Photo by Alby Oakshott
I think this beautiful photo sums up the current economic situation: caught in the middle. Financial markets and the "real" economy are in transition -- and that transition will continue to be volatile. Just like that drop of water.
With that said, the Intangible Economy is taking a short break from all that volatility. We will return in April.
And by the way, on the Bear Stearns deal -- what does it say about reputation as an asset when a $150 per share company (which is what it was this time last year) can get bought for $2 a share. When the death spiral hits, reputation and other intangibles can vanish – just like the value of those supposedly more solid financial assets that Bear Stearns was holding.
I know it is a worn cliché, but the financial system really is in uncharted territory. The Fed's actions over the weekend are unprecedented. First there is the degree of Fed involvement. According to the New York Times - Fed Acts to Rescue Financial Markets "In a highly unusual maneuver, Fed officials said they would secure the loan by effectively taking over the huge Bear Stearns portfolio and exercising control over all major decisions in order to minimize the central bank’s own risk."
Second is the expansion of assets accepted as collateral. As the Wall Street Journal - Central Bank Offers Loans To Brokers, Cuts Key Rate points out, "The loans will be secured solely by difficult-to-value assets inherited from Bear Stearns." This is similar to the new lending facility the Fed created earlier.
Tracking how well the Fed deals with these “hard-to-value” assets will be important as the financial situation stabilizes. If it goes well, we may see an increased in the comfort level of the financial system to deal with these valuation issues, with systems possibly put in place to reduce the risk created by these issues. That would bode well for the use of intangibles in the financial system – which face obstacles because of valuation issues.
So called medical tourism is getting a big boost from health care insurance companies - according to Business Week - Outsourcing the Patients:
Yes, just like manufacturing facilities and call centers, health care is moving offshore. "All of the largest U.S. insurers are starting to educate themselves or are putting [offshore] programs in place," says Jonathan Edelheit, president of the Medical Tourism Assn., an industry group formed just last year. Companies that self-insure are also bombarding Edelheit's group with requests for information.
Getting covered employees to leave the U.S. won't be that hard, says Edelheit. An insurance company could waive all deductibles and co-pays, offer to cover travel costs for the patient and family members, even throw in a cash incentive, and still save tens of thousands of dollars. After all, a heart procedure that costs $100,000 in the U.S. runs only $10,000 to $20,000 at some of the best private hospitals in Asia. And the quality of care? Foreign hospitals in such arrangements are typically approved by Joint Commission International, part of the same nonprofit organization that accredits American hospitals.
Blue Cross took the lead in medical offshoring when it formed its first partnership, with Bumrungrad Hospital, in February. Since then the insurer has signed similar pacts with the Parkway Group Healthcare, owner of three hospitals in Singapore, and hospitals in Turkey, Ireland, and Costa Rica. Three members of India's Apollo Hospitals Group are also joining the network. And another large Indian chain, Wockhardt Hospitals, is talking with U.S. insurers as well. "Americans haven't come to grips with having their heart surgery in Thailand," says Curtis Schroeder, the American CEO of Bumrungrad. "But that will change."
And what is that going to do to the service-based economic development strategy of places dependent on major medical facilities, like Cleveland and Rochester, MN (see earlier posting)?
Here are some new reports and stories of interest on intangibles:
Creative Britain - New Talents for the New Economy:
Britain is a creative country and our creative industries1 are increasingly vital to the UK. Two million people are employed in creative jobs and the sector contributes £60 billion a year – 7.3 per cent – to the British economy. Over the past decade, the creative sector has grown at twice the rate of the economy as a whole and is well placed for continued growth as demand for creative content – particularly in English – grows.
This is a strong position. But there are major challenges ahead over the next decade. Global competition is growing as other countries recognise the economic value of creativity. To face this, our creative industries need the best possible business support structures in place and an abundant pool of talented people with the right skills to meet the needs of an expanding creative sector.
European Innovation Scoreboard 2007:
Based on their innovation performance, the countries included in the EIS 2007 fall into the following country groups:
* The innovation leaders include Denmark, Finland, Germany, Israel, Japan, Sweden, Switzerland, the UK and the US. Sweden is the most innovative country, largely due to strong innovation inputs although it is less efficient than some other countries in transforming these into innovation outputs.
* The innovation followers include Austria, Belgium, Canada, France, Iceland, Ireland, Luxembourg, and the Netherlands.
