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June 3, 2014
The Dismal Science
East vs. West
by Adam Smith

I never cease to be amazed at what communication comes out of a corporate headquarters (corp.) for a large multi-national company. Corp. continually harps and whines that one of their subsidiaries is not strategic enough in their approach to business, but at the same time corp. also puts daily pressure on divisions to meet their quarterly goals.

So what do they want a division to spend their finite resources working on — strategy or the next quarter goals?

What do the divisions do? As a rule, you do not get fired for not being strategic, however, miss your quarterly goals for a few consecutive quarters and you are out the door. Of course you put 90% of your focus on the next quarter. This myopia is very pervasive in the business world and very difficult to fight. Perhaps an example would illustrate the point.

Remember (for those old enough to remember) the 90’s and the great migration of manufacturing from the United States to foreign countries. There was a big discussion about whether NAFTA should be ratified by Congress. (NAFTA is the North America Free Trade Agreement). This treaty would allow for the free flow of goods made in Mexico, the U.S., and Canada between those countries.

At the same time China was loosening its private property rights and China was just beginning its rapid economic growth.

What needs to be remembered is that NAFTA was created so North America could compete with China. If we kept the duty on goods between the North American countries, they would not be able to compete with China.

After NAFTA, a company that I worked for began building manufacturing capabilities in Mexico. At first these plants just produced product from the company’s growth. The American plants kept producing but over time the American plants could no longer compete (we were one of the last in our industry to leave the U.S.) and production was shifted to Mexico.

As I stated earlier, China was becoming a global player. We were purchasing some of our goods from China. At first, China’s labor was so cheap that there was tremendous pressure from corp. to shut our Mexico plants and move sourcing of all our product to the Far East. It was only because we had some very tough people running our division that we were able to keep our Mexican plants.

Moving forward 10 years in time, the labor costs in the Far East have risen dramatically. All of a sudden our plants in Mexico are the lowest costs providers of our product in the world, giving us a great competitive advantage.

Just looking at the next quarter/year results, corp. wanted our plants closed and all product to come from Asia. While preaching strategy, corp. is the epitome of myopia.

There is another cost with the shifting of getting product from Asia. All the companies that did this were chasing the cheap labor. But once that labor became trained and productive, their wages (of course) also started to rise. So companies went from China to Vietnam to Bangladesh to ? Over the past 20 years it has become part of many U.S. companies culture to chase the cheap labor in the world.

The days when companies used to spend money on production research and development have ceased. Those departments have atrophied to the point where now that the chase for cheap labor has been exhausted there are no current answers for how costs are going to be reduced in the future.

Is all lost? In a socialized economy it would be tough, but in capitalism there is always a way. There is starting to become an awakening. More manufacturing is moving back to the Western Hemisphere and some even back to the U.S. Companies are again thinking about the advantages of producing their own product.

The world has changed so much from when I was young. No matter what your position in a company, you are in competition with other workers everywhere in the world. The computer has made you vulnerable. In the battle for jobs, it is East vs. West.


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