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Decision Time: What Will Make the West Competitive vs. China?

Here is the harsh truth: China has no obligation to help make the West competitive. Western businesses fired up China's manufacturing engine by investing billions into the country, but the communist country itself fostered the environment that made it a magnet for foreign investment.

So don't look to China for help in the struggle to regain or stem job losses to Asia. Governments, businesses, and employees must become more aggressive in developing steps that will make North America and Western Europe competitive. The steps will involve slashing total production costs, including wages where necessary, and implementing further productivity enhancing actions.

This is not a message some would like to hear, but going by the results of the latest EBN poll it seems employees are already onboard with the lower wages; almost two out of three respondents (approximately 60 percent) said they agreed lower “labor costs [will] make the West more competitive vs. China while 33 percent of the 158 respondents (as of Tuesday, Nov. 30) disagreed. Another 7 percent were uncertain. (To take the survey or see results click Labor Costs, East & West, Part 1.)

Here's what I propose: First, stop the handwringing and start thinking; the jobs that have been lost cannot be frog-marched back. Some of these can be won back — and future losses stemmed — through diligent planning by businesses and governments.

Workers in the West must stop the servile “Aye, Aye, Captain,” response whenever a CEO, investors, or bondholders demand plants be relocated to lower-cost locations. Instead, draw up cost-effective alternatives that a chief financial officer can use to make the case for keeping those facilities in local centers. You won't win every argument, but by being active in the process of matching Western costs against the China-cost you could safe some jobs and keep the enterprise profitable.

Also, don't accept the twisted logic that Western workers should go for high-level design work and let low-level design and manufacturing operation move to Asia. Why? Chinese and Indian engineers, assembly line workers, and even the lowliest cleaners don't want to stay stuck at the lowest rung of the corporate ladder. They want the fat pickings just as much as you do, and, in any case, low-level manufacturing jobs represent the best training grounds for future leaders.

This is not a rah-rah motivational article. Some of the actions that will be needed to safeguard manufacturing jobs in the West will be controversial. Those who agreed with me in a previous article (Stop Gorging on China) may hurl rotten tomatoes this time, but regardless, Western costs must go down and productivity must ratchet up so we can ensure jobs proliferate where needed — at home.

And the blame-China game must stop. Political and business leaders haranguing China or bullying it to jack up the Yuan's exchange rate, for instance, need a different strategy. A comprehensive program to redress the situation is preferable — let's say, through tax credits for corporations willing to expand operations locally.

And finally, we must lure Chinese companies to our shores. We did it with the Japanese, and now Toyota makes cars in the United States. Chinese companies have huge foreign exchange reserves at their disposal; let's help them spend it here to invest in or purchase Western companies. Then let's seal the deal by ensuring jobs created in the West by Chinese companies stay right here in the West.

20 comments on “Decision Time: What Will Make the West Competitive vs. China?

  1. KHC
    December 1, 2010

    Thought-provoking post, Bolaji, but I'm not sure I agree that “employees are already onboard with the lower wages.” More likely, “lower wages for others ” is the prevailing view.

  2. Ariella
    December 1, 2010

    Bolaji, that was an excellent post.  You don't only describe the situation but offer practical suggestions about what can be done about it.

    On the lower wages that KCramer commented about, the reality is that people have had to accept lower wages.  Unions that refuse to accept that fact cause the loss of jobs for many others.  That is what I heard was the case for the Newark police officers.  The union leader would not negotiate and so 20% of the force was cut altogether.  IT people have taken huge pay cuts.  Those who were drawing six figures with salary and bonus are now earning around $60-$75K, with over a decade of experience.  Someone I know was just offered a job at $55K (at a major financial institution); that would pay him even less than the consulting job he now holds. It is a real dilemma for him to decide between a lowball offer like that and the prospect of unemployment.

  3. Parser
    December 1, 2010

    Wages were artificially too high just like housing boom was artificially too big and collapsed. Late 2008 many companies started furloughs and salary freeze which simply was lowering wages. As of now hot job like IC designer get even more and discrete analog circuit designers have no jobs. We have to retool ourselves. Unfortunately many of us will not have time and resources to do that. Maybe Chinese factories here is a good idea.  

  4. Barbara Jorgensen
    December 1, 2010

    I would add that Wall Street and financial institutions should do their part as well. Business loans should be easier to get and at better rates. Wall Street should stop rewarding companies that cut costs–those costs are mostly cut by moving manufacturing offshore. If a manufacturing company's stock tanks, spending dries up and jobs are the first thing to go. I do think the industry can help control its own fate to some extent, but I don't see the financial markets making the kind shift it will take to reward anything except high profits.

