The Corporate Illogic of Outsourcing and Offshoring

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You must go, now, and read a critically important piece questioning the logic of sending American manufacturing jobs offshore. It’s titled Losing Sparta (hat tip Dikaios Logos) by Ester Kaplan in VQR. We have written regularly about how we have been repeatedly told by managers and executives that the case for offshoring was often not compelling, particularly when risks, such as higher financing and shipping costs, exposure to foreign exchange losses, and inventory risk were included. This makes perfect sense when you consider that for most manufactured goods, factory labor is a mere 10-15% of total wholesale cost, and any savings in factory labor will be offset by higher shipping and greater managerial costs (more coordination, performed by much more highly paid workers). It is thus more accurate to regard a lot of offshoring as not being about cost savings, but a transfer from ordinary workers to managers and executives.

The article focuses on a world class manufacturing plant in Sparta, Tennessee, owned by Phillips that made florescent light bulbs. The workers were highly dedicated and strived to implement continued improvements in productivity. Factory pay was $13 to $15 an hour, which were good wages for that area, particularly since it included several weeks of vacation and excellent health care benefits. From the story:

Employees stuck around for years, knew their jobs inside and out, and had a rare esprit de corps. When they faced tight deadlines, fabricators would volunteer to come in as early as 4 or 5 a.m. so they could get a head start before the paint crew arrived at six. In December 2009 the Sparta facility was named by Industry​Week as a Best Plant of the year, one of the top ten in North America. In the months that followed, it won Best Plant within Philips’s global lighting division as well as the firm’s global “Lean Challenge.” That summer, plant managers invited state officials and legislators to Sparta to celebrate.

Yet Phillips decided to shutter the plant in 2010. It was impossible to get a straight answer out of Phillips and the explanations offered for moving production to Monterrey, Mexico, did not add up. And the article points to the broader mythology, that if Americans only compete better, worker will do better. Sparta, and overall statistics show that to be a myth. One of the most striking and often-shown charts is how productivity gains stopped being shared with workers around 1976.

But why shutter a plant that continued to wring more and more performance out of its workers? Consider:

This “engaged workforce,” in the words of IndustryWeek, had hiked production on some lines by more than 60 percent, cut changeover time between small orders by 90 percent, and reduced the number of defective parts by 95 percent, making the plant one of the most productive in America.

And Phillips, like many manufacturers in the US, was profitable and its returns were increasing. And a team that tried to buy the factory developed a compelling analysis that the Sparta plant would be cheaper than the Monterrey operation, meaning that if a third party funded, it, it would steal business from Phillips:

Once it was clear that Philips was determined to close the plant, [plant managers Lisa] Norris, [Dave] Uhrik, and a lean-​operations expert named Nicole Belitz pulled together a detailed proposal to buy it. They knew the numbers better than anyone, and calculated that the plant, which operated at extremely healthy margins, could be solidly profitable on its own.

Team Sparta, as they dubbed themselves, did the math, calculating the full cost to Philips of moving production to Mexico, and concluded that Philips would be dramatically increasing customer lead times, which would likely reduce its market share. The team also projected that Philips would have to rely more on distribution centers, raising warehousing costs; that the firm would be shipping fixtures longer distances on worse roads, meaning higher transportation costs and more breakage; that it would be using less automation and end up with more defects; not to mention the estimated $30 million it would cost to excavate those massive machines and rebuild them in Monterrey. Factoring in those costs, Team Sparta was convinced that the local plant could sell fixtures to Philips for less than it would cost Philips to make them in Mexico and still clear at least $1 million in annual profits.

Uhrik and Norris had no equity of their own and would need at least $12 million in start-​up capital to take over the plant, a seemingly quixotic quest. But the business case was so impressive that when they brought their plan to First National Bank in Knoxville, its investment group jumped in with $4 million. “We were able to show very healthy margins, and that moving to Mexico would hurt turnaround and logistics costs,” Norris recalls, “and show that in a consumer-​driven market, where a contractor suddenly needs thirty-​five troffer lights and he wants it next week, the Philips model was questionable.” The Tennessee Valley Authority and the USDA’s Rural Economic Development Loan and Grant program each independently reviewed the plan and together committed to another $3.75 million. After yet another review, this one by White County’s Local Industrial Board, the county commissioners, including Bailey, offered to come up with the rest by putting a $5 million bond on the ballot…

As I combed through the Team Sparta business plan, I became skeptical about whether this kind of granular analysis was ever performed by the Philips executives who decided to move the plant to Monterrey. Norris was in regular contact with Philips’s North American headquarters, and she certainly saw no evidence of it. This begged a larger question: How many of those 70,000 American plants offshored in recent decades, those millions of American jobs lost, had been the result not of a ruthless commitment to the bottom line, but of a colossal failure of due diligence?

And the article earlier came up with a best guess as to Phillip’s rationale:

But Lisa Norris’s take seemed the most persuasive: Philips’s model is to concentrate production, and so the particulars of how well a given plant performs—​even if it’s Philips’s best-​performing plant worldwide—​don’t matter. “There’s a momentum that gets in place when people say we’re going to close these plants, and it becomes a point of weakness for anyone to stand up and say, ‘No,’” she told me one evening. “No one feels strong enough to do that. Because they feel like it’s showing some sort of human weakness, that they’re making an emotional decision—​when in fact, there’s a business decision there. And so it gains a sort of momentum in an emperor-has-no-clothes sort of way. And so people are compelled to do the wrong things. And then you start adding incentives based on the execution of those plans and now you’ve got everybody marching straight off a cliff.”

