Outsourcing problem...

[Beestie]

While I like W in general, I have made no secret of my differences with his economic polic(ies) or lack thereof.

Kerry has taken a stand against companies that outsource American jobs overseas. Bush apparently is using free trade rhetoric to justify rewarding his wealthy corporate buddies with "all-you-can-eat" outsourcing.

In addition, he has cheerfully accepted close to half a million campaign dollars from a number of companies on Lou Dobbs list of the 25 most eggregious outsourcers not to mention that he owns or shares in minority stakes valued at close to $9,000,000 in companies identified as big outsourcers. Lastly and perhaps most insulting is the majority stake in a manufacturing company (not oil related) that has over three quarters of its 75 factories on foreign soil.

I'm not a big Kerry fan but at least he is taking a hard line stand on the issue.

[ladysycamore]

Here's a link to Lou Dobb's response to some of his critics:

Commentary: The Dobbs Report

That will also have a link with the list of companies that are confirmed outsourcers (click on the "Exporting America" link).

I'm going to try to tune in tonight for this report:

'Middle Class Squeeze: Health Care in America'

"Monday, March 22, 2004
Join us for our series of special reports "Middle Class Squeeze: Health Care in America." The greatest decline in health care coverage is among the middle class. We take a look at the professionals, employees of small businesses, civil servants, single working mothers, freelancers and others in the middle class who can't afford health insurance. "

Sounds right up my alley, because I sure as hell can't afford it. This is where I feel the qualifications for state insurance should change...it's not just the poor that needs affordable (or even free) healthcare.

Thanks Beestie for posting the outsourcing story.

[jaguar]

What the hel lis he going to do? Punish companies that outsource and reward those that keep jobs onshore? Good work, you just made your economy ineffecient and stagnate, wasted masses of government money and thereby increasing your already insustainable deficit and gave overseas companies an edge.

Just don't seem to get it you can't stop it. You can at best slow it a little by shooting yourselves in the foot. Welcome to globalisation. I bet 98% of the people whining about outsourcing now didn't shed a tear when all the blue-collar jobs went overseas and the prices went down.

Ironic: Link at the bottom to the India times.

[Beestie]

What the hell is he going to do?

That's my whole point, jag. I find Kerry's outsourcing criticisms both wrong AND hypocritical. The irony in the link was intentional.

[ladysycamore]

Originally posted by jaguar
Welcome to globalisation. I bet 98% of the people whining about outsourcing now didn't shed a tear when all the blue-collar jobs went overseas and the prices went down.

Interesting look at outsourcing by Rory L. Terry:

Answers on Outsourcing

"The costs of the decision to outsource are not borne by the decision maker. As a society and as a country, we experience many costs from outsourcing, including the loss of jobs, social costs, higher costs of raw materials and loss of national sovereignty. Loss of jobs reduces the tax base, creates high unemployment benefit costs, and raises the cost of government retraining programs. Displaced, unemployed workers have higher rates of child and spousal abuse, alcoholism, bankruptcy, divorce, etc. As China and India and other large populations grow, they demand huge quantities of oil, gas, steel and other basic raw materials. These costs are born by all of us -- every time we fill our gas tanks, for example. And as a nation, we lose our ability to make independent decisions that are in our best interest when we are dependent on foreign debt and foreign manufacturing. This is a classic externality. "

[SteveDallas]

Originally posted by jaguar
I bet 98% of the people whining about outsourcing now didn't shed a tear when all the blue-collar jobs went overseas and the prices went down.

Don't bet on it. Where I grew up in NC well-paying furniture and textile manufacturing jobs have turned into retail jobs at Walmart and Best Buy.

[xoxoxoBruce]

Copyright (C) 2004 The Economist; Source: World Reporter (TM) - FT McCarthy

Welding torches glow orange through the smog. A tangle of silver pipes and concrete structures cover the rutted ground from which the central naphtha cracker is starting to rise. Workers clamber everywhere. Here, near Nanjing in Jiangsu province, BASF is building China's most modern integrated petrochemical complex, the first to be partly funded by foreign money and kitted out with foreign technology. If the plant starts on schedule in 2005, says Bernd Blumenberg, president of BASF-YPC (the German chemical group's joint venture with a subsidiary of China's oil giant, Sinopec), 12,000 workers will have spent 72m hours using 150,000 tonnes of steel in one of the largest industrial construction projects in the world.

