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GE CEO Immelt Gets Pissy About China, Obama

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When a CEO has a major foot in mouth episode, it’s usually the result of uncontrolled candor. And today’s outburst by GE CEO Jeffrey Immelt appears to be true to form.

According to the Financial Times, the GE cheiftan said some less that politic things about China and Obama at a private gathering which his operatives tried to characterize as being taken out of context. Yeah, right. His commentary so typifies what you’d expect from the top executive of a large multinational (and major financial firm to boot) that it’s hard to see his remarks as anything other than a reflection of his views. They happen to be ugly because they represent American corporate arrogance writ large.

From the Financial Times:

Jeffrey Immelt, General Electric’s chief executive, has launched a rare broadside against the Chinese government, which he accused of being increasingly hostile to foreign multinationals…

“I really worry about China,” Mr Immelt told an audience of top Italian executives in Rome, accusing the Chinese government of becoming increasingly protectionist. “I am not sure that in the end they want any of us to win, or any of us to be successful.”

Yves here. This is almost comical. A US corporate executive thought the Chinese officialdom was supportive of their business goals? China is out for China, period, and that is a stance that that the US would be well advised to emulate, rather than being brainwashed (or bribed) into thinking that the interests of large multinational are aligned with national goals.

I may sound like a complete Luddite, but I have LONG questioned the wisdom of foreign firms locating factories in China and exposing themselves to the risk of piracy, counterfeiting, and other forms of technology transfer. This is an authoritarian country where organs are harvested from prisoners who are still alive. Given how brutal they are to their own citizens in the name of preserving state authority and perceived national interests, the only reason for them to play nice with foreign companies is if they think the arrangement benefits them, not because they give a rat’s ass about their health. It would not be impossible for them to seize assets (with trumped up charges) but Chinese businessmen are sufficiently skilled at stacking the deck to suit their interests that such crude measures are unlikely ever to prove necessary.

Consider this commentary in the Asia Times, in a review of Poorly Made in China: An Insider’s Account of the Tactics Behind China’s Production:

Chinese manufacturers cut corners wherever they can, from product quality to factory equipment and maintenance. They unilaterally change product and packaging specifications to trim costs. They raise prices after the deal is signed, leaving the importer to absorb the added cost. They reproduce their customers’ products for sale at higher margins in other markets. With support from government, bankers, and networks of fellow manufacturers, they conduct manufacturing and customer relations as a game, treating the other party as a patsy not a partner, playing for the short term of making an extra penny at the risk of product quality but also taking a long-term, multidimensional outlook that outflanks the hapless customer….

For Chinese manufacturers, a deal with an importer can be desirable even if it doesn’t appear profitable. Reasons range from domestic counterfeiting opportunities to status to customer contacts (for disintermediation – cutting out the importer to deal direct with retailers) – to cash flow or capital (secured by an enlarged plant) for other investments. While most small importers are playing checkers, focusing on profit on each contract, Chinese manufacturers are playing chess – and playing to win – Midler says.

Yves here. Now this extract describes the situation facing firms contracting in China, not major manufacturers like GE setting up operations in the country. But step back a second and look at the ruthlessness of the tactics, the routine cheating and the willingness to sacrifice short term profits for the long game. Immelt and his ilk, no doubt seduced by too many meeting and dinners with government officials who told him what he wanted to hear, was unwilling to to consider that a big globe spanning company could be played like a rube, used when he was valuable and squeezed when he had served his purpose. After all, isn’t that how almost all Big Co’s behave? But they act so wounded when the table are turned on them.

Immelt’s diatribe on Obama verges on childish:

Mr Immelt also had harsh words for Barack Obama, US president, lamenting what he called a “terrible” national mood and expressing concern that over-regulation in response to the global financial crisis would damp a “tepid” US economic recovery. Business did not like the US president, and the president did not like business, he said, making a point of praising Angela Merkel, Germany’s chancellor, for her defence of German industry.

Yves here. This tactic by big business, to howl over trivial, cosmetic reregulation as if it were rape, illustrates how they believe they should be in the driver’s seat and government and the public at large should fall into line. Look at his distorted logic: the recovery is going to be “tepid” (actually, we should be so lucky as to have it be as warm as “tepid”) and the national outlook is sour because we are still working through the aftereffects of a massive credit bubble, with GE profiting handsomely from helping to create this disaster. But no, let’s airbrush out the real cause, the utter recklessness of financial services firms around the world, and shift blame to Obama.

And who cares if Big Business likes Obama? I dimly recall that the major corporate interests of their day hated Teddy Roosevelt and FDR, both now considered to have been fine leaders, and were quite fond of Calvin Coolidge and Herbert Hoover, both of whom rate among the ten worst presidents. So being popular with businesses may well be a negative performance indicator.

It would be nice to see Immelt’s pique as a sign that major companies are finally being called to heel by governments, but the indignities GE has suffered are too minor to warrant such a hopeful conclusion. His reaction is reminiscent of a spoiled toddler who has had a few toys removed from his well stocked playpen.