I’ve had executives attest to variants of this behavior, that they offshored even though it was not particularly good for the company because Wall Street wanted it and doing so popped the stock. One can similarly imagine that the simple minded story that Phillips was “concentrating manufacturing” would sound great at investor presentations and never got scrutinized once it became a pillar of the professed strategy.

There’s much more good reporting in this compelling, if sad case about how soi disant business leaders throw loyal, skilled workers on the dust heap with no thought and not even a real commercial justification. Confirming our dim view:

A 2012 study by Michael E. Porter and Jan W. Rivkin of Harvard Business School, based on interviews with 1,767 executives involved in location decisions over the previous year, confirms Bronfenbrenner’s view. Porter and Rivkin found that “rigorous processes for location choices” are “far from universal” and that such decision-​making processes “have lagged behind those for virtually all other major investment decisions.” They found that companies often underestimate the hidden costs of offshoring, overlook the advantages of a US location and “fall prey to biases that work against the U.S.”

So workers are correct to see the treatment of workers in class warfare terms. It may take a long time to come to pass, but this level of irresponsibility among what passes for our elites is sowing the seeds for widespread upheaval.

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  1. John Howard Brown

    Interesting piece. I would have thought that Phillips, as a Dutch company, would not have faced the Wall Street “make the quarterly numbers” pressures of an American firm. It is worth noting that the lighting segment in general is considered “low margin” and larger corporations are abandoning it.

    1. 1 Kings

      Their execs want 6-7 homes too, not including of course an upsize at their swiss chalet location…

      1. 1 Kings

        Oops, that should read 9-12 homes. Forgot it’s 2014, you know, that one for every month cachet..

    1. Ronald Pires

      Corey Robin (author of “The Reactionary Mind”) writes regularly on Facebook and at Jacobin. The book is a very interesting read.

  2. ogee

    Here in north Carolina, offshoring has hurt this state badly over the past 15 years. The few anecdotal stories I have heard have all been bad,from an operational standpoint.
    A local general electric plant that made industrial electrical products moved to mexico over 10 years ago. Someone who has to go back and forth to the new plant says that they lose so much from production quality issues, he can only figure it is good for ge, from something happening in the accounting.and /or faux numbers for investors.
    Another person who goes to another manufacturing plant in mexico, jokes that since there isn’t the environmental regulations, there is this “ditch”, that has this purple stream of waste water flowing out, right through a huge field of lettuce…which probably gets shipped here/US.
    I would have to assume many of the factories built in places where there is little or no meaningful regulations are done on the cheap.I would also say that the investors in these companies are getting fleeced if they don’t take into account that the real assets these factories represent, are really not worth as much as might be stated.If it wasn’t for the corporate tax breaks they receive, these companies wouldn’t be doing as good as they seem. they are being subsidized by the taxpayer.

  3. Gabriel

    So Wall Street forcibly re-designed the manufacturing sector of the US economy?

    Wait till Main Street hears about this – manufacturers outsourced so as to keep WS happy. Is this “new” manufacturing working for the the guy or gal with a high school education? Are fewer manufacturing jobs better for the US economy? Maybe WS wants an economy filled with hollowed out firms that can be sold and bought at its whim so as to fatten its profits?

    I remember that Obama asked S Jobs as to when manufacturing jobs were coming back to the US. Jobs said that US labor laws and pollution regulations were hindrances. In other words, never.

    Wall Street as the hidden hand?

    1. Worker-Owner

      To say that “Wall Street forcibly re-designed the manufacturing sector of the US Economy” is only partially correct. Wall Street extracts its rents (income) from “investors” who generate fees through various kinds of transactions. Wall Street profits when equities are bought or sold, which means they don’t actually care if the value of any particular equity increases or decreases. They only care if it trades … frequently.
      Top Corporate Executives have jiggered their compensation plans so that their real compensation is tied to Corporate Shares price (stock) and they have become Highly motivated to take whatever actions convince other investors that their shares are increasingly valuable. The Wall Street transaction-creation engine pounces on evidence of strength and weakness and spreads greed or fear to drive trades (transactions). It is a tightly connected loop among the traditional Wall Street (the market itself), the investments communities (banks, insurers, mutual funds, pension funds, and other large institutional and private holdings that dominate the actual market), and the corporate looters trying to game the market for personal profit.
      One should probably draw the conclusion that the financial community, as a whole, has decided that globalization, asset stripping, tax avoidance (profit hoardin and share buy-backs with off-shored money) and the like are “good for business.” There is ample proof that this process has contributed to the decline in importance of several formerly world-leading corporations, to the detriment of their long-term investors and the profit of their “just passing through” super-star CEOs. IBM comes to mind, for example.

    2. Art Eclectic

      Funny how the people who whine about pollution and environmental regulations are the same people who don’t have to live in areas destroyed by chemical run-off, poisoned waters, and horrible air quality.
      Eventually, they’ll run out of third world countries that are willing to sacrifice themselves on the alter of corporate profits. Even the Chinese population is starting to want to live healthier lives and raise healthier children. It’s only a matter of time….

          1. HotFlash

            Might be b/c I am in Canada, some copyright thing, although usually they say. Thanks for checking.

    3. mellon

      You should be aware that US pollution regs are not good like you imply.