* The moderate innovators include Australia, Cyprus, Czech Republic, Estonia, Italy, Norway, Slovenia and Spain.
* The catching-up countries include Bulgaria, Croatia, Greece, Hungary, Latvia, Lithuania, Malta, Poland, Portugal, Romania and Slovakia. Turkey currently performs below the other countries.
The State of Indian Design: For a designer or advertising creative, India is a pretty exciting place to be right now.
A Powerful New Tool for Patent Valuation: The small, Chicago-based Patent Board offers clients a way to estimate the potential worth of an idea.
Happy reading
The Center for American Progress has released a new report early this week -- Our Nation's Surprising Technology Trade Deficit:
A snapshot of global trade statistics in advanced technology products since 2002 reveals that U.S. economic competitiveness in innovation may be slipping away. Surprisingly, the United States has recorded a deficit in high-technology products over the past five years. By the end of 2007, our nation’s high-tech deficit reached new record highs, measured either in absolute terms or as a share of the overall trade deficit.
This isn't new news to those who have been following trade. As I've noted in every posting on the intangibles trade, "The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001."
The report comes to the conclusion that we need an innovation policy:
A larger and more deep-seated problem, however, has been the dramatic difference between U.S. innovation policies and those of our global competitors. As other countries have been investing in innovation to create a skilled workforce and encourage more research and development, the United States has, by and large, neglected to make innovation a policy priority. The U.S. high-tech trade deficit finds its roots in the negligence of our innovation policy and requires a strong policy response.
I would second that recommendation.
This little tidbit from Vickie Elmer's "Working" column in yesterday's Washington Post -- The Best Pay Less:
The members of Fortune magazine's Most Admired Companies pay less for talent than less-admired companies in their industry, especially for workers outside the executive suite, according to management consultant Hay Group.
The companies pay about 5 percent less overall for talent because they have less need to hire expensive outsiders, according to Hay, which has worked with Fortune to identify and rank the most admired firms. The list includes Apple, General Electric, Google, Starbucks and Goldman Sachs.
"These companies achieve more with less because they tend to be better at giving people more rounded experiences and development, and do not have to rely so much on [salaries] . . . to persuade their people to perform," said Hay's Tom McMullen.
They give bonuses to staff members at all levels, including team bonuses for those "who deliver on strategy." They pay higher salaries and bonuses to senior executives who inspire the troops.
"No doubt the cachet of working with one of the world's top companies is a motivating factor, too," McMullen said.
Early this morning, the Fed announced it would accept mortgage backed securities as collateral -- Fed Statement on Expansion of Securities Lending:
The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF.
As the Wall Street Journal explains:
By providing an outlet for those MBS, the program is meant to make dealers more comfortable buying and holding such securities which are now being dumped by investors facing margin calls and others nervous about the strength of Fannie Mae and Freddie Mac, the huge, privately-owned government-sponsored mortgage agencies that guarantee most MBS. The same logic prompted the Fed to vastly expand the size and term to maturity of its daily money market lending operations on Friday as well as its "Term auction facility" by which it lends directly to banks against a range of collateral.
As I noted in an earlier posting, the list of collateral the Fed will take as part of the standard discount window programs includes other asset-backed securities (ABS). But apparently the new TSLF is more limited. It will be interesting to see whether the TSLF gets expanding to include more ABS -- including intangible asset-backed securities.
One of the grand intangibles in the lending business is the credit score. Two things go into any lending decisions: what is the likelihood of the loan being paid back and if the lender can pay back the loan, what do I get in return. Intangibles come into these decision in both areas. The latter is covered by collateral--and intangible goods, such as intellectual property and song/movie rights (even donor lists) are sometimes used for collateral. The part about assessing the risk of default has always been much more intangible. Part of making that intangible quantifiable was the use of credit scores. As the Wall Street Journal (Credit Scorers Find New Ways To Judge You) explains, "For many years, loan approvals were determined largely by borrowers' credit scores, which are based on proprietary formulas that include such things as debt levels and loan-payment histories."
But, as the story goes on to say, that is changing, "Now, lenders increasingly are looking at other factors, such as rent and utility payments, to determine whether potential borrowers will make good on their loans."