Yet this $3.7 billion monster is only the first--and not even the biggest--of six being planned in China. It seems that every multinational in the world is either in China already or declaring that it "cannot afford not to be". Last year, despite SARS and the Iraq war, China attracted a record $57 billion of foreign direct investment. Contracted FDI, an indicator of future investment, soared 39% to $115 billion.

Unfortunately, few foreign companies have had much to show for their enthusiasm since Deng Xiaoping re-opened the country to the world in 1992 after the Tiananmen Square clampdown. In China, first-mover advantage has often turned into first-mover curse. Early entrants, seduced by quick successes among affluent consumers in one or two cities, decided to tackle the mass market, only to encounter lower prices, fragmented customer bases, haphazard distribution and vicious domestic competition. Most responded by pouring in more resources, becoming ensnared in what Hubert Hsu and Jim Hemerling of the Boston Consulting Group call the "value trap"--the more they invested, the more money they lost.

The world's top brewers squandered hundreds of millions of dollars in China in the 1990s. The average net profit margin of China's 400 brewers (including foreign ventures) now is just 0.5%. Losses are common for companies in packaged food, food retailing, household goods and personal care.The only
foreigners to have consistently done well have ignored the domestic market and concentrated on China as a cheap base for manufacturing and export processing.

Most of these are ethnic Chinese, mainly from Taiwan, whose companies have invested more than $100 billion on the mainland, and from Hong Kong. A 2002 study by the Federation of Hong Kong
Industries found 59,000 Hong Kong-owned factories in China, mainly just across the border in Guangdong province, making everything from toys to clothes and employing 11m people. These small exporters are probably the most profitable outside investors in China. One reason, notes Gordon Redding, professor of Asian business at INSEAD, a business school near Paris, is that Chinese business people understand better than western ones how to manage uncertainty and line up long-term political support.

Connections have certainly worked for Vincent Lo, a Hong Kong property developer whose Shui On group is now one of the largest cement makers in China. Dubbed the "king of guanxi" (connections), Mr Lo made his first big splash redeveloping Shanghai's run-down Xintiandi district, to the delight of city
officials. He then took his cue from the government's "Go west" policy, moving from coastal cities to backward inland ones such as Chongqing in central China. There he won permission to buy dilapidated cement plants by promising local bureaucrats not to lay off a single worker. Mr Lo's flexibility and patience have allowed him to cash in on an infrastructure boom around Chongqing. He laughs at "Americans [who] always want to bring in whole teams of lawyers and negotiate contracts--they will be
there forever."

Even the Americans, however, seem to have learned a thing or two. In a survey of its members by the American Chamber of Commerce in China in 2002, three-quarters claimed to be profitable, and nearly 40% said their margins in China were higher than their global margins (see chart 3). "There is no doubt that companies are doing better than they were," says the chamber's then chairman, Chris Murck.

Do it yourself

Rapid economic growth has lifted the China operations of most foreign companies. But the multinationals have also learned a lot. Flexibility, as Mr Lo found, is critical. Danone, a French food group, has won plaudits in China by switching from an organic-growth strategy for its dairy products to buying up local rivals in the late 1990s. By contrast, Procter & Gamble failed to adapt, according to A.T. Kearney, a management consultancy. Its focus on shampoo worked well initially, but it confused customers with too many brands and found itself undercut by local rivals, which meant that its market share dropped from over 50% in 1998 to 30% in 2002. Now it plans to attack rural markets, a tough call.

At least P&G chose a weak joint-venture partner it could control. By contrast, Unilever invested in a host of categories it failed to dominate and chose a strong partner, leading to a string of disagreements. Unilever's Mr Gunning admits: "A Chinese joint venture is incredibly difficult." Even Kevin McCann, the former boss of Audi China, says: "No joint venture is ever good," although VW's partnership with Sanghai Automotive (SAIC) has been one of the most profitable.