      Among developed countries US pollution controls are many years behind many (most?) other developed countries- because of laws that have not been updated in decades due to industry pressures, and failure to enforce existing laws. Lots of chemicals which are banned or regulated elsewhere are not here. In particular, the US’s failure to regulate endocrine disrupting chemicals (EDC’s) seems to me to be a huge, huge problem. Did you know that many cause morbid obesity (i.e. many are “obesogens“) in a dose reponse relationship? Almost no Americans do.

      And now – by means of the secret TTIP trade deal, they basically want to force a freeze on new environmental chemical, food safety, fracking, etc. regs on the 32 or so North American and EU countries in TTIP, as well as a roll back of EU safety regs, and elimination of their “precautionary principle” which is written into the EU’s laws. (The Precautionary Principle is quite bluntly, common sense. Its hard to beleive that Americans dont see this but the US media intentionally does not cover it. they also want to greatly icrease fracking and export most of the produced LNG, because the prices overseas for it are 3-5 or more times higher than in the US. That will also raise US energy prices substantially as they currrently are artificially low due to a limit on exporting natural gas.

      They want to do this change secretly, bypassing national legislatures, by means of TTIP. the US and US agribusiness, is pushing heavily for this change.

      There has been precious little media coverage of this. Here is a sampling of it. These articles are ones with lots of good links in them.

      Leaked: US And EU Chemical Lobbies Fighting To “Freeze” Industry Regulation

      No green jobs for you! Secret EU-US trade agreement threatens Minnesota’s solar rebate and other local green job programs

      Green Groups: Leaked Energy Text Exposes Trade With European Union Endangers Action on Climate

      10 reasons TTIP is bad for good food and farming

      Also, people should be aware that TISA may drastically change the US services employment picture. (i.e. “everything you cannot drop on your foot”) leading to a lot ore hiring of low bidding foreign firms to do jobs that are currently done by nationals of the developed countries like teaching and healthcare jobs.. and other quasi public jobs.. (see this video for an idea of what’s being pushed behind closed doors by the US – its potentially huge..)

      1. Gabriel


        Thanks for your corrections to my comments.

        S Jobs apparently meant to tell Obama that US manufacturing firms consider the US an inferior siting choice for their plants. Perhaps the two excuses Jobs gave – US labor and pollution laws and regs – are merely excuses that cover the real reasons, as you suggest.

        I haven’t elsewhere seen an account like yours of worldwide efforts to weaken US food, chemical, energy, etc laws and regs. I guess I shouldn’t be surprised – where business is multinational and global so are efforts to create [i.e., lower] food, etc standards.

        I’m not quite sure what to make of all this, nor am I sure how to deal with it at the Main Street level. Anyway, thanks for ringing the bell. Perhaps Yves can do a post on this to scare up some ideas.

        1. Oregoncharles

          Working hard to block TTIP, TISA, and any and all new “trade” agreements would be a good start. Obama’s pushing them hard, in a big tipoff to his real agenda, but they’re very unpopular and it may well be possible to block them by refusing “fast track” authority in Congress. Contact your Congress-crook; you may actually have some influence there. There IS an election on.

  4. lakewoebegoner

    articles like this need to mention the taxation subspecialty of “transfer pricing.”

    a lot of illogical production moves become perfectly logical as those illogical production moves generate tax savings for the corporate holding company in Ireland.

    basically if Boeing wants to assemble a 777 in Seattle from parts from all around the globe, there is a set of mind-numbingly long regulations on how Boeing subsidiary A, B, C, D, E charge each other for parts, labor, etc. Deft use of these regulations can generate tax savings—–how else do you think companies are generating all those offshore profits in random countries like Ireland?

    And on the big picture level—-governments need to stop subsidizing the transportation industry. (or in econ speak, stop encouraging negative externalities). for example, ocean cargo ships, unlike your car, are largely exempt from most emissions regulation. long-haul truck freight damages roads more than they pay via tolls/fuel taxes. Local taxpayers shell out big $$$$ to subsidize airports and sea ports.

    Making transport companies pay the true market price for transportation (like from 1776 to pre-interstate highway) encourages more local production—though it would make going to Cancun more expensive.

  5. Ulysses

    “Maybe WS wants an economy filled with hollowed out firms that can be sold and bought at its whim so as to fatten its profits?” Yes the kleptocrats want this, and they pretty much already have it.

    Yves suggests that “workers are correct to see the treatment of workers in class warfare terms.” Indeed, outsourcing, union-busting, privatizing, etc. are more about turning us into a precariat, desperate for any crumbs that fall from the fat cats’ table, than they are about any rational quest for stable, profitable long-term business success.

    It is revealing that the U.S. workforce, especially in the right-to-work (for less) states, is already considered sufficiently beaten down as to be a good, cheaper alternative for German manufacturers. Even the neoliberal WaPo can’t hide the fact that BMW building cars in the south is part of a larger story of downward mobility for U.S. workers:

    1. Carolinian

      I’m not sure those BMW workers are “beaten down.” My cousin owns a salboat in Charleston harbor–spends his weekends there. But for sure they don’t make Detroit wages.

      At any rate BMW has just announced a second North American assembly plant in–where else?–Mexico. Take that southerners (however the SC plant is set to expand). Unmentioned in the above story is the role of Clinton and NAFTA. Wall Street’s betrayal followed a political betrayal.