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50 comments

  1. bob goodwin

    “I dimly recall that the major corporate interests of their day hated Teddy Roosevelt and FDR, both now considered to have been fine leaders, and were quite fond of Calvin Coolidge and Herbert Hoover, both of whom rate among the ten worst presidents. So being popular with businesses may well be a negative performance indicator. ”

    There is a little selective sampling here. Business liked Reagan and hated Jimmy Carter, which cuts opposite your examples. It is even easier in the 19th century to plum counter examples.

    I think your point is fine, however, that government should not be overly concerned about the interests of large business.

    1. Yves Smith Post author

      Bob,

      I was merely out to demonstrate that being liked by business was hardly an indication of a successful presidency. But you are wrong about Carter. He limited the welfare state, deregulated industry (financial services, trucking, airlines), pledged to balance the budget and take other measures to tackle inflation. Carter’s problem was more that he was seen as ineffective (he was a micro manager and not at all tuned into the ways of DC).

      And let’s not talk about W….

      1. Bates

        Yves…Excellent post about how clueless Immelt comes off with his remarks re China…and, you are absolutely right that China is, in effect, waging an all out economic war against the world. There really are no rules in war except to win at all costs. Winners later write the history to suit themselves.

        Question: Why does Woodrow Wilson always rate in the top percentile when various surveys of presidential effectiveness are taken? I realize that even the worst presidents have usually accomplished some good for the country, but imo Wilson negated any good he did when he allowed big business/finance to organize and ram through the third Federal Bank (Federal Reserve Act)?…BTW, he is also the one that introduced the progressive income tax. Near the end of his life Wilson said that the creation of the Fed was the worst decision of his presidency. Hey, we all make mistakes but that was a biggy!

      2. jdmckay

        Carter’s problem was more that he was seen as ineffective (he was a micro manager and not at all tuned into the ways of DC).

        That’s somehow an analysis?

        Carter’s “problem” was 14% + inflation.

        It was also his guy (Volker) that solved that problem for Ronnie, who later fired the same.

    2. Anonymous Jones

      “cuts opposite your examples”

      Let me bastardize the great Darth Vader, “The delusion is strong with this one…”

      It’s amazing what people can get themselves to believe if they tell it to themselves over and over again.

  2. Doc NORINCO Holiday

    Re: “authoritarian country where organs are harvested from prisoners who are still alive.”

    Thanks for bringing back those wal-mart memories I lost about a decade ago …. whew, I almost forgot all about how wal-mart took over the world…. It’s amazing this old info is still up on a server somewhere….

    ==> NORINCO is one of China’s largest manufacturers, making more than 4,000 products ranging from toys to ballistic missiles. It is a major supplier for retailers like Wal-Mart. Last year the company exported products worth some US$ 100 million to the US. Its US subsidiaries include Beta Chemical, Beta First, Beta Lighting, Beta Unitex, China Sports, Forte Lighting, Larin and NIC International.

    Phftt…

  3. doc holiday

    Re: “Business did not like the US president, and the president did not like business,”

    ==> We need Bush back at the wheel ASAP; look at all the good things he done for big business in the last ten years. We had progress and promise until Obama stole the election ….

    I can just imagine how these people (like Immelt) are being deprived of sleep as they wander from McMansion-to-McMansion in their OwnerShip Society Twilite Dreams, and complain to all the ghosts that haunt their memories.. … where’s W, where did he go…. where am I, where is this, who am I???

    * Sorry …

  4. KD

    “I have LONG questioned the wisdom of foreign firms locating factories in China and exposing themselves to the risk of piracy, counterfeiting, and other forms of technology transfer.”

    Well-done, Yves. I couldn’t agree more. You have to say it to Japanese companies and government, who are all touting to export their way out of economic mess with the “Now is China’s age” slogan.

  5. wazmo

    Poor Jimmy still hasn’t found a buyer for GE Capital’s private label card ops-after, what-2+ years? Much like Citi Holdings trying to unload their private label ops after gorging themselves sucking up Assocaited, Sears, The Home Depot and macy’s cards.

    Why doesn’t someone float to those willing to listen in Congress to have them repeal the Bankruptcy Reform Act? THAT would clean up balance sheets in both the private and public sectors real quick.

  6. purple

    China’s market has been a fantasy of the West for centuries. The country is too big and too poor to survive without a large amount of centralization, which also precludes the kind of open internal market Western companies desire.

  7. Expat

    Excellent. Archetypes of capitalism being beaten at their own game by Communists!

    This simply shows that American capitalism is simply corporatism. Large American corporations would not survive a truly competitive market, just as they fail miserably when the tables are turned.

    How would Immelt react to a Chinese firm setting up manufacturing in the US and taking huge market shares? GE would drape itself in the flag and demand protection from unfair, Commie competition destroying the fabric of America (GE management bonuses).

