LEAVING HOME

Jun 01, 2005 9:30 PM  By

Three days after Valentine’s Day, in the middle of a typical New England winter, The Boston Globe reached out and punched many of us Vermonters in the stomach.

Under the front-page headline “Founded in N.E., exported to China,” the paper ran an in-depth article on the departure of Tubbs Snowshoes from Stowe to a factory in Guangzhou, China — not just to “outsource” some components or to sell to the Chinese market but to make the whole snowshoe. The Chinese operation will be working with the same aging machinery used when Richard Byrd walked on those shoes to the South Pole nearly 100 years ago. The news of another gaggle of increasingly rare manufacturing jobs going down the rat hole of financial inevitability was a gut shot to those of us who use and admire the product.

On the same day, Rep. Bernie Sanders (I-VT) was trying to mount a legislative campaign among his fellow House members to repeal normalized trade relations with China. According to the same article by Michael Kranish of the Globe‘s staff, Sanders was quoted during an interview as saying, “If you are an employer and you don’t give a damn about your workers and you don’t give a damn about your country, going to China makes perfect sense. They pay workers as low as 30 cents an hour, workers can’t form unions, there is virtually no environmental protection, and by and large workers can’t stand up for their rights. That is their climate. You can’t compete against that.”

THE NUMBERS

So what’s going on here? How pervasive is this “manufacturing flight”? And is Rep. Sanders correct? Is everybody who decides to migrate to less costly labor an unpatriotic, cold-hearted skinflint?

According to the U.S. Department of Commerce, manufacturing productivity in the United States is at an all-time high. But simultaneously, the number of jobs in manufacturing has been eroding for the past 70 years. One industry after another has relocated in an effort to survive its competition. Shoes, textiles, and machine tools manufacturers have all pulled out of New England, going first to the Southeast, then some to Europe, others to Mexico, and many more to China.

The most recent job declines have been breathtaking. According to the Economic Policy Institute, no state in the U.S. has reported a net gain in jobs, due to China trade. The 10 biggest losers include five New England states, leading with Maine with a 1.67% net job loss during the past four years and ending with Vermont in ninth place, with a loss of 1.41%. During that same period, 1.42 million American jobs were eliminated as the work migrated to China. Meanwhile, the U.S. trade deficit climbed a whopping 24% in 2004, with the largest gap occurring with you-know-who — China.

THE REASONS

In the words of Walt Kelly’s Pogo, “We have met the enemy and he is us.” Perhaps more to the point, a surprisingly generous Tom MacGregor, one of Tubbs Snowshoes’ displaced employees, explains the forces shaping his employment future very simply: “Consumers want to buy things at a price that is cheaper than they would be willing to be paid to make it.”

Compounding the consumer’s understandable impulse to pay least for the most is a world quickly becoming “flat.” In an interview on National Public Radio, New York Times columnist Thomas Friedman described the contents of his latest book, The World Is Flat, by suggesting that instant communications and unimpeded access to individuals and information networks are making much of traditional commerce obsolete. Reverse engineering and the instantaneous ability to create “me too” products in less-costly labor environments have decreased the shelf life of new products, lowering their return on investment and eroding margins. Management, therefore, turns its attention to its highest “fixed” cost of production, namely, labor.

Finally, and perhaps fundamentally, the question is not so much “Why are we so rich?” but “Why are they so poor?” What kind of social circumstances make 30 cents an hour look so compelling?

In his most recent book, The Mystery of Capital, the Latin American economist Hernando de Soto speculates that the difference between the developed economies and the Third World lies in an essential social mechanism that allows Westerners to convert their real estate possessions into capital. After all, the occupants of the Third World possess real estate assets worth an estimated $9.3 trillion. How can they remain mired in misery? DeSoto answers by saying, “Because the rights to these possessions are not adequately documented, the assets cannot be turned into capital, cannot be traded outside of narrow local circles where people know and trust each other, cannot be used as collateral for loans, and cannot be used as a share against an investment.”