Incorporating this new set of intangibles will open up the housing market to potentially some 50 million new borrowers. But as the sub-prime meltdown illustrates, that come with some risk. The credit scoring industry will need to convince lenders that the new system is fair and accurate. How they make that pitch and how it is received will say a lot about the current market's tolerance for new financial ideas right now. It will have to be accepted on "safety & soundness" grounds based on more and better information--rather than as a means of expanding the market. If the change is successful, it may bode well for others to try to also expand increased lending on intangible assets on the other part of that decision: the use of intangibles as collateral.
After a good month in December, the US trade deficit turned slightly in January, as the BEA trade data showed an increase of $300 million— to $58.2 billion in January from December’s revised $57.9 billion. Both imports and exports increased, but imports great faster than exports: exports were up $2.4 billion and imports were up $2.7 billion. The dollar amount of oil imports continued to grow as both the price and volume increased. On a politically sensitive note, the deficit with China also continued to grow. The number was expected to be worse. According to the Wall Street Journal, “Economists surveyed by Dow Jones Newswires had estimated a $59.75 billion shortfall.”
Our intangible trade balance in January grew by $226 million to $11.2 billion. Every category—imports and exports, royalties and business services—grew. In both royalties and business services, exports increased more than imports. The royalties’ surplus grew by $56 million and the business services surplus by $168 million.
Note: our intangibles surplus covers approximately 45% of our consumer goods deficit.
The deficit in Advanced Technology Products increase in January to $3.5 billion, as imports declined dramatically and exports grew. The big change was a decline in aerospace exports. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
The big news this month is the revisions for 2007, especially the second half of the year. BEA’s latest data on “other private services” (what I label “business services”) exports increased dramatically. In July, August and September, the data was revised upwards by $500 to $857 million. In October, November and December, the numbers were revised upward by over $1 billion. Likewise, imports were also revised upwards for those months—the biggest upward revision being a $720 million revision in December.
Royalty payments were also revised for the second half of the year, with royalty receipts (exports) revised upward by an average of $140 million per month and royalty payments (imports) revised downward by an average $13 million per month.
Consequently, our intangibles surplus for the second half of 2007 is on average $560 million per month greater than was previously reported. As a result of these revisions, I am updating the charts I published last month for annual growth in intangibles trade (see chart 2 below) and the percentage of intangible trade in our total international trade (see chart 3 below).
These revisions raise the obvious questions of the ability of our statistical system to cope with the I-Cubed Economy. For the months of November and December, this represents an increase in business services exports of over 7%. The BEA release states that the revisions are due to “the incorporation of more comprehensive and revised quarterly and monthly data.” BEA has made previous revisions to the business services data, as high as a change of $1.5 billion to December 2006 and March 2007 exports.
The Commerce Department recognizes the problem. Improving data on intangibles and services was one of the recommendations of the report of the Advisory Committee on Measuring Innovation in the 21st Century Economy (see also my earlier posting). BEA is undertaking a number of activities to improve the data on intangibles and the knowledge economy (see their strategic plan). In fact, last year, they instituted a new quarterly survey BE-125, Quarterly Survey of Transactions in Selected Services and Intangible Assets with Foreign Persons (see also the list of BEA survey’s on International Services Transactions). However, those surveys are quarterly—and the trade numbers are released monthly. So, for awhile, expect to see continued revisions in the intangible trade statistics.
Note: we define trade in intangibles as the sum of "royalties and license fees" and "other private services". The BEA/Census Bureau definitions of those categories are as follows:
Royalties and License Fees - Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term "royalties" generally refers to payments for the utilization of copyrights or trademarks, and the term "license fees" generally refers to payments for the use of patents or industrial processes.
Other Private Services - Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term "affiliated" refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise's voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.
When the January employment numbers came out a month ago, I pointed out the rise in part-time work for economic reasons - otherwise known as involuntary underemployed. These are worker who would like to have a full time job, but can't find one. Friday's numbers for February were about the same -- an increase of over 100,000 involuntary underemployed.
Part of the reason for this growth is economic conditions. But part is also due to a changing in the labor market itself - as the Wall Street Journal (More People Pushed Into Part-Time Work Force) points out:
A big factor is the fast-growing retail sector, which has felt more pressure to use part-timers since many supermarket and big-box chains started staying open for extended hours in the 1980s and 1990s. The stores' most recent wrinkle is the adoption of computerized scheduling systems, which try to boost service and trim costs by matching staff size to customer traffic, hour by hour. Growth of part-time staff in the sector has been slightly outpacing that of full-time staff since 2000, according to Labor Department figures.
