January, 2012

  • January 30, 2012
  • “Executives may be limiting the investments of their companies because of economic fundamentals and policy uncertainties. But their decision making is also tainted by biases and loss aversion that harm performance and cause companies to miss potentially value-creating opportunities.”

    So says a new study by McKinsey.  Worth checking out as it points up an area that could be very important to sustaining a recovery.
    Published: 12 years ago

    This is not about CRM.  It is the last in a series on globalization and labor arbitrage.

    There’s been a predictable response to the revelations about Apple’s labor relations in China.  Pundits have trotted out that old chestnut that it’s not Apple’s fault but the free market—you and me—who crave cheap and insanely great products etc., etc.  But really it has nothing to do with consumer demands and everything to do with mercantilism and globalization.

    Capitalism routinely attempts to source the lowest cost materials and labor for two reasons.  First low costs make it possible to have high margins.  Second, the inevitable commoditization that is also part of capitalism erodes high margins on the journey from branded product to commodity.

    Apple’s latest earnings show the company made more than a billion dollars in profit per week during the most recent quarter.  That’s profit not revenue.  But those profits come mostly from the newer iProducts not the computers that the company built its reputation on.  To be clear, profit is good, good, good but only if it is gained fairly and not by taking advantage of the powerless.

    Today you can buy a computer with the latest Windows operating system and get most if not all of the features that made the Mac special a few years ago—at a lower cost.  That’s commoditization in action.  Commoditization is a good thing because it forces us all to continuously innovate to develop new products and services that can demand top dollar.  We all know this.

    The working conditions-related labor problems we see between Apple and Foxconn are both historic and unique to globalization.  In previous eras of globalization, notably the eighteenth and nineteenth centuries, globalization and labor arbitrage were mostly, but not exclusively limited to raw materials and agricultural products.

    Sugar, cotton, rubber and spices production were all centralized in tropical or sub-tropical regions where national sovereignty was extended at the point of a bayonet and slavery was common.  Where slavery was impossible such as in the cotton-processing regions of New England or the British Midlands, starvation wages, child labor, poor sanitation and high infant mortality were the norm.  By comparison today’s Chinese sweat shops with their dormitories, cafeterias and company-supplied healthcare are paradise.  Just ignore the forced overtime, unsafe conditions, low wages, and dictatorial management.

    Factories and the significant investments required to situate one were once a barrier to entry for cutthroat competition from low cost labor countries.  Every factory needs supplies of water, energy and a shipping infrastructure to facilitate the supply chain.  But once the host country covers these significant costs the ability to situate and take advantage of low labor costs becomes practical and even an imperative.

    But the argument that consumers demand the low prices that drive low wages is something of a canard.  First, we were all leading our lives before the introduction of iProducts and other gadgets and while these gizmos have added to productivity and enjoyment, few people were walking around saying “If I only had a device that.…” If they had more of them would either have filed patents or begun careers writing science-fiction.  No.  The devices are in demand because they are both novel and because they satisfy an economic need.  But neither of those conditions sets price or wages or anything else.

    In an economy where for the vast majority real earning power has not expanded in decades (and has actually declined) low prices are what maintains purchasing power.  So we have the condition where even a new device enters the market well down the price commoditization curve.

    Low purchasing power has driven the low price points for these manufactured products.  But in order to satisfy the low cost/low purchasing power conundrum, you need to produce in an even lower price culture and that’s mercantilism.  And actually as we saw in the last decade, even low prices were not enough to satisfy demand as millions of people took money out of their homes (negative savings) to support lifestyles centered around demand for cheap goods.

    This is the beginning of a deflationary spiral, which is unsustainable.  Labor conditions and wages will improve in China and in some areas this is already happening.  But once that happens producers will go shopping for new low cost places to manufacture.  One of the issues revealed but not addressed in the current flap over Chinese manufacturing is that, in part to maintain low costs, even primary manufacturers are beginning to outsource to other manufacturers further inland.

    But the contracts that an Apple or an HP has with, say, a Foxconn are not transitive, they don’t necessarily affect Foxconn’s suppliers who are then free to ignore any agreements regarding labor and environmental conditions made with Foxconn.  That goes for quality control too.

    Away from national laws governing labor and other relevant concerns, companies are free to do whatever they can get away with in the host country, which turns out to be a lot.  The purchasing country suffers from this arrangement also through job elimination and with it a decline in the quality of middle class life.

    As in the eighteenth and nineteenth centuries the real winners were not the masses who got cheap sugar, nutmeg or cotton garments and they certainly were not the subjugated people who worked in conditions of slavery.  Today we get cheap iProducts but grand fortunes are being made by the tiny fraction of those who take advantage of globalization.

    The solution is better government and better regulation to ensure fair competition but the globalists have us convinced that all regulation is bad and no government can do anything right.  Not everyone believes this of course.  Zuccotti Park was no accident.

    Published: 12 years ago

    Re: Larry Dignan’s ZDNet Piece “Apple’s supply chain flap: It’s really about us”

    When he died, the cover of the New Yorker had a cartoon of him checking into heaven and St. Peter looking him up on, what else?  An iPad.  So began the mythologization of Steve Jobs.

