
And lesson three: Time is running short for American dominance in manufacturing. Remember that the US is still the largest manufacturer in the world. Innovation and new product introduction are the hallmarks of the American factory. The role of government in America ought to be to ensure the success of that factory just as the government of China ensures the success of theirs. Our challenge is to do that within the context of a democratic society. The People’s Republic of China is not bound by such constraints.
Competitive taxes, judicious regulation and coordinated planning are missing in the American economy. We already have enough KFC’s and Papa John’s Pizza.