    2. Howard Beale IV

      IBM has had a number of labs in the United States that over the years have been eliminated or had their functions severely reduced. At the same time they’ve opened new labs in emerging economies where the wages are orders of magnitude smaller than what exists in the US. What should really start to concern IBM customers is that they are in the process of spinning off their foundries that make the POWER and z/Architecture CPU’s.

  6. PaulArt

    The question is, how many of the Blue Collar class make the link between the artificially high dollar and outsourcing? How many of them understand that labor cost in the USA is artificially high because Wall Street Bankers have their thumb on the scale keeping the dollar inflated? You can bet good money that very few understand this. It is very reminiscent of that scene in ‘The Remains of the Day’ where the high class dinner guest is talking politics with the host advocating fiercely for the Gold Standard and the host talks Democracy and what the people want and suddenly the dinner guest asks the Butler (Anthony Hopkins) a few questions about the Gold Standard and the Butler has no clue about it and the guest smirks in satisfaction – here it is, enjoy!

    DARLINGTON: Mr. Spencer would like a word with you.

    STEVENS: Sir.
    SPENCER. My good man, I have a question for you.
    Do you suppose the debt situation regarding America…
    is a significant factor in the present low levels
    of trade? Or do you suppose this is a red herring,
    and that the abandonment of the Gold standard is
    at the root of the problem?
    STEVENS: I’m sorry, sir, but I am unable to be of assistance
    in this matter.
    SPENCER: Oh, dear. What a pity.
    Well, perhaps you can help us on another matter…
    Oh, no!
    SPENCER: Do you think that the currency problem in Europe
    would be alleviated by an arms agreement between
    the French and the Bolsheviks?
    STEVENS: I’m sorry, sir, but I’m unable to be of assistance
    in this matter.
    DARLINGTON: Very well, Stevens, that’ll be all.
    SPENCER: Er, one moment, Darlington, I have another question
    to put to our good man here.
    Oh, no!
    SPENCER: My good fellow, do you share our opinion… that
    Monsieur Daladier’s recent speech on the situation
    in North Africa was simply a ruse to scupper the
    nationalist fringe of his own domestic party?
    STEVENS: I’m sorry, sir. I am unable to be of assistance in any of these matters.
    SPENCER: You see, gentlemen? Our good man here is unable
    to assist us in these matters, and yet we still
    go along with the notion that this nation’s
    decisions be left in the hands of our good man
    here, and a few millions like him.
    You may as well ask a committee of the Mothers’
    Union to organize a war campaign.

    1. William

      What, pray tell, does your comment have to do with the article above? Did you read it?

    2. Mark P.

      ‘The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.’

      The Rothschild brothers of London, writing to associates in New York, 1863.

  7. weinerdog43

    What a depressing article. The fact that offshoring has been going on for decades and still is showing no signs of slowing down is depressing to me because of all the wasted potential. Call it crapification, or race to the bottom, but ultimately, no one here will be able to afford or want the products our corporate overlords are selling.

    1. Benedict@Large

      Business planning by fad. Wall Street’s loyalty to ideology trumps not only it’s loyalty to place, but also even its loyalty to the bottom line.

  8. drb48

    “It may take a long time to come to pass, but this level of irresponsibility among what passes for our elites is sowing the seeds for widespread upheaval.”

    Substitute “until hell freezes over” for “long time” and you’ve got a more accurate statement. The supine US public looks unlikely to rouse itself to meaningful action.

      1. Code Name D

        Agreed. American apathy is likely an illusion being projected by the media. Who is going to charge the bestial if they think they will be the only one? So make people think that they are alone in their suffering or that it’s all their own fault. But they only ones they may be fooling will be themselves.

        I have a feeling the first sign of public discontent, will be the mob at the door and throwing torches through the windows. And I bet you they will be so surprised, astonished even.

  9. /lasse

    “This makes perfect sense when you consider that for most manufactured goods, factory labor is a mere 10-15% of total wholesale cost, …”

    Or maybe even at that level on production cost.
    2003 GM announced a fake competition between its Opel factory in Russelsheim Germany and their SAAB factory in Sweden on where the next generation of Saab 9-3 and Opel Vectra should be built. Each factory had to come up with the most attractive bid on production. Don’t know the total but at the Swedish factory they believed they did have competitive bid. And a factory workers total salary cost was 30 – 50 % higher in Germany.
    The competition was probably merely an attempt to squeeze German labor cost. GM was predicated to use the German factory. A new modern factory where they also had their design office. Built with EU subsidy.

    So factory workers salary cost wasn’t all that important in the total cost estimate. But when you read newspapers just a few dollars more for the worker will sink the factory or some minor fluctuations in the currency.

  10. washunate

    “class warfare terms”

    Spot on. It becomes quite logical in those terms.

    ““No one feels strong enough to do that. Because they feel like it’s showing some sort of human weakness, that they’re making an emotional decision—​when in fact, there’s a business decision there. And so it gains a sort of momentum in an emperor-has-no-clothes sort of way. And so people are compelled to do the wrong things. And then you start adding incentives based on the execution of those plans and now you’ve got everybody marching straight off a cliff.””

    That paragraph is an excellent insight into what can go wrong with centralization and authoritarianism.