  8. bob

    I saw the ex-ceo (chiefly entitled observer) welch on tv a while ago. He was standing on the desk, compeletely obsessed with the chest of one of the “crew”.

    He kept repeating, over and over again “I want them”.

    Asked about the current trade situation with china, he paused for a moment and added “but there so big.”

  9. jumping

    I have worked in Silicon Valley as a design engineer for years. The effects of manufacturing in China, and outsourcing to India, go beyond the counterfeiting and labor cost.

    To me the biggest problem is the hindered ability to innovate due to having manufacturing thousands of miles away where synergies of working between engineers and technicians is non-existant. It is impossible to continously innovate when one isn’t intimately familiar with the equipment to get the next incremental improvement. Those small improvements add up over time. So it looks good on paper to have low wage manufacturing in CHina, and engineering and high paying jobs in US. However, it doesn’t work that way all the time.

    The one saving grace is Chinese are not great at innovation and design yet.

    1. alex

      “To me the biggest problem is the hindered ability to innovate due to having manufacturing thousands of miles away where synergies of working between engineers and technicians is non-existant.”

      As an electrical engineer, I’d like to second that. This is a “view from the trenches” observation often missed, or at least under-appreciated, by those not in the trenches. Frighteningly, it may also be missed by younger engineers who haven’t had the opportunity to work in close conjunction with manufacturing.

  10. alex

    Yves Smith: “I may sound like a complete Luddite, but I have LONG questioned the wisdom of foreign firms locating factories in China …”

    To be pedantic: “Luddite” is inaccurate. Perhaps you meant “protectionist”. Luddites are opposed to technological improvements in productivity.

    P.S. I don’t think you’re being a “protectionist”, just a pragmatist.

    1. Yves Smith Post author

      Extended supply chains, outsourcing, and offshoring were all considered the hallmark of sophisticated corporate behavior circa 1995.

      1. alex

        Not to beat the point to death (as I originally said I was just being pedantic), but are you saying “Luddite” is correct?

        I suppose “Luddite” is not a precisely defined term, but I take it as opposition to technological change that reduces the labor required to make something, or more broadly as opposition to technological change in general. To me extended supply chains, outsourcing, and offshoring are changes in business arrangements, rather than technological changes, notwithstanding that technological changes (e.g. the Internet) may help facilitate these changes in business arrangements. Of course steam ships also helped these changes in business arrangements.

        Full disclosure: as an engineer Ludditism is anathema, so that predisposes me to not apply it to things I object to. Where’s Noah Webster when you need him?

  11. alex

    “Jeffrey Immelt, General Electric’s chief executive, has launched a rare broadside against the Chinese government, which he accused of being increasingly hostile to foreign multinationals …”

    Good news! If GE’s CEO is waking up to that, perhaps there’s some hope.

    A big difference between the Japanese trade issues of the 80′s and the current Chinese trade issues is that Japan spurned foreign direct investment. As a result the interests of many American companies were more aligned with those of American workers.

    Japanese companies exported from Japan, not the Japanese operations of “American” MNC’s. By contrast many of our imports from China are from the Chinese operations of “American” MNC’s. If that starts to change, then so will the attitudes of American companies towards the wonders of Chinese imports.

  12. Wabac Machinist

    If Immelt’s an example of the sort of CEO whose “confidence” needs to be sustained for the sake of economic growth, then to hell with confidence.
    The suspicion grows that “confidence” is code, not for anything related to investment or innovation, but for the ability to game the political system.

  13. NotTimothyGeithner

    I love Immelt’s subtle racism. He thought the little yellow people would be overjoyed and exuberant to be graced by his presence.

    1. Bates

      Those ‘little yellow people’ are far more savvy and have a much longer tradition in Western style finance/banking than most people imagine.

      Here is a fascinating view of Western style financial innovation in Shanghai… as gleaned from the ‘Fortune Magazine’ Jan, 1935 issue. And yes, Shanghai was doing pretty well considering America, and many other soverigns, were still gripped by grinding depression in ’35. The article mentions that the Chinese banker was typically shrewder than his counterpart of the Jewish faith.

      http://www.talesofoldchina.com/reading/fortune.php

  14. anonymous

    Fairly clearly, the issue is which businesses are mad, when, and why. I see no difference between O and W, neither has the parts to raise taxes and cut the pay for federal, state, and local government employees.

    I don’t see a whole lot of angry CEO’s out there. This administration received hundreds of millions from corporate bundlers like the current ambassador to Japan, who knows nothing about diplomacy, politics, or Japan.

    The big shots have jobs and are making money hand over fist. They are not interested in our well being and we’re foolish to believe they are interested by anything but self-interest.