Examples abound. An American businessman in north-eastern Shenyang tells of boxes of car parts piled outside a warehouse run by Jinbei GM, GM's joint-venture partner there. The warehouse manager had apparently been stealing the equivalent of five cars a night for years, "with the implicit approval of GM's partner". Confronted with the tale, GM's Mr Murtaugh concedes that: "We've had some problems with that joint venture." Such stories explain why multinationals are opting for wholly foreign-owned enterprises, or "Woofies", wherever possible.

The foreigners with the best chance of success in the difficult domestic market are those selling goods and services that local firms need, such as iron, cement and steel, or that will take years to develop. The international investment banks make around $500m a year in underwriting, equity sales and advisory fees. Lawyers, advertising agencies and accountants have strategic expertise to offer, and educational services,
especially English-language materials, are a booming niche.

Similarly, as demand for air travel soars, China's airlines need more planes, and with domestic firms decades away from being able to make big aircraft, the two global suppliers, Airbus and Boeing, are in a sweet spot. Though a late entrant, Airbus is winning orders for relatively little investment. Laurence Barron, president of Airbus China, says it will be "politically correct" for the company to quadruple the $15m of manufacturing contracts it currently awards to Chinese firms by 2007. But that should also lower its costs.

The product does not even have to be sophisticated. With 1,000 outlets on the mainland, Kentucky Fried Chicken is China's leading fast-food chain. Samuel Su, China president for its American parent, Yum! Brands, says it has been successful because it offers the Chinese a rare combination of safe, tasty food in clean surroundings with American cachet, all at a reasonable price.

For those who have to battle against local, often unfairly subsidised competition, success usually requires a dash of unorthodoxy. Honda entered China late but cheaply, snapping up Peugeot's Guangzhou plant for $250m in 1998 when the French retreated. Counter-intuitively, Honda then sold its Accord as a
luxury sedan to businessmen, rather than betting on a cheap family car like its rivals. Production and profits have soared ever since.

Carrefour, a French hypermarket retailer, has built up China's second-largest chain of stores by ignoring the requirement for central-government approval of retail joint ventures. Instead, it signed deals with local city governments, in the expectation that once the stores were open, the central government would not shut them down. It worked.

But in absolute terms the earnings of foreign firms in China are almost certainly still small. A study of American Commerce Department data conducted by a research publication, China Economic Quarterly, showed that direct and indirect profits made by American affiliates in China amounted to $2.8 billion in 2001--less than the $4.4 billion made in Mexico, with a population of just 100m.

Although profitability has undoubtedly improved, many companies are not even covering their cost of capital, much less getting a proper return on their investment. Norman Villamin at Morgan Stanley says that some multinationals deliberately lower the required rates of return for their China operations to wave
through projects that would not usually qualify, and charge costs to head office to make the China arm seem more profitable than it is.

Foreign investors that concentrate on exports or use China as a source of goods, such as Wal-Mart, will definitely benefit from the mainland's cheap labor. "Businessmen should take the low-hanging fruit and limit their investment," argues Kenneth Lieberthal, a China expert at the University of Michigan Business School. A few large multinationals, notably General Electric, are planning to go much further, moving advanced production lines and research facilities there in order to transform their entire corporate cost base. But many of those lured to China for the domestic market will struggle to generate sustainable profits. And all foreign companies have to face the fact that China is still not a rational place to do business.

Well, the question is really not about foreign corporations making a killing in Chinese domestic markets, now is it? Our British cousins already did that one better than anyone before or since with the introduction of opium from what was then the British colony of India. Lets talk about the impact on the domestic economy of the U.S. here and now.

Wally World deserves far more than a brief sentence here. A trip to the local Walmart can be an extremely disturbing experience for one who looks at the labels and considers their implications. Do you know that at Walmart you can no longer buy a pair of shoes made anywhere but in China? And its not just shoes. Check out the electronics department. Look at the TV's and VCR's. Go look at the lamps and the towels and the hardware - all made in China. The industrial/manufactoring base of the US is vanishing more rapidly than an endangered species in the rain forest.

The US economy is becoming one which is agrarian and service based - rather like that of the South prior to the Civil War. It was nice for a brief while for the plantation owners, but when Sherman decided to make his march to the sea, there was no stopping him.