  11. Ben Johannson

    People tend to think of financialization as the rise in inequality of incomes and power, but that’s only a symptom. The heart of the process is the utilization of real wealth in ways that solely benefit financial markets. Housing can no longer be considered a real asset but a financial one subject to the same speculative forces at work in stocks and derivatives. The same can be said for offshoring, where words like “consolidation” make speculators salivate as though subjects in Pavlov’s laboratory. This won’t end until a floor is constructed for workers to stand on and a firewall separates the real from the unreal world traders inhabit.

  12. H. Alexander Ivey

    What happen to the factory? Dang, now I’ll have to go and read the article!!

    Why sell the factory? Simple. For the money, to the upper management (I wage none of them lived in Tennessee), not for “saving” money for the company (the Supreme Court not withstanding, a company is not a person, so the “savings” goes into an actual pocket, not a company pocket). Haven’t y’all heard? The point of a business is not to make a good or a service (for a profit), it is just to make money.

    1. mellon

      If the factory is obsolete and its machinery has not been upgraded since the 1970s, and is a toxic waste nightmare, a superfund site, by all means, sell it to the workers.

      1. Johann Sebastian Schminson

        Why should we allow “capitalists” to extract profits before they clean up their messes?

  13. amateur socialist

    It might be worth comparing IBM to Apple (especially since Ginni Rometty has stated early on in speeches her goal of making IBM “the Apple of Business”). IBM is (still) moving server manufacturing from US plants offshore but my new Apple PowerMac was assembled and shipped from here in Austin, TX just a few miles from my house.

    Tim Cook is still adding value to his organization. I have never seen Ms. Rometty do anything but extract it.

    1. lakewoebegoner

      Key word is “assembled.” The overall product design is California, final assembly is Austin, but the high-value guts (screen, processor, RAM, antenna, etc) are overwhelmingly non-American. Same deal with most GM/Ford cars—-American assembled with overseas transmissions, engines, etc.

      while something is better than nothing, Apple is just as guilty as everyone else of offshoring production costs, labor costs, environmental costs to third-party contractors.

      1. amateur socialist

        Oh I don’t kid myself that it is mostly built here. But afaik flextronics (apple’s contractor) pays a living wage here. As you say it’s something.

    2. Carolinian

      Yes, ridiculous to use Apple as support for your argument. Their very expensive electronics are mostly made by very low wage labor overseas.

    3. John

      Yeah and Austin had to PAY Apple to set up the plant.
      It’s bad enough they don’t pay taxes to this country, now taxpayer is being PAYED to them.

    4. Howard Beale IV

      It’s worse than you think-Rometty’s getting ready to cede the crown jewels (POWER and z/Architecture CPU manufacturing) to a third-party.

  14. Klassy

    Well, it works both ways. Sometimes business decisions are sold as ideology. But sometimes ideology is sold as a business decision.
    We know the great ideology of the USA is “keep workers in their place”.

  15. John B

    Yes, in the international trade field, we do sometimes hear executives admit that they outsource just because Wall Street likes it and it bumps up their stock price for a while. But another reason for moving to China (not Mexico) is that the Chinese government makes clear that if you want much of a market share in China, you’d better have a production facility in China. So it’s not just Wall Street attacking U.S. workers, it’s also the government of China. Of course, eventually some of these corporations may realize that the Chinese government will not let them have much market share in China anyway, but the lure of a market where consumers’ incomes are growing, not shrinking, is still very great.

    1. mellon

      If Chinese workers wages don’t keep growing every year, they get antsy. Its not unusual to see Chinese firms bragging on their web sites that all their workers got raises of at least 15-20% last year. And so on.

  16. Rexl

    Financialization has ruined our country. And, of course, we are not nearly as smart as Wall Street people, they know much better than people who work with their hands and actually make things. After all what could someone know who does not make a living screwing other people, I mean, deal making.
    The possible blowback from these actions make me shudder.

  17. Anon

    I’ve worked as a consultant for the offices of the CFO of a number of Fortune 100 companies and I can attest that this is absolutely the case. Wall Street wants it. McKinsey does a cursory study and produces some nice slides on what can be “saved”. Two years later, it’s in progress but all the executives remember is that McKinsey promised they would save $X hundred million per year, and no one knows how, nor what new costs might be offsetting that savings. It’s a treadmill of expectations up through the executive lines that drives this, to the CFO, CEO, board, and Wall Street, not actual, reasoned, and detailed analysis.

  18. Deloss

    Thank you, Yves, but I was unable to finish the article. Faced with something like this, all I can do is quote St. Paul:

    For we wrestle not against flesh and blood, but against principalities, against powers, against the rulers of the darkness of this world, against spiritual wickedness in high places. –Ephesians 6:12

  19. HotFlash

    I remember being bemused by the rush of businesses to merge and acquire in the ’80s. This town (Toronto) went from 12 respectable-sized, highly reputable but local chartered accountant firms to maybe three huge ones, all global. Yeah, the ones that keep getting fined for enabling Enron, etc, etc, etc. I worked with the wife of one of the name-on-the-door partners why her husband was not merely happy but euphoric about merging his firm with KPMG. I mean, he was *king* at his place, and the money was very, very good, plus he got in on lots of ground floors. She just shook her head. “I cannot for the life of me figure it out. I think it must be a guy thing.” Dunno, but certainly a mystery.

    It reminded me of seeing birds start flocking in the fall. They form bigger and bigger flocks, and they fly up all together and settle back down. And they do that over and over. And one day they just up and fly south.

    I believe that the Ilargi article explains, or at least describes, these kinds of irrational group behaviours. It is power concentration. That’s what I mean by deeper than the unconscious. We are not talking about individuals here, this *is* a species thing, a flock or herd behavoiur that has its roots way deeper than our brains.