  15. jdmckay

    China is out for China, period,

    True, but not just “period”: China is doing major energy engineering/generator construction/training throughout Asia, in some cases (clean coal) delivering technology we (US) does not have, and doing so for far far less then US “multi-nationals”.

    and that is a stance that that the US would be well advised to emulate,(…)

    Who’s the “US” you are referring to?… our homegrown companies, or Federal policy (tax/banking dergegulation etc), or UAW workers, or the 100k’s of H-1B hiring companies, or maybe the domestic professionals they’ve displaced?

    I think you’ve got it backwards: WS, through several decades of political bribes, has become de-facto “US” as they’ve driven investment, control/direction of FED, and led us and world to the brink. These guys are US, regardless of fact most citizens don’t (or are just beginning to) recognize the extent to which they dominate what we call economy.

    And I don’t know how… given absurd compensation, utter lack of regard for US economy & health as a whole… please explain how these guys were in the game for anyone other then themselves… “period”.

    The Bush/CATO/K-Street congress gave them everything they wanted and then some for 8 years… “period”. They took their opportunity and bankrupted/looted the country. “period”.

    I think you greatly minimize the extent to which global commerce has put US on shortest leash we’ve seen in my lifetime. So. America gets little discussion here, but they’ve entirely reorganized their trade map, greatly expanding direct exchanges across Asia while diminishing same w/US. Across the board, I see the same trend.

    US doesn’t need more of a vague “look out for itself” mandate: it needs a moral introspective inventory and discussion, a reconstituting what we do here and who/what pulls the levers… eg. a really, really serious process of getting an entire country on purpose.

    That means establishing (what conservatives used to proclaim) “reliable markets” and currency, building what we/the world needs, rather then selling ‘em (and us) junk w/clever (or not) marketing. Educating a people for massive challenges ahead… you know, that kind of think.

    Let’s not slip into blaming China for our cesspool banking/shit product/corrupt/inept/ignorant political apparatus again… please?

    1. alex

      Grove gets it. And it’s hard to find someone much more authoritative about the tech industry than him. Now what we need is for the “news” to be spread far and wide, and to be accepted as the conventional wisdom (or at least a credible alternative wisdom) instead of the endless globalization propaganda. Can someone arrange an abrupt end to Tom Friedman’s writing career?

      1. Raging Debate

        I already built the online technology platform for citizen-powered news organization and am executing this model. I won’t go into detail here, I (and Yves) would consider that poaching of commentators.

        But I can say this project began in 2008 and the research cycle is complete. Two barriers exist:
        1) Authors need a solid revenue model.
        2) Technology structure must be completed to fit Author’s competitive nature (and ego).

        The general technology barriers-to-entry have been solved.

    2. Jeff

      Start-ups might compete with large multi-national monopolists. That’s like funding legal services for the poor so they can sue businesses for giving them cancer. It’s guaranteed to hurt business.

  16. pros

    GE is a combination ponzi scheme and government contractor with fraudulent financials.
    they are insolvent and dependent on continuous government bailouts
    the stock price now is lower than it was in 1997

    Immelt is a creepy crook

    Who cares what this PIECE OF SH*T says?

  17. Friedman's Ghost

    This is just choice. According to opensecrets.org GE made a decided shift in contributions to politicians in 2006. In 2008 GE (this includes PACs, individual, et al) gave 66% of it money to Democrats and in 2010 has given 64%. In 2008 they gave over 500k to Barack Obama. Not sure what the problem is there Jeffy…I mean…you paid for this. Ha Ha

    http://www.opensecrets.org/orgs/summary.php?id=D000000125&cycle=2008

    1. pros

      This Kabuki—
      Immelt has raped the government and taxpayers for billions under Obama’s watch….

      Immelt has to pretend like he doesn’t like it.

      Oh stop, please!!!! You’re hurting me!!!!….wink, wink..

      1. Friedman's Ghost

        Pros: Good point. He was in Rome speaking to Italian executives. Very likely just playing the audience.

  18. Tom Hickey

    “This regionalization is in keeping with the Tri-Lateral Plan which calls for a gradual convergence of East and West, ultimately leading toward the goal of one world government. National sovereignty is no longer a viable concept.”

    “The nation state as a fundamental unit of man’s organized life has ceased to be the principal creative force: International banks and multinational corporations are acting and planning in terms that are far in advance of the political concepts of the nation-state.”

    Zbigniew Brzezinski

    1. Raging Debate

      The plan was Nixon & Kissinger’s ping-pong strategy with China. How it was executed was based on the Central Bank model of mandraking.

      Mandraking means that when a nation has gotten too top-heavy with entitlements and debt that the CB begins transferring the wealth to another nation. This happened to Europe in the early 1900′s with the wealth coming to the U.S. The biggest global money guys know the deal and follow suit with investment into the country (hot money flows and infrastructure).

      The risk of course when the U.S. accelerated the “ping” in the 1990′s was that China was not going to “pong”. China did a bait and switch with the Central Bankers. How do I know this? Because I was offered to build a peer-to-peer lending system for BRIC. In other words, BRIC has learned that the banking system must evolve or they may the next mandraked Europe of the early 1900′s. The CB model is lovely for until you become the impoverished shell of a nation like the U.S. has become.