     

  5. bolaji ojo
    December 1, 2010

    Ariella, How can one agree with two conflicting views? I am going to try. KCramer is right that for many people it's about lower wages for others and that workers in the West may not really agree with the view that their compensation must drop if they are to retain their jobs and compete with others globally. Yet, the EBN Poll does indicate people realize Western salary packages may have to decline to make them more competitive against China. I don't think people in the West necessarily want to earn what the average Chinese employee makes, though.

    That's the first view. The second accepts the reality you cited. Western wages, in real terms, are already falling in certain professions. We've also figured out ways to “cut” wages without actually reducing them by using mechanisms like salary freeze — President Obama just announced a salary freeze for civilian federal workers — and many companies have pared down or eliminated such perks as bonuses, performance incentive payments, etc.

    We've also seen situations where positions are eliminated and the workload redistributed among survivors. This is essentially another form of wage reduction. At some companies, employees are paying higher health insurance premiums and old perks such as company-paid retirement plans and 401-K contributions have either been eliminated or frozen.

    The truth is we are already seeing lower salaries for workers. In some cases, laid off workers returning to similar jobs often don't get less than they used to earn. That's another form of wage cut.

  6. eemom
    December 1, 2010

    This is a very interesting subject although somewhat complicated in its implementation.  There is no question that the west needs to become more competitive and less dependent on China.  There is also no question that people have accepted pay cuts and pay freezes in an effort to save their jobs and the jobs of their friends.  Yet, we still see certain sectors that say “not us”.  Some that still look for pay increases and bonuses.  Some that feel some level of entitlement because that is what they are simply used to.  It doesn't make sense but it exists.

    I wholeheartedly agree with the post about wall street getting onboard.  Maybe the government needs to offer tax incentives to coorporations for “jobs added” or “plants opened”.   Instead of bailing out companies that are near bankruptcy, why doesn't the government offer stimulus in a more proactive fashion.

  7. Ariella
    December 1, 2010

    Sorry that I was not clear.  To clarify:  I am not in favor of lowering wages as the solution to remain competitive.  I am simply pointing out that wages have already dropped significantly for many.  As a result, people in professions that were traditionally considered low paying, like school teachers, are actually earning far more than many who work in IT on Wall Street (plus they have the summers and many more holidays off).  The salary freezes on the federal level are coming years after the salaries of people working outside of it have faced layoffs, loss of benefits, and pay cuts.  The federal workers, in the mean time, have still enjoyed full benefits, a real 8 hour day with an hours break (as opposed to 9-10 hour day assumed for other industries), and automatic annual increases.

  8. eemom
    December 1, 2010

    The reason teachers and police and other state and municipal workers are still enjoying full benefits is because they are backed by powerful unions.  While in the private sector we are are not given a choice when benefit costs increase or a salary is decreased, unions are strong and have the power to negotiate favorable contracts.  Unfortunately, I do not see this ending anytime soon.

  9. Hardcore
    December 1, 2010

    Hi,

    Ultimatly lowering wages will not work as a solution to curing copetativeness with China or  indeed any other 3rd world country.

    because:

    1. no one in the USA will work for  $100 a month.

    2. no one would give up paid holidays , so that they could send money home to their poor hill farming families.

    3.  the cost of living in the USA is significantly higher than China, in China I can buy a large live Chicken for $2.00US, and have it cleaned & de-fetherd included in the price.(unless i want to stock up and keep it live under my kitchen sink for a few days)

     

    The solution to remaining competitive, is producing services that cannot be easily processed offshore (example in the U.K  the BSI standards contributes about 16 billion pounds a year)

    That is 16 billion pounds from basically the sale of 'paperwork'

    The future is innovation at a faster rate than the other guys you are competing against, unfortunately there are far too many politicians whining about how unfair the world is rather than trying to put systems in place that allow innovation, you only have to look at the School curriculum to see the damage they are doing.

     

     

     

     

  10. Ariella
    December 1, 2010

    Yes, eemom, unions have maintained a type of bubble for the members that ignored the economic situation around them.  Like all bubbles, though, it cannot be sustained.  The unions that insist on not giving up anything, as was the case for the Newark police, are actually selling out the people who have to be let go when there simply is not enough money to pay them all.  From what I heard, that was the unilateral decision of the union head and did not necessarily reflect what the members actually wanted. 

