Outsourcing the Soul of the US

The outsourcing trend started with manufacturing. With the internet came "global wage arbitrage" and outsourcing progressed to call centers, XRAY analysis, and other medical diagnostics. After all, why should any company pay a US lab technician for analysis when they can just as easily take a test here then ship the results over the internet to a doctor in India who is willing to do the diagnosis for a fraction of the cost? Why stop there? Why not outsource R&D too?

For years we have heard pundits claim that "manufacturing does not matter", "those are only low paying jobs", and "the good jobs" (aka high paying design and innovation jobs etc) would stay in the US.

Why should those high paying jobs stay here? What could possibly make them stay here? Does the US have a lead in education or intelligence? Are US colleges turning out better engineers than do colleges in India? Are Chinese workers less intelligent or less hard word working than US workers? Isn’t it being more than a tad arrogant to assume so? Even IF the US had an insurmountable lead in talent, just what % of the total job force were those "good jobs" supposed to be anyway?

The point is now moot because the proof is in. We are now starting to see a big push towards outsourcing innovation and R&D, which up to this point have been the heart and soul of US technological advantage. Business Week discusses this very point in the March 21, 2005 Issue:

"Outsourcing Innovation"

When Western corporations began selling their factories and farming out manufacturing in the '80s and '90s to boost efficiency and focus their energies, most insisted all the important research and development would remain in-house.

But that pledge is now passé. Today, the likes of Dell, Motorola, and Philips are buying complete designs of some digital devices from Asian developers, tweaking them to their own specifications, and slapping on their own brand names. It's not just cell phones. Asian contract manufacturers and independent design houses have become forces in nearly every tech device, from laptops and high-definition TVs to MP3 music players and digital cameras. "Customers used to participate in design two or three years back," says Jack Hsieh, vice-president for finance at Taiwan's Premier Imaging Technology Corp., a major supplier of digital cameras to leading U.S. and Japanese brands. "But starting last year, many just take our product. Because of price competition, they have to."

On Feb. 8, Boeing Co. (BA ) said it is working with India's HCL Technologies to co-develop software for everything from the navigation systems and landing gear to the cockpit controls for its upcoming 7E7 Dreamliner jet. Pharmaceutical giants such as GlaxoSmithKline (GSK ) and Eli Lilly (LLY )are teaming up with Asian biotech research companies in a bid to cut the average $500 million cost of bringing a new drug to market. And Procter & Gamble Co. (PG ) says it wants half of its new product ideas to be generated from outside by 2010, compared with 20% now.

Some analysts even see a new global division of labor emerging: The rich West will focus on the highest levels of product creation, and all the jobs of turning concepts into actual products or services can be shipped out.

Consultant Daniel H. Pink, author of the new book A Whole New Mind, argues that the "left brain" intellectual tasks that "are routine, computer-like, and can be boiled down to a spec sheet are migrating to where it is cheaper, thanks to Asia's rising economies and the miracle of cyberspace." The U.S. will remain strong in "right brain" work that entails "artistry, creativity, and empathy with the customer that requires being physically close to the market."

Isn’t it interesting how the analysts keep paring down what processes will take place in the US while making silly excuses for what processes don't? Here is the progression so far: Manufacturing, Custom Manufacturing, Innovation & R&D, "Key Innovation" & R&D, Key Innovation, etc etc etc. That model finally blew up when there was nothing left and no one could figure out what "Key Innovation" really meant. Clearly that model had to be replaced so some analyst in complete fantasy land dreamt up the half-baked idea that the US will remain strong in "right brain" work. Are the "right brains" somehow deficient in citizens from China or India? Somehow, I think not.

Innovation may be vital, but there is no underlying reason it has to take place in the US. Indeed, with costs in the US of over 30 times the costs in India or China, there is every reason to believe this is just the start of the trend towards the outsourcing of our soul. If the trend continues long enough, the US will have nothing left but bunch of "over-hyped designer brand labels" offering little to no differentiation vs. "off-the shelf" products made by generic Asian manufacturers.

Will we keep our over-paid US marketing reps or will they go too? Why can’t the design of advertising campaigns be outsourced to India as well? Eventually everything that can be outsourced will be outsourced. The outsourcing progression in advertising will be the same as with technology: "Don’t worry, ‘cutting edge’ advertising campaign will always stay in the US"…… and on down the line. Eventually, no one will be able to define "cutting edge advertising" any more than they could define "cutting edge technology". Even if someone can define it, why would it stay in the US if there are far lower costs elsewhere? Right wrong or indifferent and without attempting to lay blame, it is vital to understand the processes that are in place:

The trend towards outsourcing is very strong and will remain strong because of "Global Wage Arbitrage". Wages in the US are 30 times wages in China. Quite literally any job that can happen cheaper somewhere else is at risk. "Global Wage Arbitrage" will continue to apply wage pressures on jobs in Western countries vs Asia and developing countries. That is the very nature of this trend and there is nothing likely to stop it until it completes.