      Guys like Immelt and George Soros are now alarmed that they have realized they were suckers. BRIC gamed them good. I started talking a lot about what I called the “Clash of the Titans” phase for the Reserve Currency Peg beginning in 2009 on Seeking Alpha: http://seekingalpha.com/search/?source=search_general&q=clash+of+the+titans+and+ithinkbig&cx=001514237567335583750%3Acdhc2yeo2ko&cof=FORID%3A11%3BNB%3A1#1074

      The Anglo-Saxon empire has only one choice. Evolve banking into a peer-to-peer system which does two things:

      1) Restarts lending between individual wealth owners and innovators (think of millions of individual bankers).
      2) Creates democracy in banking.

      The Central Bankers either evolve into this process or their model dies during the global collapse and subsequent world war. The people are already awakening to the Wizard behind the curtain of Oz. Central Banking can either be proactive or their model dies. Evolution can be suppressed in this era but it cannot be stopped and the snap-back effect for doing so is awful. That statement is the premise for George Soros’ Reflexivity theory that created a billionaire.

      But George Soros should have known better that a monetary union without a political union will always collapse (Europe). That globalization without the political union (first must come global debate) means nations are still very much opportunist as Yves mentions.

      I chuckled to myself at Jim Rogers having his kids learn Mandrin. I thought to myself “Great, his kids can speak to the Chinese guards when they visit his Dad in prison as his wealth over there is confiscated.”

    2. Bates

      “The nation state as a fundamental unit of man’s organized life has ceased to be the principal creative force: International banks and multinational corporations are acting and planning in terms that are far in advance of the political concepts of the nation-state.”

      As always this statement begs the question; who will provide the infrastructure that is currently provided by Soverign States? For instance, is GE going to provide dollars for repairs to Interstate Highways in US States where GE has no business interest? In the absence of an entity to insure that commodity flows are not disrupted, thereby bringing business to a standstill, who will collect the taxes and maintain the infrastructure of a soverign?

      I side with Volker on this one: ‘The most useful innovation by the financial sector in the last 30 years is the ATM’ (paraphrased) I believe that ZBig is getting way ahead of himself with his vision of Int Banks/MNCs taking over the world.

  19. Ryan

    Why do Immelt’s comments represent “American corporate arrogance writ large”? Finally coming to the realization that China is potential snakepit for Western companies seems more like naivete–not arrogance. I hope that more multi-nationals come to the same conclusion and bring manufacturing back home or at least closer to end demand.

    “This tactic by big business, to howl over trivial, cosmetic reregulation as if it were rape, illustrates how they believe they should be in the driver’s seat and government and the public at large should fall into line.” Why does having disagreements with Obama’s efforts at re-regulation necessarily demonstrate that the government and public should unquestioningly support big business? Howling as if it were rape? Seems like hyperbole of the highest order. This country definitely needs some re-regulation, but I for one have issues with the way we are being re-regulated. So far, little of the legislation has attacked root causes while it has been simultaneously complex and overreaching in non-productive ways.

    The complexity of the re-regulation is undoubtedly creating indecision by businesses and undermining hiring. I agree that business disliking a President is not necessarily a sign that the President is doing a bad job. But in this case I think it is.

  20. spc

    @ “exposing themselves to the risk of piracy”
    I simply don’t see the connection between piracy and China.

  21. Man of God

    Jesus, and therefore God has blessed us by entrusting us with the management of the world and also of the common/lesser people in the U.S.

  22. jdmckay

    Lousy article, Yves. How you get from Immelt’s foot-in-mouth moment to Poorly Made in China I don’t know.

    Curious: do you stand behind your linked AT author, much less the author (Midler) who’s book that article reviews? Are you vouching for Midler’s integrity?

    Midler’s creds are damn thin: lots of claims, little verifiable trail.

    When you quote…

    Chinese manufacturers cut corners wherever they can, from product quality to factory equipment and maintenance. They unilaterally change product and packaging specifications to trim costs. They raise prices after the deal is signed, leaving the importer to absorb the added cost.

    … are you asserting this stuff is broadly characteristic of Chinese business/industry, as your wording (and previous posting history) suggest?

    Your followup to these comments sure suggest so:

    Yves here. Now this extract describes the situation facing firms contracting in China, not major manufacturers like GE setting up operations in the country.

    What’s your basis for that?

    Like your oft repeated (and wrong) Extended Supply Chain mantra, based upon, as best you provide citations, an NYT article on IBM outsourcing you entirely misrepresent, w/a handful of conversations w/semi connected WS (???) connections you never identified, to conclude somehow authoritatively statements (again, which you’ve repeated over and over)…

    outsourcing, and offshoring were all considered the hallmark of sophisticated corporate behavior circa 1995.