  20. cnchal

    Josh Bivens, an economist with the Economic Policy Institute in Washington, DC, said that increased productivity like that generated at Philips’s plant in Sparta could create jobs in theory, but weak demand is standing in the way. “One way you can imagine productivity gains not translating to rising demand is if more of those gains go to corporate profits, rather than wage growth,” he said. “The share of corporate-​sector profits as a share of income is the highest since 1951. They’re not investing in capital, they’re sitting on piles of money. We’d see more job growth if that weren’t the case.”

    One might be forgiven for asking what, exactly, all this productivity is for. “We busted our butts to get where we were at,” Ricky Lack said the first time we spoke. “We got to number one. And it didn’t matter.”

    Despite the “they’re sitting on piles of money” nonsense (can any economist really say that with a straight face), when productivity increases are taken by the executives for their own benefit, demand for goods drop.

    Globalization has destroyed the value of labor.

    Look at modern day slavery like Apple’s China factory with it’s infamous suicide prevention nets surrounding the building. Yes, that Apple product in your hand was made using slaves. How many cars and yachts does Tim Cook buy?

  21. ep3

    Remember Yves, the importance of offshoring is that labor outside of the US has no rights. You can work them to death, you can beat them, they don’t cry about wanting raises or going on disability. Those costs are hidden. They are not even visible in the US

    1. Yves Smith Post author

      But you didn’t read the article!!!! Even allowing for that, it would still have been cheaper to produce light bulbs in the Sparta plant.

      Or are you suggesting that management is a bunch of sadists, and hurting workers is the primary objective, and any additional profits are a secondary consideration?

      1. cnchal

        If the CEO is a narcissist surrounded by “yes” people, then sadism towards workers is as plausible as plain stupidity or just following the crowd to Mexico.

        Philips never gave a reason for closing the Sparta plant, after repeatedly being asked to explain the decision. They owned the plant since late 2007 so there was no real connection, and it is a lot easier to fire people when they are invisible.

        Selling the plant to the employees was never going to happen. Why would Philips birth a competitor that would hurt it?

        A second twist of the knife from Philips was the $millions of subsidies from the gracious taxpayer, while this was going on.

        If the executives admit that it was a stupid decision, then the question is “why are you not fired?”, so they say nothing and continue collecting millions in pay and perks.

        Others can suffer from their stupidity or cruelty.

        1. hunkerdown

          Oh now there would have been a hell of a way to twist back: “Yeah, remember those tax credits? They’re recoverable, and it’s not in your interest to be seen within 500′ of our city’s plant.”

    2. Gabriel

      It’s likely from S Jobs’s reply to Obama – “Manufacturing jobs aren’t coming back to the US because of labor and pollution considerations” – that Wall Street thinks human resources management and labor relations are a pain and that manufacturing firms are better off without such nuisances.

      Despite years of human resources thinking, practices, and legislation in the US, many firms would rather not deal with people problems from their lower class workers. Overseas, especially in Mexico and Asia, such problems are minimal.

      1. Ben Johannson

        Franklin wrote:

        Private Property therefore is a Creature of Society, and is subject to the Calls of that Society, whenever its Necessities shall require it, even to its last Farthing; its Contributions therefore to the public Exigencies are not to be considered as conferring a Benefit on the Publick, entitling the Contributors to the Distinctions of Honour and Power, but as the Return of an Obligation previously received, or the Payment of a just Debt.

        Strange that no one ever suggests not allowing public corporations, created by society, to offshore at all. Why should we just sit passively while individuals are permitted to abscond with what by definition belongs to everyone?

        1. mellon

          >*”Strange that no one ever suggests not allowing public corporations, created by society, to offshore at all. Why should we just sit passively while individuals are permitted to abscond with what by definition belongs to everyone?”*

          The reason nobody in high places suggests that is that that kind of change or regulation, if it effected a multinational firm, would have to be compensated by the government under investor-state dispute settlement rules. (ISDS) These are new, and have been largely kept out of the media. Basically, every multinational corporate “investor” from a foreign country gets a new “right” now that government action will never “adeversely effect” them. If they do, they can sue them in an arbitration court where the sole question is whether they broke the agreement. No other issues allowed. And of course the “investors” always win against the states. The FTAs are designed that way. This has had a chilling effect on all changes of any kind.

          Also, these new trade agreements give multinational corporations this huge advantage when they are operating in another country which they would not get at home. If a corporation can by means of targeted aquisitions, aquire some small company and make it their subsidiary, they can increasingly figure out a way to use these new rules to their advantage to sue almost any country for any change whatsoever and often the rewards are huge. Also, the way these laws are structured, they seem to be encouraging bad business practices and lack of accountability for multinationals, while at the same time putting countries in a position of near powerlessness, effectuating changes which would never, ever have occurred at the ballot box. They represent a takeover of the world in many ways.

          If you want to see some of these “investor-state” cases and how they work, a unique web site is – where they are compiled and searchable.. they are organized by numerous criteria.

          1. hunkerdown

            I don’t understand why governments at whatever level don’t organize accidents for those making those complaints. It’s so much cheaper than playing ball and there’s free stuff to be had!

        2. HotFlash

          Yes, yes! In the old days we had tarriffs, now corps *are* the govt, so manyof our high officials (in Treasury, the Fed, Health, FDA, HUD, Dept of Energy, EPA, Resources, State, you name it) are just corporocrats on temp assignment to the government.

