The Irrationality of Too Much Offshoring

Generally, I spend much of my time arguing against meddling with the economy. Regulation where needed, but avoiding the whole “industrial policy” or “national investment” motifs, and definitely looking for ways to make it easier and less expensive for people to try their hand at enterprise.

Historically, though, our first Prime Minister, Sir John A. Macdonald, put forward a “National Policy”, and thereby built up the central Canadian manufacturing economy (Maritimers might well argue that this was done at the cost of the destruction of the industrial Maritimes, and there is something to that, but overall I think Canada as a whole was better off as a result). As well, much of our national infrastructure has been built first by public action (railways, communications, etc.). In a country with a massive amount of geography, a smallish population, and a large neighbour, such concessions from the purity of private economic action have been warranted. (The meddling with incentives, innovation programs, etc. has not been and is simple Liberal vote- buying, with heavy skimming around the edges.)

So I never thought I’d see the day when I was writing a piece on why we need to rebuild our manufacturing sector in an era of globalisation, but here it is. We have taken offshoring to a point beyond the healthy, and are starting to pay the price for that.

Back in 1915, Henry Ford raised the wages of his workers at the various Ford enterprises significantly above the market clearing rate necessary to attract employees. His rationale was simple: “my workers must make enough to be able to afford the products they build”. This was sound thinking: not only did Ford benefit from a first-mover advantage (his higher wages attracted a number of high performers!) but his company also benefitted as the monies flowed back into it with the purchase of Model Ts galore. Ford was recognizing that his business had a stake in the community and that the short-term diverting of funds from the business in the form of wages came back multiplied, both directly as the employees bought a Ford and indirectly as other businesses prospered from increased spending and they, in turn, too, could afford a Ford.

The idea of a healthy relationship between employer and town is not a new one. Port Sunlight and Saltaire in England are a tribute to the 19th century version of this kind of thinking, this time in the creation of wholly new “company towns” with the infrastructure for a better life provided. In Germany, the Mittelständ employers, often located in small towns, have understood the other side of the equation: their comforts as owners and managers resident in the same town as their workers required that they keep the order book full so that the business would succeed (and thus support typical German labour rates in numbers suitable to a vibrant community). They therefore sought out niches that could be dominated globally, focused on product quality, continuously innovated in production techniques and invested in the business year after year, thus achieving the growth needed for general prosperity. (They are so successful at this, in general, that despite the highest labour rates in the world German small companies are often producers of top quality, yet affordable, products.)

North Americans became lazy, instead. Our very prosperity, especially after World War II, when we were intact and other competitors were recovering, helped make us so. So, too, did automotive mobility, zoning (which isolated socio-economic communities as well as isolated manufacturing from residential zones) and, in Canada, a new “national policy” under the continued tutelage of C. D. Howe as Industry Minister in the Mackenzie King and St-Laurent Liberal governments which can be summed up as “buy up our companies and make them into branch plants”. We stopped worrying about tomorrow, and simply looked for how we could make a buck today.

With that, the pressure on Canadian companies to compete by raising quality and investing in themselves was released (and, of course, for the branch plants, any such decisions were now made out of the country: the plant now became a variable cost, to be expanded or shut down, as part of managing a larger mix of facilities).

With widespread public stock financing (most companies outside of North America used bank debt for growth until recently) there was no one left to tell managers (as, in Europe, a bank manager most assuredly would have) that they were failing to keep pace industrially or competitively. Indeed, as publicly-traded companies, the impetus shifted to managerial compensation and shareholder returns. Also, as the ratio of managerial to worker, and executive to managerial incomes, widened (which did not happen elsewhere) the socio-economic strata in companies segregated into separate communities, breaking the tie between the health of the employer and the health of the community. The stage was set for the destruction of the continent’s industrial base.

Enter the second age of globalisation. Cheap oil created the possibility of mass shipping around the planet at an effective transfer cost of zero, i.e. building in Asia was as cheap, “free on board” when delivered, as building in a plant down the road. Cutting labour costs by offshoring and closing local facilities increased the pay-for-performance returns and shareholder value. If you see yourself as a player in finance, rather than industry, “what to do” is obvious!

One after another, we closed manufacturing plants in favour of simply shipping products back in to North America. (That I love my Apple products, for instance, doesn’t mean I am not aware that my first two Macs were built in California, my third in Ireland … and all computers since, along with all iPods, have come from China, and that while Apple employs designers and engineers in California the many jobs associated with building their products are gone — and, to be reasonable, there are limited opportunities to upgrade from an plant-floor position to a design/engineering one.)