    What the hell does that mean? In the past, you similarly described this wave of outsourcing/offshoring as “in vogue on WS”, “fashionable”, etc.

    Are these statements illuminating… even a little bit? In Econned and here on NC, over and over you’ve pulled back layers of obfuscation from various players in mortgage bond meltdown, all which reveal machinations far removed from the one-liner monikers you disseminate (and do well). So, how does “fashionable” and “in vogue” pass muster… have you actually investigated this?

    “hallmark of sophisticated corporate behavior” is even worse: this “behavior” was planned and calculated. The “sophistication” was remedial, stripped of everything from quality control, to product support/customer service, responsible manufacturer (turned importer) environmental planning, & damn near everything else.

    You think BP executives were unique in substituting hazardous process over proven ones to save a few bucks (much of traceable back to motivation for executive bonuses)?

    I know plenty of folks over last couple decades where Cocaine was “in vogue” by people in suits, where sex clubs after cocktail hour was the “hallmark of sophisticated” business folks, and tons of traders/fund managers who knew 5+ yrs ago their mortgage bond “products” were a scam but… hey, we’re making money and the feds will bail us out (explicitly stated in Lehman emails).

    Your oft repeated IBM example:

    Moreover, the ADDITIONAL coordination costs (which ARE a labor item too) of extended supply chains are a substantial offset even when labor IS the main cost. You completely ignore this issue.

    To wit: IBM decided to shift its computer software writing to China. The cost of writing the code would be only 20% of writing it in the US. But how much did they expect to save? Only 15-20%. In other words, the 80% savings was offset by 55-60% of OTHER COSTS, in this case, extra layers of project management. This was a front page WSJ story. BTW, clearly based on a leak of internal documents.

    … is so off base as to be absurd.

    * IBM did not “shift it’s computer software writing to China”: it established projects in China, did studies on some outsourcing.
    * IBM (despite headlines of their shenanigans w/retirement account funding and indeed several large rounds of layoffs… all true) absolutely committed to retaining it’s USA domestic technical brain trust, far more then MS/ORACLE and the other big boys. They’ve bet their entire future on software alone, having sold almost all their hardware business… much of it well before the big downturn.
    * As I’ve tried to explain in the past, the tech/software “off shore”(ers) vastly increased their profit margins w/cheap (Chinese, even more in India) labor. BUT… what you over and over again refuse to acknowledge: these out sourcers did none of the quality control you cite in this example as costs: they just didn’t do it. The huge problems w/Oracle 8/9 series Data bases and HR products (not to mention their marketing methods: buying state legislators and getting purchase of their product mandated by state law), the AV software that locked up all your computers and which one could never get uninstalled, and has Chris Whalen (and many others) have written: WS’ simply did not “invest” in quality software which most of the big boys knew was wholly inadequate: eg. the sales of their massively layered exotic products brought in profits which they didn’t want to take a chance of interrupting w/software that might reveal their products were crap.
    * IBM, w/whatever flaws, absoultely committed to high quality software. Their purchase of Rational, and deep commitment to developing that project (all maintained and kept current on US shores BTW)… this is “stuff” IBM did to provide tools for very high quality, sophisticated enterprise wide software design/critical testing/maintenance… and something all those “out sourcers” simply didn’t even try and do, they just didn’t!!! They were happy to deliver crap product, at huge margins, frustrate customers w/firewalls of overseas customer service who could not solve built in product problems, on and on etc. etc.

    That IBM was doing things right, which largely separated them from the outsourcing crowd, paints an entirely different picture then you present.

    Further, the kinds of tools/skill sets in packages like Rational (there are others)… software design “management” stuff (UML, CASE, “unit” testing suites and such) are skills which, even during the boom times, only a small % of (very otherwise capable) programmers/software “engineers” did not have and did not pursue.

    In short, the “project management” costs you cite were unique to a very small % of US software “shops”, whether corp., private or institutionalized.

    Microsoft’s big problems w/VISTA (really, 3 years of wasted time) all came w/their offshoring of “presentation layer” (fancy screen widgets)… entirely unmanaged by any process they put in place resembling your IBM example, and moved onto the shelves by MS fully aware of the problems because, well… same old story.

    Beyond that, for some time now (at least since ’92/3), IBM has been amongst, if not the standard bearer of Corp planning in tech… in many ways, the anti microsoft. IBM embraced, supported, invested and developed all kinds of good/promising technologies through emergence of WANS/B2B/WEB business: JAVA, SMALLTALK, all the Web standards developed through that era… IBM largely and energetically worked and comitted to further these things.

    They were a very, very good “tech community” citizen, they made money and they furthered technologies. Tech guys in the industry, having to work w/many of their portal products (WebSphere for example), legitimately would/will say that there were “holes” here & there, some of which IBM did not address… all true, and all w/in context of x-platform/application functioning/connectivity and such.