      2. mellon

        But here in the US they would presumably be automating.

        So they would employ substantially fewer workers, but those workers would be paid well, and operate at a much higher skill level. Think of each one as a “manager” of many machines.

  22. /L

    Some claim CEO is the profession with the most psychopaths, and also bosses can be dedicated to higher goals e.g. class warfare. Western workers have had it to good have to be punished, they are the enemy.

    But who gonna buy all stuff if workers are squeezed more and more.

    I sort of started when capitalist class war successfully divested productivity growth from wages in the late 70s. Trickle down supply side economics promised diversity but of course we got more and more concentrated corporate/capitalist power. Loaded with more and more financial power and financial leverage in the top competition was bought up and smaller players outmaneuvered. A game where the winner takes it all.

    No good forces will come and rectify things, working class have to be in arms again for class war. No Piketty or any other intellectual or academic will do it, not even how strong arguments they have for a better functioning economy and society. Either you fight or get crushed to nothing.

    1. mellon

      >*”But who gonna buy all stuff if workers are squeezed more and more.”*

      The size of the middle class Asian market dwarfs the US one. And its growing rapidly, because Asian families are just buying things like cars for the first time.

      US corporations should learn how to, but still rarely if ever train their own workers or promote from within, unlike European and Japanese companies.

      However, all those US jobs still have a high perceived value, giving them value as bargaining chips in the globalization game. thats what TISA is all about. they can trade US jobs for Asian market access, and kill off the hated unions at the same time.

  23. steviefinn

    Brilliant stuff which clarified my suspicions in regard to some of the reasons for outsourcing. I have seen similar happen in what used to be the largest pottery manufacturing area on the planet – Stoke – on – Trent. It was good that the knock on effects were highlighted in regard to small companies that supply the larger ones. The sad tales from those who lost their livelihoods could probably be replicated thousands of times & not just in the US, but mostly everywhere in the West.

    In Ireland I experienced another form of this but on a much smaller scale, but perhaps just as damaging seeing as SME’s provide a large percentage of small town employment. This was 2 profitable companies each employing around a hundred which outsourced simply to make the owner of the company even wealthier.

    I remember thinking once that it would one day come back & bite them up the arse in as much as that if all the companies did the same thing, who is going to buy the stuff that they are importing ? It’s only one very small example but a small local giftware manufacturer I know who outsources is really struggling despite his prices being rock bottom. He has a shop that sells to the local community – I asked him one day what kind of people are still buying, what kind of work do they do ? After giving it some thought he replied that it appeared to him that most of those who still seemed to have some spare cash to spend on something substantial are those who work in the public sector.

    Well if the Neoliberals suceed in destroying the public sector & everybody else is at rock bottom, he will be out of business & what will the multinational parasites live off then ?

    1. hunkerdown

      Natural resources and human relationships, same as always. At some point, numbers cause more trouble than they solve, especially once one has already won the game and other players are demanding an accounting. Fealty is a much more interesting currency for the lords of today, as Zappos’ new recruiting strategy has proven.

  24. John Merryman

    I think a lot of this goes back to the mindset that money is a commodity which can be mined out of the larger economy, rather than the contractual glue holding it together.
    Once they suck it all out, then they find there is no place to put it back in and it becomes worthless, like blood on the sidewalk.

  25. nothing but the truth

    the reasons are not only financial.

    the system in the US has a somewhat amoral side to it. It is based purely on power and gaming the system. Customers are sniffing around to sue and make an easy buck, employees looking for worker comp plums and so on.

    Of course the majority are honest people but the “personal injury lawyer mindset” crowd has poisoned the place.

    People will say “those are the rules, play by them”, well that’s exactly why honest people included pack up and take as much business overseas.

    The other problem, although this is coming in the future and so is not the cause of the past, is that the public discourse is becoming difficult and especially people on the left seem to have adopted ad hominem as normal behavior (eg krugman columns).

    1. mellon

      “Nothing but the truth” Did you know that – for example, malpractice suits are at record all time lows, while hospital mistakes are at record highs.. (the third highest cause of death in the country, Ive recently heard) Gnerally, there is no such thing as easy money in personal injury, plus with subrogation clauses there is rarely any payoff to suing, even if workers win, the money all goes to the health insurance company first. oftentimes, they end up owing far more than they ever could imagine. The odds are truly stacked against the working person now. Lawyers cost $300-1200/hr and even in slam dunk cases, they rarely work on contingency any more. For an older person, nomatter how bad the injury, its rarely worth suing, because they wont need lifetime care or be a vegetable for long, they are too old. Plus, its all based on lost income. If the income isn’t high, not worth it.

      1. nothing but the truth

        most insurance companies settle these things out of court.

        as a businessman who had to go through it, it was disgusting to see a customer trying to scam us for a minor injury but that is the system.

        The problem here, especially in some communities is that of entitlement of getting stuff for free. Democrats are especially guilty of encouraging this, and the practice ad hominem to anyone who points out the truth.

        Economists love to tell us “this is not about morality” (because it suits them).

        Well they’re wrong as usual. If you see someone doing very well by cheating, that has a bad effect on everyone else.

        The macro has a lot to do without social mood and that is ruined by seeing cheats prosper.

        Truth is not a technicality. It is the core of the human heart. Economists can go f** themselves.