Our own government and corporate interests have sold the US down the river, and, I for one, do not appreciate being reduced to the hard life of a cotton or tobacco farmer. Corporate America has short sightly given away this nation's manufactoring jobs for the sake of a brief profit fix. Consumers are in and producers are anywhere but here.

The whole thing is a house of cards which ultimately will collapse upon itself. A telemarketer cannot command the salary of a steel worker, nor can we rebuild the World Trade Center upon imported steel girders - not without inviting a second and even more profound collapse.

[xoxoxoBruce]

Welcome to the Cellar, marichiko. It's always nice to have a new member that has their head on straight.
Thompson (RCA) is closing their last two TV picture tube plants in the US because they are moving their entire manufacturing operation to China. They say it makes economic sense because that's where the market is and not just because it's cheaper to make them there and ship them here. I guess they can see there won't be any market here with all the jobs gone.

Perfect example of what I'm talking about. Take away US jobs and you take away the US market. It doesn't take a rocket scientist to figure out that someone with no job or one in the low paying service industry can no longer consume the products corporate America needs us to buy so their profit margins will continue to look good. (and thank you for your gracious welcome)

[Undertoad]

Because it's my job to mention the other side of this, a couple of weeks ago I bought a TV. Flat-screen CRT-type 17" Philips (NL) at Best Buy. What do you think I paid.

$179.

I don't need a great job to buy that TV.

I do not think we should make these things in the US if they are going to be such a low profit margin. We should be making the big screen ones that cost thousands.

[xoxoxoBruce]

If they don't make the high volume line here, they won't make any here.
There are a lot of people (and growing) that can't afford $179. A guy with a wife and kids, mortgage, car payments and debts, that suddenly loses his $15/hr job and has to take an $8/hr job will never recover. The thing that made America great was the middle class. They spread the wealth around and kept the service industry and retail suppliers alive. One person with a million doesn't spread it aroud like 10 people with $100k do.
There is no guaranty the guy with the million is going to invest in growth either, so save your breath,...er, ink....er, electrons. :p

[jaguar]

The Economist had a massive special on China this week, made for interesting reading but nothing groundbreaking or that people who work on the ground did't know - China is a funny place to do business and the domestic market is a flighty bitch to deal with. As one of the articles stated 'companies should go for the low hanging fruit - cheap labour'.

[tw]

Originally posted by marichiko
Perfect example of what I'm talking about. Take away US jobs and you take away the US market. It doesn't take a rocket scientist to figure out that someone with no job or one in the low paying service industry can no longer consume the products corporate America needs us to buy so their profit margins will continue to look good.

History does not agree with you. When jobs disappear, then we run up debt to keep buying those things. However you completely miss the villian's identity.

Honda Accord and Civic were the two best selling cars in America. Where did the Honda CVCC engine come from? Ford Motor company where the technology (stratefied charge engine) was stifled for almost 20 years by Henry Ford - a man who did not even know how to drive a car. Where did the Sony Trinitron come from? Philadelphia. Top management saw big bonuses if they sold the technology to Sony. Where was the VCR developed. Top and greedy Ampex management (as a result of their MBA training) realized big bonuses by selling the technology to Japan rather then empower American innovators.

How long do your wiper blades last? If less than one year, then you are probably buying them from companies such as Trico who sell only on costs. Wiper blades every three months - because you keep telling the enemies of American industry to make things cheaper rather than better. A smart Trico executive would have used the long lasting rubber that comes standard on most new cars.

Jobs going overseas is only a symptom - of bad domestic management who cannot even take a risk - innovate. Why is AT&T now nothing more than a circuit switch provider? Why did they abandon virtually every new or innovative part of the communicaton industry? Top mangement was so MBA trained as to only see short term profits. This is the mentality that causes jobs going overseas. Top management that does not come from where the work gets done. Top management who gets there by purchasing politicians (First Energy) rather than innnovate better and new products. The only source of American jobs - innovation. Innovation means top management must come from where the work gets done rather than legally grease the palms of greedy politicians.

[xoxoxoBruce]

Top management is hired/fired by the Board of Directors and the Board is voted in/out by the stockholders. Now that very large chunks of that stock is purchased by Mutual Funds, who votes that stock? The Fund managers whos job depends on the stocks showing a gain every year?