Land rich, cash poor: This is an old story. What the estimated 9 million-13 million deceased native North Americans did not lose to disease or outright violent theft when their land was invaded by Europeans, they could not defend due to the lack of a deed. It is interesting to suppose that without real estate agents and attorneys, we would all be dispossessed. DeSoto concludes his thought by suggesting that Westerners “take this mechanism (a formal property rights regime) so completely for granted that they have lost all awareness of its existence.”

So we have capital surging toward inexpensive labor, which, with all due respect to Rep. Sanders, is quite pleased to receive it, even at rates that make very little sense to the buyer. There are market forces at work that defy regulation and control. The newly “flat” world is one whose connectedness leads to most types of merchandise and services being available to consumers at prices far lower than those of years past. People the world over wish to improve their physical comfort, the opportunities their children have for upward mobility, and the financial stability of their families. At the buyer’s end, hard-pressed middle-class consumers are working to get their children through college and provide a retirement that amounts to more than cat food by candlelight.

IF YOU CAN’T LICK ‘EM …

It is at least possible to conclude, therefore, that what we are witnessing is a largely peaceful redistribution of the world’s resources. It is a shift not without violence and disruption, but what redistribution has ever been painless? At the beginning of our own Depression in 1929, 30% of the American population was directly involved in agriculture. Today it is slightly less than 1%. If that’s not disruptive enough an example, ask the French nobleman with his head on the block if mankind’s bloody footprints through history seemed fair or logical to him.

For the sake of argument, let’s assume that you are a decision-maker faced with the same old squeeze. Three of your children are in private colleges. You make and sell or distribute a product, and your competitors are nibbling away at your market share. Your margins are evaporating, and you have already been through your entire operation slashing jobs, costs, and waste. So, albeit reluctantly, you are seriously considering moving part or all of your manufacturing, supply chain, and assembly operations overseas. Wouldn’t you like to speak with people who have been there before you? I spoke with three who have, and you’ll find their stories on these pages.

You’ll see China mentioned over and over, but that country need by no means be the end of your quest. In fact, as the entrepreneurs John and Chris Corelli discovered (you can read their story on page 48), it is becoming more difficult to get quick product turnaround from China, because the Chinese manufacturing market is evolving to accommodate higher-priced product assembly, which is soaking up all the available labor closer to the coastline and forcing foreign companies to depend on labor that can be increasingly found only inland. One of my interviewees, packaging expert Peter Cameron of the McClure Group in Burlington, VT, is convinced that the “China bubble” has already burst. He expects that the emerging markets in the next 20 years will be Malaysia, Indonesia, India, Vietnam, and Cambodia.

This is not to say that he is sour on China, or that there is not room for more business there. But if you need to be on the front end of an awakening labor force, you could be well advised to take a step further out on the Pacific Rim. And unlike many of the intrepid explorers of yore, you will not do it alone. As another of my globetrotting interviewees, international trade expert David Levy, points out, you really won’t be going any place where no one has gone before. “Information is superabundant on the Internet, and there is no longer such a thing as a ‘secret’ weapon or an ‘undiscovered’ resource,” he says.

Levy adds that education is the best weapon to go full tilt at globalization. His advice for desk-bound logistics executives is to learn as much as possible about the unfamiliar and threatening landscape of foreign commerce: “Attend seminars on supply chain management. Ask the people you already do business with for their advice.”

For instance, Levy says, “your trucking company probably is already handling international shipments for others; they will share their experiences with you. Each conversation you initiate will lead to other sources of equally reliable advice and guidance. Network, network, network.”