  11. eemom
    December 1, 2010

    I agree with you that the decisions of the union management does not reflect the union members but the problem is that members do not often have a voice.  For teachers for example, seniority and tenure are key.  When a contract is negotiated, it is mostly done with senior members that are looking out for themselves and not for the little guy who does not have tenure.  I am not saying that all unions operate that way and some have opted for wage freezes in order to save jobs but sadly, that is not the norm.  Anyway, my point is that in the private sector, we don't even get that luxury.  I do hope that you are right and that the bubble does burst so that a level playing field is generated.

  12. Ariella
    December 1, 2010

    I actually majored in labor studies, and most of my instructors were very sympathetic to the union movement as a reflection of Marxist ideals.But the notion that everyone is equal, but some are more equal than others certainly pertains to unions.  From my experience as an adjunct who automatically was entered into the union for the instructors, I recognize that the union really did very little for those in my position beyond taking dues off our salary. 

     I'm somewhat familiar with how the Verizon union operates and know a retired Verizon worker.  The way they negotiate, in general, is that they won't give up anything for the senior members but allow for different, less favorable contract terms for the new employees.  So long as the interests of the senior members are met, they are willing to compromise on the others. It's not about worker solidarity but jockeying for the best position for the top group.  I don't know if the same holds true for all unions, though.

      I also know someone retired from the union for the New York transit workers.  He get full health insurance, as well as a full pension. With all the MTA's crying poverty,  they've cut many jobs out to try to save money.  I find it hard to believe that they will be in the position to keep extending benefits in the way they have in the past.  

  13. Ashu001
    December 2, 2010

    EEmom,

    I totally agree with your insight in this post.Nonsenical decisions like this one by the Unions to absolutely nothing to endevaour US Labour to globally competitive manufacturers….They are not happy with one country they move elsewhere and this keeps happening as they leverage and squeeze whatever they can out of the Global Supply Chain and of course Labour.

    http://globaleconomicanalysis.blogspot.com/2010/09/uaw-workers-vote-457-to-96-to-close.html

    Regards

    Ashish.

  14. Ashu001
    December 2, 2010

    Hardcore,

    Not wanting to argue with you but you raise a valuable point here.

    “no one in the USA will work for  $100 a month”

    Major reason being that Cost of Living ,ie.Inflation caused by the Governments Money printing is leading to large-scale theft  from the middle class to feed the ever burgeoning Government and Wall Street.

    Don't worry about this.This current system of US Dollar hegemony is not going to last much longer.Very soon,the US Dollar will be replaced as the World Reserve Currency and our Govt will no longer be able to print money at will.Once that happens then Wages will come down to more realistic and Globally competitive levels for everybody.Including Govt workers(who are currently heavily,heavily overpaid).

    Check this out from US Today(they do some really cool work exposing how they are getting more and more cash for doing basically nothing…

    When America goes completely and officially bankrupt(and the US Dollar is no longer the world Reserve currency) stupidity/theft like below will not continue one bit…

    Since 2000, federal pay and benefits have increased 3% annually above inflation compared with 0.8% for private workers, according to the Bureau of Economic Analysis. Members of Congress earn $174,000, up from $141,300 in 2000, an increase below the rate of inflation.”

    http://www.usatoday.com/news/nation/2010-11-10-1Afedpay10_ST_N.htm?csp=hf

    http://www.usatoday.com/news/washington/2009-12-10-federal-pay-salaries_N.htm

     

    Regards

    Ashish.

  15. Anna Young
    December 2, 2010

    The optimist knows the West has one factor in its favor and that is the ability to renew itself, anticipate challenges and believe in itself. China is still far behind the West in too many ways and in too many areas for us to start panickying. At the same time, though, they are making strong advances and we can find a way to leverage the edge we have. That's why discussions like this are very important. We still have enough time to raise our game and put some good distance between us and rival goegraphic centers but it will take more than mere talk. Concrete actions are needed now!

  16. Hardcore
    December 3, 2010

    Hi Ashish,

    Don't worry , no need to consider your post as an 'argument',  but rather healthy discussion.

    You make a valid point about the US $ going 'bankrupt', but it has been like that for decades. T he real issue is the setting up of a secondary trading currency to replace the US$.

    I remember last year most of the chinese businesses were talking about doing business in Euro rather than US$ (many of our suppliers were pushing for this, so much so that they would give 90 days lc on US$ (down from 120) but as much as 180 days LC if it was Euro)

    Well we all saw what happened to that fantasy!!, Ireland and the 'pigs' fairly well put a nail in that coffin.