    However, compared to rest of industry as a whole, they were generally (a few others) among the best of best in corp suppliers of tech/software wrt quality/maintenance/bug fixes/continued-ongoing product development.

    I worked for them in small group (APL) for 1 yr in ’91, then formed my own development group: eg. I have no loyalty or anything w/them. Through those years, we did a lot of corp work… a lot. We had to build a lot of stuff that worked w/IBM products. There were gripes, and problems here and there, but as I said… all in all, IBM was a very very good citizen in the community.

    AFAIC, Gerstner was a model CEO… I’d like to see him speak up and address the degradation in corp America, I’m quite sure he’d have a lot to say given how he did things.

    Summary: your example of quality control/project management costs, using IBM’s example (which you entirely mis-charactarize), to make a case that offshoring was/is not cost effective… you entirely miss the point.

    IBM was not representative of this “sophisticated” trend: those companies that offshored almost entirely & deliberately did so with deliberate planning which did not include efforts to manage anything in the process… they just hired off shore shops, and said “here, just do it & call us when you’re finished… and oh yea, marketing says we need it tomorrow.”

    If anything, the facts underlying IBM example you use suggest that IBM’s costs you cite should have been a metric by which the quality control of most the rest should have been measured. And had this been done, it would have exposed most of the rest as committed to getting product and the shelf, little regard for quality, and well focused on the “opportunity” to make a financial killing selling shit product w/low cost production… then take the $$ and run.

    And it is this mentality that has taken hold here (US), across more sectors then I can count: food/farming, bio-tech, engineered materials… even increasingly lousy home construction… and of course, utterly fraudulent banking/WS/investment sector.

    Offshored manufacturing did so for big profits to entirely unregulated markets, and was done by managers/boardrooms/executives to exploit these conditions to the fullest for big profit with little/no concern for product quality or anything else.

    Period.

    I really do appreciate NC, your insights into much of econ/financial debacle has been yeoman’s work and I applaud it. But your China assertions, repeatedly off the mark by a wide swath, steeped in ignorance supplanted w/bigotry…

    With all due respect Yves, you’ve got this equation wrong by orders of abstracted fictional magnitudes.

    1. Yves Smith Post author

      jdmckay,

      Keep this up and you won’t be welcome here. I make what is at most a minor error in the post, and you make a Federal case about in and incorrectly argue, with venom, that it invalidates the entire piece. Your peculiar need to defend IBM led to a rant.

      First, the business about offshoring and outsourcing not delivering the goods is AMPLY docuemnted in studies by people who have nothing to gain by pointing that out. Deloitte Touche has run surveys of Fortune 100 companies (who by virtue of their muscle and sophistication ought to be best able to profit from offshoring and outsourcing) and has reported that 70% of companies are unhappy the results. I can give you long form as to why.

      With IBM, you choose to airbrush out that it has been firing tons of experienced workers, basically saying “you can move to Brazil, we’ll cut your pay to 25% of what it was and won’t pay repatriation if you don’t like it”.

      As for China, I have heard the same complaints REPEATEDLY form attorneys representing small companies in China. Reject rates on apparel even now are around 50%. And China is NOTORIOUS for ripping off IP, copying goods that are contracted for manufacture.

      I do have multiple datapoints from independent sources that in turn each has a large sample of their own, real businesses having real experiences. What’s your sample?

      The IBM example is not isolated, a WSJ story on them cited an expert saying the disparity between labor cost and project cost savings was typical. The reason for picking out software as an example is that it is one of the very few products provided in China where labor cost is still a major cost in total product cost….except, it turns out, even the cost of coding really isn’t. For manufactured goods, manufacturing labor is actually a small % of total product costs, that’s why this fixation on Chinese labor costs is bizarre.

      You veer off on a defense of IBM that only tangentially relates to the point of the post, and does not in any way disprove the contention of the AT author on the practices of Chinese manufacturers.

      1. Skippy

        Federal case…eh…well sounds like an opportunity for promotion under the prevailing environment…lol.

        Skippy…they killed a perfectly good bit of colonialism…sigh.

      2. jdmckay

        I make what is at most a minor error in the post, and you make a Federal case about in and incorrectly argue, with venom, that it invalidates the entire piece.

        Not even sure what your perception of “minot error” is.

        Regardless, I’m telling you flat out: this mantra of yours, based on citations I mentioned prior and which you re-state often, that IBM’s study (or whatever) of your mistated “they outsorced all their software development” (not even close) is not representative of what happened… period.

        IBM incurred upfront costs on everything they did to ensure quality product. Vast majority of outsourcers did not.

        You quote IBM costs on one such venture… well after great wave of outsourcing software was complete BTW, and somehow consider that representative of companies who did not do things this way.

        I was there, in the middle of all this, for 15 years. I know what happened. I know what IBM’s staffing policies were, and I know how they built their software, their enterprise products, the whole schmere.