    There was a lot to like about Jobs along with some of the same lifetime baggage that we all accumulate, which was amplified by great wealth.  But for all the wonderful products and his habit of thinking outside the box—and daring us to follow—Jobs was also the creator of a company that built itself on the backs of plantation workers in China.

    We can disagree whether this makes him merely mortal or something else but let’s dispense right away with the mollifying assurances that everyone was doing it.  That hasn’t worked since Nuremburg.  Nor can we say that the globalized workplaces in China’s fastest growing cities are by far better than the rural poverty many Chinese peasants escaped in going to the cities.  In poverty these people had a modicum of human dignity, in the cities, not so much.

    What Apple and the rest of the global manufacturing community has replicated in China is not a worker’s paradise.  It might be the bottom rung on a global economic ladder and it is certainly a replay of nineteenth century Dickensian Britain right down to the air fouled from burning coal.  Articles in Wired, The New York Times and elsewhere have documented beyond a doubt the harsh working conditions that lead to glitzy and “insanely great” products.

    But behind the insanely great is a brutal totalitarian economics—mercantilism—that shakes workers out of their beds in the corporate dormitory to go to work in the middle of the night.  Thought leaders like Thomas Friedman, also of the Times, and other people who ought to know better, marvel at a workforce so, so, so, what?  Dedicated?  Give me a break.

    For all the praise and prowess of global manufacturing Chinese style, there is devastation back here at home.  The price of nicely manufactured devices from the plantation in China is structural unemployment.  It is no wonder that the recession drags on with high unemployment.  In the first ten years of Chinese membership in the World Trade Organization (WTO) 42,400 factories—not jobs—decamped the U.S. and reappeared where labor rates of around $22 per day were considered good.  You can trace today’s unemployment rate to the factory-exporting regime of the last decade.

    Steve Jobs is not responsible for all this.  Though Apple today is one of the world’s more admired and emulated companies, Jobs was only a part of a global movement of capital to China.  But the results in the factories reflect on Jobs as sure as do the iProducts and the Macs before them.

    Forget the jobs that went to China, they aren’t coming back.  Ask for more humane treatment of the workers there.  We also lag at creating jobs for the new economy and that’s a serious problem because others can create those jobs elsewhere.  We can’t be a country where everyone goes to college.  Someone needs to bake the bread and we need to make those jobs rewarding.

    There would be nothing wrong with making much greater efforts to redress the inequalities in the global manufacturing system.  Making manufacturing more humane by, say, eliminating the 16-hour day could be a great start as would making workplaces safer and keeping fifteen year olds out of factories altogether. That might serve to help level the playing field and with that we could even rediscover the virtues of Made in America.  While Apple still has the spotlight, we could do it all in Steve’s name as a way to perfect what he left unfinished.

    Published: 12 years ago

    Call it Karma.  A week after we celebrated the ignominious back down forced on the congressional supporters of PIPA and SOPA and their corporate feeders, The New York Times ran a story about how even, or especially, on the Internet, some things have not improved since Roman days.  Caveat emptor, buyer beware.

    I call your attention to a story about a little turd of a company, VIP Deals, that sells leather cases for Amazon Kindle devices, oh, and, stun guns.  Don’t ask.  They had been retailing on Amazon but today are probably selling at flea markets out of a ’95 Explorer.

    It seems they were buying stars or more precisely the reviews of regular consumers who bought the leather cases and then gave them glowing reviews in the Amazon review section for the product.  The scam came through snail mail.  In the leather cover delivery package was a letter offering a full refund (A ten dollar value…) for the product if the customer would only write a glowing review on the retailer’s site.  News flash: 310 out of 335 reviews had five stars, which catapulted VIP to the top of the heap in the Amazon rankings.

    You might say this is a tempest in a teapot but with Amazon projecting sales of 20 million Kindles this year, a few good reviews could set up the “heirs and assigns” of VIP’s owners in Margarita Land more or less permanently.

    What’s disappointing is what we the networked did to ourselves on the Internet.  We showed just how easy it is to make a hash out of the ratings systems that depend on everyone to be good scouts.  The problem is pervasive in our society—not limited to a few undesirables who saw a quick way to make ten bucks.  That’s right, a double sawbuck was all it took to purchase the morality of 310 regular Americans.  One of those Americans was quoted in the story thusly:

    Anne Marie Logan, a Georgia pharmacist, was suspicious. “I was like, ‘Is this for real?’ ” she said. “But they credited my account. You think it’s unethical?”

    You think?


    With what?

    Stuffing the ballot box is nothing new but I won’t be so glib as to say it is a time honored tradition that in retrospect gets a nod and a wink from the winners.  For all the good that the Internet has brought and all of its potential, there is also the real possibility that some will use it as just another scam device.

    The people who want to limit piracy on the Internet have a point and some form of regulation is going to happen.  Last week was simply an example of an industry laboring in an old paradigm coming face to face with the reality that it needs to change its model.  The Internet needs sane regulation, not the absence of regulation and not censorship.  Without it we’ll be playing whack a mole with little turds like VIP Deals, and who needs that?