        1. Vatch

          “The problem here, especially in some communities is that of entitlement of getting stuff for free.”

          You must be referring to bailouts for the giant banks that do “God’s work” (thank you, Mr. Blankfein), and subsidies such as the oil depletion allowance for the giant oil companies and really cheap grazing fees on public lands for ranchers (hurray for the Wise Use movement).

    2. armchair

      The worst thing in the personal injury practice are the clients who believe there are giant payoffs waiting for them, because they believe all of the B.S. they have been told about the evils of the tort system. They’re the morons who, after years of bellowing about greedy trial lawyers, think that they’ve hit the jackpot for their whiplash.

  26. Gabriel

    Maybe off-shoring is Wall Street’s reaction to lean manufacturing?

    Before off-shoring took off, we had lean manufacturing/operations – borrowed from Toyota. Lean manufacturing, a very strong movement then overtaking manufacturing, requires a good workforce – intelligent, cooperative, thinking employees. Each worker is trained to think and decide for him/herself.

    It is also very tough to achieve a true lean manufacturing workplace. But once you do have a lean environment, you have very low product costs along with very high quality – cars, for example, that can run 100k or more without major repair. Low product costs and very high quality.

    Could it be that Wall Street saw the future of lean manufacturing – a strong, thinking workforce – and decided against it? Maybe Wall Street was afraid of such a manufacturing sector filled with hard working and discerning employees?

    Just some hunches. No proof.

    1. mellon

      With TISA they wont have to offshore. The foreign companies and their workers will come here.

  27. Johann Sebastian Schminson

    Widespread upheaval will be answered with a new and improved existential threat — foreign or domestic.

    The US middle class is a dog trained to chase its own tail.

  28. different clue

    To an Yves Smith comment way upthread, I concur in the opinion of others that the primary motive is social class sadism and control, and profits are secondary for as long as Bussiness Deciders can afford to lose money in order to inflict greater losses on their social class targets. So class aggression-class sadism explains it.

  29. John

    I import-export stuff all the time and will say designing and making things locally are much more preferable. Every time I design something at a Chinese factory it comes back with some kind of flaw. Then add the shipping costs and then customs duties and it makes the experience not so exciting.

    Economists alway project customs duties as a bad thing because it distorts costs. That is partly true. The real implications are that it tempts manufacturers to make things locally versus importing them. The other implication which is never discussed or added in as a cost is environmental costs. How much does that iPhone really cost? Chinese folks are literally dying because of the excessive pollution due to unsound manufacturing practices. Health care costs to China are not factored in the cost of the iPhone. Capitalists like Apple are always able to shift those costs somewhere else because the Chinese government allows it.

    Phillips may have had the environment in mind too when they shut down their plant and moved to Mexico. It is far easier to commit environmental disasters in other countries.

  30. run75441

    Hi Yves:

    You need more manufacturing people answering this message.
    This: “factory labor is a mere 10-15% of total wholesale cost, and any savings in factory labor will be offset by higher shipping and greater managerial costs (more coordination, performed by much more highly paid workers). It is thus more accurate to regard a lot of offshoring as not being about cost savings, but a transfer from ordinary workers to managers and executives.” is kind of true. The cost of manufacturing which I typically tout is less than whole sale cost. I would say Labor is 10% or less of the cost of manufacturing which having been employed as a consultant to places like Dana, Caterpillar, National Can, etc. we found to be essentially true.

    What this leaves are two other costs Overhead, and Materials. If Labor is so small than the other two must be bigger of course. Say 50-60% Materials and 30-40% Overhead.

    I can impact materials through better manufacturing processes or throughput. I can negotiate better and eliminate the horde of suppliers engineers like to spec into a product. I can use blanket orders and JIT to minimize inventory. In any case, Materials will be the biggest nut and will not go away even if you go overseas.

    There is always Overhead. Accountants like to burden Labor with Overhead. The problem is if I am improving productivity by giving Labor greater efficiency, I can not change much of the Overhead other than eliminate Labor. Overhead is always there. Overhead being the legislative ones like Social Security, Medicare, Workman’s Comp (except Texas – the miracle) , Unemployment Comp, OSHA, EPA regs, Child Labor Laws, OT laws, etc. Then there is the customary stuff like ESI, 401K contributions, paid vacation, paid holidays, paid sick days, etc.

    I can not impact Materials that much. You are getting charged for Asian Labor t ~$6/hour as opposed to $12- $15/ hour or $.60 as opposed to $1.20 at 10%. Would I move for that differential? Likely not. Usually, you are going to be FOB Dock or FOB Origin or Ex-Works which means I pay before I receive the product. In the US for automotive it is 45-60 Days payment terms. In other words, I used it up before I even pay for it. Then there is the ~5 weeks on the ocean, on a rail car, on a truck, and in customs x 2. 5 weeks of inventory all the time.

    Which of the three would you pick as a reason to move to another country. It is not Labor, too small. It is not Materials as the impact is small and often times more (GE Nylon resin for one or Polypropylene resin). It is the Overhead, one goes to Asia to eliminate. It is almost nonexistent except for breakfast and lunch and a snack for OT, transportation to the plant (bus), and a nurse on staff. US companies do not want to pay the Overhead and will shuck the Unemployed off on the Gov and the taxpayers as they virtually sell the product for higher prices than what they could be.

    To boot since we pay their subsidiaries, the money stays overseas. Ok I am done. :)

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