Posts Tagged ‘mercantilism’

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

~F. Scott Fitzgerald

This is not a post about CRM.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Who would have thought that a software company would become a pivot point in the east-west struggle to define globalization and capitalism in the twenty-first century?  The obvious software companies that have direct effects on globalization — companies like Microsoft, SAP, Oracle and all have important application level solutions that contribute to the global ball of wax but they were not involved.  None of them has had the effect that Google has had in the last week.

The search company came to the situation quite by accident, without intent and to be honest, I think they were unwilling participants having been pushed or more likely pulled, into the mess.  Of course I am talking about Google’s ongoing dust up with the Chinese government.

Earlier this week we got word of an attack on Gmail servers by computers in China in which the Chinese tried to obtain data about the private email accounts of Chinese dissidents.  In addition to the Gmail attack, 33 other companies were hit.  In those cases valuable computer source code was stolen or at least an attempt was made to steal it.  It was not the first time something like this happened.  If you check out another piece on this site you can find more details.

As a Chinese proverb says, “May you live in interesting times.”  Well this is it.  And keep in mind that the translation of interesting is anything but benign.  The implication in interesting is turbulence.  The incident, and Google’s reaction to it come at a very interesting time.  China has established itself as the world’s workshop with a ten percent growth rate and all of the problems that go with it including high expectations of an improving standard of living.

Much in contrast to what many talking heads have spouted, China has not discovered capitalism so much as it has harnessed mercantilism, an economic system that focuses making things for export while depressing the value of its currency and repressing its people.

China has used the trappings of capitalism — especially importing foreign capital and expertise to rapidly evolve from a poor agrarian economy to one that is increasingly urban and oriented toward building cities, power plants, roads and more.  In short, the country is modernizing at breakneck speed.  We know all this. (Did I already mention the ten percent annual growth?)

Keeping the lid on mercantilism requires authoritarian rule and control of information to better control the populace.  Orwell had it right.  But for a country growing as China is, the stirrings of the people for a better life goes well beyond the material.  The American social scientist, Abraham Maslow showed in a famous paper published in the 1940’s that humans have a hierarchy of needs, the higher ones focusing on self actualization and self esteem.

The problem for China is that controlling information as it does will have little effect on its manufacturing prowess.  But the game has changed, recent global events, most notably the credit crisis, are drying up markets.  Western consumers have mortgaged themselves silly trying to buy all of the semi-useful plastic that China, Inc. spews out like so many salad shooters.  China’s inevitable evolution as a nation has to be in areas that are information intensive and there’s the rub.  In a nation where the state controls information flow, the essential raw material of China’s future will be forever bottled up causing an impediment to future growth.

Moreover the world’s attention is focused like the proverbial (Ok, Clintonian) laser beam on what China does next.  The world economy that has invested in China and bought its goods still has not gone “all in” and how the Google affair is handled (and the obvious larceny of intellectual property) will have a lot to do with China’s future.

So far, the world community has been very reluctant to say much beyond President Obama’s comments yesterday endorsing Google’s stand.  If it was up to me, I would tell the Chinese to turn back one containership full of merchandise for every company that was hacked.  Please don’t tell me about all the Americans who would be hurt by this shortfall of merchandise.  Sometimes you have to take a stand.

It took the world ten long years to forget Tiananmen Square and when China was finally allowed to join the World Trade Organization in 1999 it was with the understanding that China’s leaders had learned something and grown.  The events of the last week stand in stark contrast.  China seems to be taking on capitalism and globalization as if they were at a buffet.  This isn’t a buffet — democracy and basic human freedoms as expressed by the U.N. Universal Declaration of Human Rights are all part of the package.  If you want to be in the game, that is.

Google grew a pair today and told China to quit messing around in its business or Google would cease operations in the People’s Republic.  The incident that provoked the tension involved a massive hack last week from computers operating in China.  A total of 34 companies including Google were hit and most of the larceny involved source code.  But in Google’s case, the larceny was of the company’s soul and reputation for trustworthiness.

Chinese hackers had attempted to discover the gmail addresses of dissidents inside China.  It is not clear from the report in the New York Times that the hack was successful but this was not the first time something like this happened either.

According to the Times article:

“In its public statement Google pointed to a United States government report prepared by the United States-China Economic and Security Review Commission in October and an investigation by Canadian researchers that revealed a vast electronic spying operation last March.

“The Canadian researchers discovered that digital documents had been stolen via the Internet from hundreds of government and private organizations around the world from computer systems based in China.

The five-year relationship between Google and China has been a rocky one from day one when Chinese officials demanded that some Google searches like “Tiananmen Square massacre” turn up no information.  And as recently as June Chinese authorities blocked Google temporarily over another issue.

The existence of cyber warfare or cyber espionage has been known for some time and the United States does its share.  Some people say Google’s actions are overblown and that the company cannot afford to walk away from a market that has 300 million search users (and growing) and generates $300 million per year for Google, but I strongly disagree.

The logic of not wanting to walk away from this lucrative emerging market has the same merit as boiling a frog and if you look at the relationship to date, the United States is having its lunch money taken by the Chinese.  In the name of future profits we are sending jobs overseas and we are not receiving anything as valuable in kind.

According to The American Prospect magazine, since China joined the WTO (World Trade Organization) the main referee of globalization, 42,400 factories have left the United States for China.  That’s not jobs, that’s factories.  Ross Perot was right about that giant sucking sound, it’s jobs baby jobs.

So why do we continue to kowtow (a nice Chinese word) to an authoritarian regime that treats us this way?  This isn’t globalization as it was envisioned, it’s mercantilism and it’s doing us no good to pretend otherwise.  This nonsense has to stop.

Today Google grew a pair, who’s next?