THE DREAM

Which brings us to our stirring conclusion. In his most recent book, The European Dream, the economist Jeremy Rifkin suggests that networks are quickly supplanting the traditional forms of market behavior:

“Markets, by their nature, are adversarial forums. They are arm’s-length exchanges where each party enters into the negotiation with the idea of maximizing his own self-interest at the expense of the other party. Buy cheap, sell dear, and caveat emptor — let the buyer beware — have been guiding behavioral principles from the very beginning of modern market relations…. Networks operate on an entirely different principle. Each party enters into the relationship based on the supposition that by optimizing the benefits of the other parties and the group as a whole, one’s self-interest will be maximized in the process.”

Perhaps this latest incarnation of the golden rule will help ease the pain of this current seismic shift in the world’s resources. It certainly seems as if the moment has arrived to give it a try.


Stephen Harris is a principal of Harris & Harris Consulting, based in Lincoln, VT. He specializes in the design and construction of distribution facilities, as well as strategic planning for warehousing, picking, and shipping.

The Flower Entrepreneur

OfficeScapesDirect
Chris Corelli, Cofounder

CHRIS CORELLI is part of the third generation of the Corelli family males to be directly involved in the artificial-flower business. His grandfather Jack took to making paper flowers during the Depression, and it wasn’t long before 150 Americans were working for him, providing floral decorations for women’s hats. Chris’s father, Ron, guided the enterprise into selling components to department stores for their interior decor, which led to a catalog business of designer floral arrangements and gifts.

It was as this business model took root that the Corellis began to source their floral components overseas. In the late 1960s, Ron took his first trip to Hong Kong, where he remembers that there were about 50 guys waving signs saying “Welcome Ron Corelli.” The days of Western businessmen arriving at an Asian airport and creating that kind of stir have long departed, but the tale reminds the Corellis that they were in there early.

As time went by and the floral component business moved from plastic to silk, the sourcing shifted to China, and Ron’s sons began to familiarize themselves with the newest entrant into the world’s free-market economy. Since Ron’s retirement, Chris and his brother John have reinvented the business again, starting a catalog and Internet business named OfficeScapesDirect. They continue to operate Corham, a retail location in White Plains, NY.

The Corelli brothers represent the best of the American entrepreneurial spirit. They work hard, care deeply for their employees, and do what it takes to build a profitable enterprise that pleases their customers and supports their suppliers. And as a key strategy to remain successful, they continue to source their components in China to supply their operations in Ohio.

Knowledge that Chris Corelli has gleaned in the past few years includes:

  • If you plan to source a component today, don’t expect to find one fast. The Chinese factories that provide manufacturing for simple assembly are moving inland to find labor. This translates into more time-consuming searches and visits. It also drives up transport costs to Chinese ports.

  • Be prepared for lengthy, one-on-one negotiations. The Chinese prefer to know their partners and use time as a tool to arrive at the best arrangement they can get.

  • By moving to a niche market the Corellis have had to get more creative in their ordering to find ways of filling an entire container. The days of “truck after truck” product receipt are behind them, and this has meant an increase in strategic buying and scheduling.

  • In the past few years, lead times have shrunk from six to three months. It appears that experience and demand are causing the Chinese to focus more on efficiency.

  • The Chinese industry is getting more reliable at putting together, testing, and shipping completed assemblies, possibly driving the future of component sourcing into younger, emerging markets.

Cardboard Castles

McClure Group
Peter Cameron, Packaging Manager

PETER CAMERON is in the packaging business. As a sales representative for the newly formed McClure Group in Burlington, VT, he splits his time between sourcing packaging and advising his clients on strategic and logistical solutions to all of their product handling challenges.

For the uninitiated, packaging is a bigger business than you might expect. What used to be a simple corrugated box is now more likely a printed exterior on an exotic glossy paper with extruded polystyrene foam inserts and all kinds of special tie-downs, blister packs, and accessories. And more and more of it comes from China and elsewhere.

Cameron’s early professional career involved teaching intellectually challenged children and adults. It was this experience that taught him the value of breaking an apparently simple task into its component parts. He once authored a sequence of 18 separate steps that must be applied, in order, to tie your shoes. This same inquisitive and systematic approach to industrial processes has saved his customers a lot of time and money.