. . .
The makers of the new scheduling systems -- as well as retail analysts and unions -- say the systems make it easier for chains to manage a big roster of part-timers working short, flexible shifts. Previously, that was too difficult to be worthwhile for many companies. As use of the systems spreads, the makers are growing fast: Their combined revenue rose 8% last year to $814 million and could reach $1 billion in the next few years, according to AMR Research.
The problem isn't just the reduced hours -- many of these underemployed are actually working two or more part-time jobs. The problem is the lower hourly rate and the lack of benefits. And, as the Journal article notes, "Those working two part-time jobs are taxed twice for unemployment insurance."
Part time work and flexible scheduling are going to be a permanent feature of the I-Cubed Economy. But there is no reason why part-time workers aren't treated the same as other workers. At a minimum, we need a system that apportions job related benefits and taxes fairly accord multiple employers. Maybe I choose to work part time, but as long as we have an employer-provided health care system, that part-time job should contribute an equivalent part to my health insurance costs. Likewise, it should contribute something toward my retirement savings.
Fixing the part-time worker problem will increase the flexibility of the labor force – and a more flexible labor force will contribute to the agility of the I-Cubed Economy. That will contribute mightily to both the corporate bottom line and the nation’s prosperity.
It’s a different type of economic clustering, but three very different companies located in the same area are determining what the public is reading. From the New York Times - Book Lovers Ask, What’s Seattle’s Secret?:
Though the big publishing houses are still ensconced in New York, the Seattle area is the home of Amazon, Starbucks and Costco, three companies that increasingly influence what America reads.
Books by relatively unknown or foreign authors become best sellers by dint of their anointment at the hands of Amazon editors. A forgotten older paperback, recommended and featured by the book buyer at Costco, can sell more copies in six weeks than it did in the last few years combined. Almost every book Starbucks stocks in its coffee shops sells more than 100,000 copies in its outlets alone. That pushes most Starbucks selections into the top 1 percent of all books sold that year, without counting sales in other types of stores.
The three companies settled in Seattle for different reasons, and each had its own motivation for choosing to sell books. Together, though, their combined power in the book industry has put the city in the position of tastemaker.
Strangely, there seems to be little of the standard synergies. Each company seems to be doing its own thing. And there doesn't seem to be a lot of local spin-offs. Maybe it is just a coincidence -- but it is an interesting one none the less.
The February employment numbers came out this morning -- and the decline in payrolls immediately had everyone crying recession (see for example Economics Blog : Economists React: Payrolls at 'Recessionary Levels').
The numbers certainly were not good. But I have a different immediate reaction: how little our data tells us about what is really happening in the labor market.
It speaks to the paucity of our language and conceptual framework. Right now, we look at the economy as split between manufacturing and services (with agriculture, mining and construction thrown in).
Our economic data is broken up by those industry categories. But the difference between the celebrity chef and the minimum wage fast food workers? Between the person who designs a bridge and the person who builds it? Composing a symphony and playing a symphony? Engineering a car and building a car?
According to our conceptual framework, one of those persons is in manufacturing, one in construction and six in services. To break it down further, two are in “food services”, two are in “performing arts” and two are likely categorized in “engineering services”.
None of those categorizations tell you anything about what the key difference might be. One difference is that the former in each pairing works more with their brains (intangibles) and the latter more with their muscles (tangibles). Sure, there is brain work in playing a symphony – but it is the tangible counterpart to the intangible composition process.
Each of the halves of those parings goes about their work in very different ways, uses different tools and relies on different skills. Yet our current economic data has no way of telling them apart.
Is it It is past time we updated our statistics and our concepts for the I-Cubed Economy.
Late last year, a new online journal appeared - Knowledge Ecology Studies:
KE Studies is an online publication that focuses on the creation, dissemination and access to knowledge goods. It is a multidisciplinary journal that draws on a number of specialties: sciences, technologies, public policies, the laws of intellectual property, business, free speech and privacy, telecommunications and other related knowledge disciplines.
Issue #1 has an article Five Questions for James Boyle. In addition to the general questions about "knowledge ecology" there is this exchange:
We normally think of intellectual property rights as being synonymous with the right to exclude -- to forbid publication or copying of books, to deny a license to an invention, to enjoin someone from using trademarks commercially. Yet there are other types of intellectual property rights; those that come with a right to payment, but not a right to exclude, such as compulsory licenses or so-called "liability rules." Do you think these have a place in the future of intellectual property?