I note, in passing, that Europeans have been no less assiduous at offshoring, especially the larger companies. The smaller ones have held back from this — and the larger ones have often used the closures and restructuring to change what is made in Europe, building higher-value, higher-quality at home, and lower-value, lower-quality product lines (or components) offshore. (The UK remains resolutely non-European in this regard, having been quite willing — another part of the Thatcherite legacy — to let its manufacturing sector go almost completely: European companies now often use Britain as an “offshore” manufacturing centre alongside Eastern Europe or China. The unintended consequences of changes remain an issue when establishing policy.)

Today, community after community in North America lacks employers capable of sustaining it. Monies earned in the community leave the community, whether via the big box retailer on the highway strip, or via the Internet. The community weakens as a result, and its infrastructure is allowed to decay. The recent mortgage débàcle in the US (and look out, Canada, ours is ready to unfold in earnest!) is an example of this: plants closed, but services (loan officers, for instance, or mortgage hucksters) replaced the jobs at lower wages. Now these are the jobs that are being shed, with massive layoffs in the services industries. More than 8 out of 10 lawyers in the US fails to make even $50,000 a year due to oversupply and a lack of potential clients (people without sufficient funds do not engage lawyers when they are wronged). The ripples are spreading widely.

As we look ahead, one certainty is that, no matter how much oil we are able to produce in Canada, the world as a whole will have higher demand for petroleum products than there is supply. As this begins to bite home, our zoned and spread-out communities will come under new pressures. The effective cost of shipping will rise from zero. The cost of running mega-plants, such as are found in Asia, will become a part of the cost of goods. Smaller, efficient, technologically-adept plants here producing goods of high quality and value will (just as in Europe) remain viable local employers, serving local markets effectively (and being worth the cost of shipping internationally because of their value proposition). Augmenting an existing sector will be far easier, more affordable and more helpful through the transitions that lie ahead than waiting for things to require the change and then having to build locally again under pressure. In other words, we should have been doing this years ago (and didn’t); we should be doing it now (a new “National Policy” to favour our own enterprises, building from community to nation); it will be harder and more expensive to do it later, after more damage is done.

I am not against, in other words, offshoring. I am against too much of it: what’s good for a company in itself can be bad for us all when done near universally. I have come to be against the “gut and run” form it is taking now in North America. Canada’s superb resource base for the 21st century will be meaningless (and merely a target for takeovers) if we do not return to the notions of building quality, building things of value, keeping communities viable and the inter-relationships that entails. We can already see how much more of our resources are merely sent out of country, and how much of the extraction base is now in the hands of others. We are allowing ourselves to be recolonised!

This is actually the true Tory tradition in Canada, as opposed to the Liberalist “you’re either good enough to prosper or you deserve your fate” of Neoconservatives and leftist Liberals alike. It is the path of stewardship for the nation and its future prosperity. Will we have the will to stand up to the short-term view of things and build for the future as our 19th century antecedents did? Or will C. D. Howe’s “get the money from anywhere and worry about tomorrow tomorrow” attitude continue to drive our decisions?

The future of your children — and indeed, whether your own pensions will be paid — depends on the answer.

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4 Comments

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  1. The story about Ford is a myth. He raised wages because the high turnover was threatening his business. Working conditions were simply poor compared to alternatives, that’s why he needed to pay people better.

  2. The original story I found on the Ford website. Forbes, on the other hand, tells the story in a way to diminish any thought of Ford doing something right. P. Pennock at the University of Michigan says Ford actually operated a research unit to determine what would be most effective. The Michigan Department of Natural Resources comes down somewhere in between the two. Finally, the Wikipedia article on Henry Ford suggests that this was also part of a strategy to hold unionisation at bay.

    Turnover was certainly a problem; in this Daniel Lemire is correct. Perhaps the shift to an eight hour day was even more of the corrective needed: it increased his productivity by allowing for a third shift, and shortened the work day enough to fit the demands on labourers to their ability to recharge their strength and energy overnight. The higher wage (Detroit was booming, and there was great competition for anyone competent) allowed for workforce stabilisation. But Ford was also thinking about market share, and how to grow it, which meant both bringing down the price of the product and ensuring more people could afford it.

    The $5.00 wage accomplished both ends. Moreover, the real point is the notion of the capitalist entrepreneur as responsible in some way for the community’s welfare, which is how a German Mittelständ manager thinks. It is what I think we need more of in our own society, and that, in turn, will require the scale of enterprises to again fit to communities (as laid out by Jane Jacobs in The Economy of Cities and Cities and the Wealth of Nations, amongst others). My own belief is that “big corporates” won’t do this, and therefore we will need to start new enterprises that will.

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