        You’ve take 1 or 2 articles, extrapolated suggestions they make backwards in time, superimpose those conclusions on a 12 yr + time period which you define (circa ’95), then declare/profess authoritative opinions on that era.

        You “WSJ article”, from (I believe) 2009, taking costs IBM incurred in their offshoring… which the vast majority of US FOTUNE 100/500 simply bypassed for cost savings, eg: KNOWN BEST PRACTICES TO DEVELOP HIGH QUALITY SOFTWARE… these guys, executives, boardrooms, whatever… THEY DID NOT INCURR OR ATTEMPT TO INCURR THE COSTS CITED IN YOUR IBM STUDY.

        I’m not trying to make trouble, ream you, or anything. Your conclusions are simply sloppy and incorrect, and their hugely important matters.

        Your peculiar need to defend IBM led to a rant.

        Nothing peculiar about it, nor is it a defense: what I say is a damn close approximation of IBM’s behavior… a correction to your incorrect summations… it’s just the truth.

        Maybe in the circles you run, the “analysts” and “experts” have repeated this so often you’ve adopted it as truth?

        Deloitte Touche has run surveys of Fortune 100 companies (who by virtue of their muscle and sophistication ought to be best able to profit from offshoring and outsourcing) and has reported that 70% of companies are unhappy the results. I can give you long form as to why.

        Fine. So, by your description, this is a “survey”, long after the fact, regarding satisfaction w/software development offshoring… correct? Or in other words, is there any indication whatsoever in this survey on board / executive decisions as to why they outsourced? Does it measure how much bad product recieved from this outsourcing was sold to public? Or does it even address/suggest management calculation on initial savings achieved in upfront offshoring costs added to their bonuses?

        Of course they’re dissatisfied. They guaranteed themselves a lousy product.

        I have not read that survey, but I’ll take a guess (eg: your “longform”). Correct me if I’m wrong. Generally, the offshored work product…
        * had shorter lifecycle then IBM type stuff (eg. development done correctly)
        * was unmaintainable: work product was time consuming to fix bugs, if they could be fixed at all. UNMAINTAINABLE, the hallmark of early offshored (mostly Indian) work products.
        * Much higher customer service costs: eg. a lot more bugs, poorly documented code and user docs/manuals, etc.

        That generally describes this stuff, and is an entirely different set of costs then the IBM study you cite… completely, totally different.

        With IBM, you choose to airbrush out that it has been firing tons of experienced workers, basically saying “you can move to Brazil, we’ll cut your pay to 25% of what it was and won’t pay repatriation if you don’t like it”.

        Actually, you airbrushed that in… it is irrelevant to the the topic at hand, Yves… other then to illustrate your proclivity to express bias as fact. This Brazil event ocurred long after the great outsourcing wave, w/US corp. & municipal (where most of their resources have been directed of late) software budgets gone.. it has nothing to do with time period you describe.

        And BTW… get used to more of this: in this economy, gutted and corroded, this kind of thing will happen more & more. But how can this event, in late ’08 or so, be used to define IBM’s behavior in your time period?

        I do have multiple datapoints from independent sources that in turn each has a large sample of their own, real businesses having real experiences. What’s your sample?

        As for China, I have heard the same complaints REPEATEDLY form attorneys representing small companies in China. Reject rates on apparel even now are around 50%. And China is NOTORIOUS for ripping off IP, copying goods that are contracted for manufacture.

        Fine.

        I asked you if all this stuff, characterizations from Midler’s book, did your…
        a) vouche for author’s credibility?
        b) accept these this stuff as characterizing Chinese mainland business

        You answered neither question, instead digging in deeper.

        So yes, China has copied some stuff, no question about it.

        I was in middle of Silicon Valley software development for 15 yrs. Until dot.COM meltdown, and with less intensity after, stealing everybody else’s secrets was the order of the day, on a very sophisticated scale. The courts were hugely overwhelmed, and whole lot of the startups did not have budgets to mount legal cases.

        FRONTLINE did a documentary on this BTW.

        Microsoft routinely stole stuff from little guys, going back to DOS days. Remember Stacker?

        Companies long ago gave up trying to write whole range of various MS software ad-ons, as it became near accepted fact that MS would just take it then beat ‘em up w/legal fees.

        You think US business has never copied stuff, or failed to deliver as contracted?

        So anyway, that’s just life in the big city Yves. And if you dug a little deeper, the answer to my question (eg. does this behavior characterize Chinese biz practices) is an overwhelming NO, whether you choose to acknowledge it or not.

        I do have multiple datapoints from independent sources that in turn each has a large sample of their own, real businesses having real experiences. What’s your sample?

        About 20 mos. on the ground in mainland over last 12 years.

        The IBM example is not isolated, a WSJ story on them cited an expert saying the disparity between labor cost and project cost savings was typical.

        I’m sure WSJ has lots of “experts”. It’s actually among primary reasons I severed my subscription after near 30 years… utter disgust w/those guys and their “experts.”

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