    Published: 12 years ago

    “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.

    ~F. Scott Fitzgerald

    This is not a post about CRM.

    If you could apply Fitzgerald’s definition of a first-rate intelligence to a thing or group endeavor—always a dubious proposition—Exhibit A might be the New York Times.  This week the Grey Lady published two contrasting pieces that demonstrate the conflicted nature of our economics and the ways we think about globalization.

    First up is Thomas Friedman’s opinion piece about Apple and its manufacturing prowess, through Foxconn, in China.  Friedman makes the point in “Average Is Over” that manufacturing has increasingly moved to China over the last decade because China is so attuned to the demands of global manufacturing that it can easily outcompete American companies with its flexibility to changing global circumstances.

    Friedman’s example is instructive.  In his piece he references how a factory in China was able to move from a standing start to manufacturing ten units per day of revised versions of the iPhone (with Corning Gorilla Glass replacing plastic for a harder and more scratch resistant surface) in a matter of hours.  Friedman tells the story of how 8,000 workers were roused from their beds in company dormitories, given a biscuit and a cup of tea and sent to work in the middle of the night to accommodate Apple’s revised demand.

    Friedman extols the Chinese for their work ethic and ability to provide the manufacturing flexibility that modern markets demand.  But a second article in the Times “In China, Human Costs Are Built Into an iPad” discusses in fine detail the cost of that flexibility.  In the article we see what it really means to be dragged from bed and fed that heroic biscuit.  It documents 60 hour work weeks, forced overtime and working environments that are, some cases literally lethal.

    The article documents how poor ventilation led to fires and explosions in manufacturing facilities and death to some workers.  It documents suicides too as workers jumped from their tall dormitory windows unable to cope with the demands of high production for $22 per day.

    I think Friedman confused capitalism for what the Chinese practice aided and abetted by their government and by American business.  Friedman envisions a plantation economy, not modern business.  It is a form of mercantilism, not capitalism.  It exploits workers and other resources in countries where the labor and safety laws are lax and environmental standards practically non-existent.

    Take a look at this list of mercantilist characteristics from Wikipedia.  How many do you recognize?

    • Building a network of overseas colonies
    • Forbidding colonies to trade with other nations
    • Monopolizing markets with staple ports;
    • Promote accumulation of gold and silver
    • Forbidding trade to be carried in foreign ships;
    • Export subsidies;
    • Maximizing the use of domestic resources;
    • Restricting domestic consumption with non-tariff barriers to trade.

    Mercantilism requires two actors, the colony as well as the colonists, thus you have networks of colonies owned by the colonists and restricted domestic consumption in the colonies and this perfectly describes the relationship between Apple and other manufacturers and their Chinese partners.

    Ironically while the business interests advocate a neo-mercantilism the U.S. government has had little success at getting the Chinese to open their markets to more capitalism, more foreign goods and to let their currency appreciate to more realistic levels.  This might look like a disagreement between countries but it is actually an argument between American business and the federal government.

    This relationship disenfranchises both the workers in one country and the citizen-consumers on the other.  And this doesn’t even touch the issue of lost jobs moved overseas by the mercantilists chasing low labor costs and the ability to ignore health and safety laws.

    A form of state sponsored desperation-growth drives Chinese mercantilism and a generation of its people ignore what’s happening in its factories in a vain effort to catapult the country from poverty to emergence and ultimately to first world status.

    Friedman holds this up as some kind of aspirational goal for Americans.  He seems to be saying that if only we could be a little more like the Chinese we could recapture our manufacturing base.  But this amounts to prostituting ourselves, our country and its resources to a gratuitous mercantilist ideal.

    Why not go in the other direction?  The opposite of mercantilism is not suspension of trade but trade on a more level playing field, one where profits are not made through arbitraging safety and dignity.  Real capitalism.

    Companies like Apple have the upper hand.  The conditions in their factories are sanctioned either explicitly or implicitly by them and will only persist as long as Apple applies benign neglect to the situation.  Alone Apple determines what it will pay for components and labor so that it can meet price points in the Fast New World economy.

    Other computer and consumer electronics makers use some of the same Chinese manufacturing partners to make their products.  We like those products a lot and we especially like their low prices.  But hidden behind those shiny new things and their low prices are 16 hour work days, no time off, regressive discipline and dangerous working conditions.

    I like my consumer electronics but not with the hidden costs that are attached to every device.  Those costs include an eroded and impoverished first world manufacturing base and despotic working conditions where those jobs end up.

    In 1906 Upton Sinclair published The Jungle, a book about the lives of American immigrants.  The book spent many of its pages portraying life in the corrupt meatpacking industry.  From that book we derived the sage idea of liking the sausage but of studiously avoiding asking how the sausage was made.

    In effect, we’ve been told not to try to hold Fitzgerald’s twin opposing ideas in mind.  But the Times was able to do just that and to offer us a compelling and discomforting contrast.  The larger question is whether or not any of us retain the ability to, as Fitzgerald suggests, function in the face of this information.

    Published: 12 years ago