    I get a strong feeling that the RMB is  fairly close to being floated, but even this is not enough to cause a move  back to the USA for the majority of business that have a manufacturing base out in Asia, I still feel Innovation is the only way forward.

    As for the RMB, i suspect it will be via the 'backdoor', China will start off with some trading partners with their currency linked to the RMB, then expand it one country at a time, until they are done , a bit like Chess, move one piece at a time, until “checkmate”

     



  17. Hardcore
    December 3, 2010

    Hi Ashish,

    Don't worry , no need to consider your post as an 'argument',  but rather healthy discussion.

    You make a valid point about the US $ going 'bankrupt', but it has been like that for decades. T he real issue is the setting up of a secondary trading currency to replace the US$.

    I remember last year most of the chinese businesses were talking about doing business in Euro rather than US$ (many of our suppliers were pushing for this, so much so that they would give 90 days lc on US$ (down from 120) but as much as 180 days LC if it was Euro)

    Well we all saw what happened to that fantasy!!, Ireland and the 'pigs' fairly well put a nail in that coffin.

    I get a strong feeling that the RMB is  fairly close to being floated, but even this is not enough to cause a move  back to the USA for the majority of business that have a manufacturing base out in Asia, I still feel Innovation is the only way forward.

    As for the RMB, i suspect it will be via the 'backdoor', China will start off with some trading partners with their currency linked to the RMB, then expand it one country at a time, until they are done , a bit like Chess, move one piece at a time, until “checkmate”

     



  18. Ashu001
    December 3, 2010

    Hardcore,

    The Chinese are already doing this,right now most trade between China and its East Asia partners(as well as Russia and Brazil) is now being conducted in their respective bilateral currencies;without using the US Dollar as an intermediary.If it were'nt for this historical animosity between India and China ,India would also be a part of this club.Which basically means those parts of the world which are now showing the fastest growth no longer need to hold the US Dollar.It really does'nt take much for markets to lose faith in a currency.When that happens,All hell breaks loose.

    Regards

    Ashish.

  19. luv4flying
    December 5, 2010

    Sir,

     

    I agree with you. 

     

    Does it matter if a product is produced in China or India if too many “westerners” are earning low wages or not even be employed?  Has anyone noticed the food prices lately?  How many of us are going to buy the products that are not really necessary to raise our families? What good is it to have only 50 employees in the US and 800 in China or India? Perhaps the marketers might want to look closely at that potential trend?  What necessary professional skills are being lost in the west versus the new ones learned in China or India? With all the transfer of manufacturing and sourcing skills outside the west will China and India be enabled to teach and produce many times the number of well educated engineers, scientists, and other professionals than developed in the Western World? Will China and India become our new major R&D locations in the next 5 to 15 years as well? Perhaps the economists can tell us who is really benefitting for the long term from all the western outsourcing to China and India? Perhaps the economists do not know how to evaluate the question?

     

    Perhaps our Boards of Directors, really need to start thinking long term once again (to keep their companies alive and economically healthy) and consider lower quarterly profits?  Maybe the Board of Directors should only give golden parachutes to those senior executives with at least 15 to 20 years of dedicated executive service within the same company?  Maybe the larger corporations should buy up all the public stock to reduce the pressure on dividends given back to stock holders?  Maybe it is time that larger corporations consider decreasing in size, when is the span of economic control lost? Would larger numbers of smaller corporations help us?  Maybe the smaller companies could create strategic partnerships with other small companies?  Perhaps we need steady slow growth with long term investments to start re-introducing US manufacturing and services back into the west?  Maybe the investments back into the Western World could be similar to a 401k, contribute a 5% reinvestment in manufacturing and services each year for the next 35 years to balance out the present and future economic impacts?  I wonder if that might help??

     

    Maybe we need to attempt to evaluate all the “perhaps” and “may be” questions with some serious thought and actions?

     

  20. Ms. Daisy
    December 21, 2010

    Bola:

    Good advice for the wise! But will these suggestions hold grounds in an environment that is based on entitlement and what ifs? The hand wringing will continue for a little longer because the average western worker is still mad at the technology transfer and loss of jobs and less on thinking on how to create jobs, live within his means and take what is available to get back ontrack. The average Joe has gone into survival mode because of the lack of preparedness for the offshore transfer of technologies and consequently jobs, and to compound the problem, your average Joe is also deeply indebted – a bad recipe for bouncing back. But the advice given and the will to rise again will help the willing to prevail.

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