The US wants it cake and to eat it too.
We want jobs but we also want to buy cheap goods at Wal-Mart. We blame China for "currency manipulation" but would scream bloody murder if the prices of TVs rose 300% to protect 2000 TV assembly jobs in Tennessee. At 30-1 wage differentials how can floating the RMB accomplish a thing unless the value of the US$ fell 80% Does the US really want to pay 80% more for oil and TVs and everything else?

OK. What if China paid their workers more? Wouldn't that raise the prices of all goods manufactured in China? (Answer: Yes it would). Would it bring back plants to the US? (Answer: No it would not. Some other country such as Brazil would step in and undercut us).

In the meantime outsourcing is profitable for CEOs and wall street fat cats. It has increased profits for many corporations but it comes with a price: class warfare.

The number of "haves" that can afford to pay extra for that designer label is rapidly shrinking vs. the ever growing number of "have nots" where price now means everything. Is a shirt with a small "Gucci" label worth 10 times more than something from Kohl’s or JC Penny’s? Well it is if you are a CEO with a $10 million salary on top of a huge bonus and stock options, not to mention an image to maintain, and nothing better to do with your money. After all, it’s damn hard to spend $10 million dollars. I wish someone would give me the chance.

Let’s look at outsourcing from a CEO’s point of view:
Outsource manufacturing, give yourself a raise.
Outsource innovation, give yourself a raise.
Outsource R&D, give yourself a raise.
Slash worker benefits, give yourself a raise.

Here are just two of the more preposterous bonuses granted to CEOs this year:
Ford CEO Receives $18 Mln in Compensation

Monday March 14, 2:14 pm ET
DETROIT Ford Motor Co. granted Chairman and Chief Executive Officer Bill Ford Jr. $18 million in restricted shares and stock options in compensation last week, the automaker said on Monday. For last year's performance, the automaker's board awarded Bill Ford with 600,720 restricted shares valued at $7.5 million in lieu of a cash salary and a BONUS of 240,288 restricted shares valued at $3 million.

This is a bonus for what? Ford is at a 52 week low and ultimately headed for bankruptcy. But let’s make sure the CEO can have one hell of a going away party. It’s the American way.

EMC CEO set for $13 mln in 2004 compensation
Joe Tucci, chief executive of corporate data storage leader EMC Corp., stands to pocket nearly $13 million for 2004 as the company held the line on salary and stock options but boosted restricted stock compensation, EMC said in a filing on Friday.

Tucci exercised 350,000 outstanding stock options with a value of $3.34 million during 2004. He holds 2.8 million additional exercisable options and 5.34 million shares that were not exercisable at the end of 2004, the proxy said. The total value of Tucci's in-the-money options is $26.5 million

This is a bonus for what? EMC stock has gone sideways for over a year. Is $26.5 million in stock options not enough? I guess not.

Real wages have decline for the average worker but the pay of CEOs is doubling or tripling from already outrageous levels. Here is what the New Your Times has to say about these new robber barons:

Captains of Piracy

Carly Fiorina was fired last month as chairman and chief executive of Hewlett-Packard. So why did the board reward her with a total of $8.15 million in her last full year before booting her out? Then there's Michael Eisner, who is finally being pushed out of the Walt Disney Company's chief executive post for running his company almost into the ground. Yet the Disney board recently gave him a $7.25 million cash bonus.

Bonuses for C.E.O.'s last year rose more than 46 percent, to a median of $1.14 million. Both the amount and the percentage increase were the highest since comparable studies began five years ago. Companies have shaved costs by laying off workers and reducing health care coverage - and then using those savings to slather more pay on top executives.

Since 1993, the average PAY for C.E.O.'s of the S.&P. 500 companies has tripled to $10 million at last count, while the number of Americans without health insurance has risen by six million. Public companies devoted about 10 percent of their profits to compensating their top five executives, up from 6 percent in the mid-1990's.

If there is anyone in need of outsourcing it is CEOs and boards of directors.
Why pay CEOs $10 million a year when we can easily replace them with a set of 5 rotating rubber stamps? Those stamps read as follows:

1) Outsource Innovation
2) Outsource R&D
3) Outsource Marketing
4) Reduce Employee Benefits
5) Feed Monkey More Peanuts

Number 5 is to pay the monkeys that replaced the CEOs.
When there are no more employees remaining in the US (except for retail clerks and a single low level manager per store) we will then be able to reward the monkeys with "a bonus banana". What the heck? I'm generous. Give them two.

Mish