Cameron’s current view of China is based on the needs of his business, which requires samples and prototypes to precede the manufacture of custom-built items. Everything he buys is a unique design that requires the submission of an example for approval before an order is placed. “Initially I was wowed by the fact that a Chinese die could be purchased for $4,000. The equivalent American product costs $20,000, so I figured that even if the Chinese got it wrong the first time, I could afford five more tries for the same price. But it is a more complicated comparison than that.” All of his following observations are cautionary and based on experience:

  • An agent on the ground is critical. A Hong Kong connection can be very helpful in finding the right person. Budget 3%-7% of your total investment to be represented in China by a local agent motivated to get you what you need.

  • Nothing happens quickly. If you are looking to develop a custom container, plan on 4-12 months, start to finish. Two years is not out of the question.

  • Energy costs are running at the same premium throughout the world. Shipping is becoming a much more critical cost in calculating the bottom-line impact of labor savings.

  • Getting a list of the equipment a factory has in use can be very helpful in evaluating its ability to meet schedules and maintain quality.

  • Doing business in China is like going back to business school; you have to be prepared to learn everything you thought you knew all over again. China is a family-based business environment, and family members are not always completely honest about what they can accomplish. Their culture discourages the Chinese from giving an outright “no” to any request. Be careful about the promises you take to the bank. Still, family-owned enterprises are characteristically the easiest companies with which to do business.

Chinese Exchequers

David Levy & Company
David Levy, Outsourcing Consultant

DAVID LEVY has represented large American companies in China and elsewhere overseas for the past 30 years. His employers have included Johnson & Johnson, American Tourister, Rite Aid, and U.S. Ring (a manufacturer of loose-leaf and other types of binders).

Twenty years ago, Levy hated outsourcing labor of any kind, but he has come to see it for what it is, a necessary component for remaining competitive in global markets. When he started working in international trade, the going rate for an hour of semiskilled labor in Taipei, Taiwan, was $3.50, while in China it was $0.27. In those days, visiting overseas factories in person was a requirement, as teletype and then fax communication were all there was to maintain a business relationship. Today frequent personal visits are not essential but can do much to cement alliances.

It used to take six months to get anything to the United States from a loading dock in a Chinese factory. Now the “all water” route is running more like 45-55 days. Levy has seen the development of the “land bridge” for destinations on the East Coast and the subsequent explosion of traffic into Long Beach, CA, and Seattle.

Like Cameron’s, Levy’s observations are cautionary, but clearly of real use to the novice. Advice and tips he offers include:

  • The demand on Chinese manufacturing capacity is straining local facilities’ ability to deliver on their promises. If you can create a fallback option to rely on in the event of a schedule collapse, do it. It may cost you more than you had hoped to pay, but it’s better than being caught empty-handed.

  • Know the calendar of your foreign suppliers. For instance, the Chinese New Year is an extensive holiday on the Chinese cultural agenda. From mid-January to mid-February, pretty much the whole country shuts down. And many employees use the holiday season to find alternative, better-paying employment. Sometimes a factory can have severe labor shortages right after the holiday. This can turn an unpleasant surprise into a disaster for the uninformed.

  • Pay attention to the weather and to reports of all natural disasters. Once you are connected to global sources for products and services, a typhoon in the Indian Ocean can mean big problems half a world away. When the devastating earthquake hit Kobe, Japan, in the 1980s, the world’s steel supply was disrupted for months. If you are counting on Long Beach, CA, as your port of entry, and your shipment arrives during a flood, it can be additional weeks of delay before you see your imports. Revolutions, coups, and political upheavals can be equally significant.

  • Levy has never paid more than 8% in fees for an agent, but a good one is worth all of that and more. The problem now is that the good ones know it, and their fees are rising.