Absolutely. Liability rules are found throughout the intellectual property system. Whether it is someone making a “cover version” of a song on payment of the statutory fee or the “march in” provisions of the Bayh-Dole Technology Transfer Act, the idea is to separate the right to compensation from the right to forbid use. My colleague Jerome Reichman has spent much of his brilliant career writing about the ways in which these liability rules can minimize some of the dangers of legalized monopoly while still making sure to compensate innovators and distributors. The case for liability rules is particularly compelling in cases of humanitarian emergency -- such as access to essential medicines -- and in cases of technological monopoly that is accompanied by strong “network effects” -- control over a dominant operating system, say. There is also a powerful case for it in the world of mashups and remixed art. Some have suggested that we should have an intermediate position between a finding of fair use for a parody or satire on the one hand, and the ability of a copyright holder to gain an injunction over derivative works on the other. With those alternatives, a "remixer" either has total freedom or none at all. Is there a place for an intermediate category, in which the copyright owner cannot forbid the use but is entitled to some share of the proceeds for any commercial exploitation? The difficulty in all of these cases, of course, is the issue of the appropriate level of compensation. How do we set that level without markets to guide us? How does one avoid the dangers of state corruption or capture? These concerns are real. Still I think that if one actually looks at the number of places in which liability rules already work, and work well, it is reasonable to conclude that they could be used more widely.
Interesting - and something I hope Boyle and others will pursue.
Yesterday, Goldman Sachs announced a new $100 million initiative to increase business and financial education among women in the developing world. The 10,000 Women initiative has 6 points:
* 10,000 Women Over Five Years Will Receive a Business and Management Education: Over the next five years, Goldman Sachs will support partnerships with universities and development organizations that will lead to 10,000 women receiving a business and management education. The initial partnerships will fund business and management education certificates in countries around the world. These innovative certificate programs are pragmatic, flexible and shorter term and will help open doors for thousands of women whose financial and practical circumstances prevent them from ever receiving a traditional business education. These programs will provide women with the opportunity to develop specific skills, such as drafting a business plan, accounting, public speaking, marketing, management and accessing capital. There will also be a select number of MBA and BA scholarships funded.
* Build Quality and Capacity Through Global Business Sister School Partnerships: To strengthen the quality and capacity of business schools in developing nations, Goldman Sachs will support new partnerships between business schools and universities in the United States and Europe and business schools in developing and emerging economies. Through these partnerships, the schools will collaborate to train professors, exchange faculty, develop curriculum and create local case study material.
* Establish Mentoring and Post-Graduation Support for Women Entrepreneurs: In addition to funding tuition for business and management education, 10,000 Women will seek to establish mentoring and networking channels for women and to encourage career development opportunities that will extend the benefits of the program beyond the classroom, leveraging the overall impact of their educational experience.
* Work with Leading Research and Women's Development Organizations: Many outstanding organizations are working on the ground to give girls, young women and potential entrepreneurs a sense of their future potential. 10,000 Women will work with these organizations to better understand the local challenges these girls and women must overcome so more of them can ultimately realize their potential through access to greater economic opportunity.
* Develop Partnerships in the United States to Help Disadvantaged Women: As part of 10,000 Women, Goldman Sachs will establish parallel programs and partnerships to provide more business and management education for disadvantaged women in the United States.
* Commit $100 Million in Addition to the Time and Dedication of Goldman Sachs People: Goldman Sachs will commit $100 million over the next five years to 10,000 Women. In addition, the people of Goldman Sachs will contribute their time and expertise through classroom instruction and mentoring.
10, 000 Women Initial Academic Partners Include:
* American University of Afghanistan
* American University in Cairo
* Brown University
* Columbia Business School
* Harvard Business School
* Indian School of Business
* Pan-African University, Nigeria
* School of Finance and Banking, Rwanda
* Stanford Graduate School of Business
* Thunderbird School of Global Management
* United States International University, Kenya
* University of Cape Town Graduate School of Business
* Judge Business School, University of Cambridge
* University of Dar es Salaam, Tanzania
* William Davidson Institute at the University of Michigan
* The Wharton School of the University of Pennsylvania
Thousands of women entrepreneurs in developing countries have started their own businesses in the past few years, many with help from local microfinance banks and nonprofits that issued them small loans and financial support. The concept has taken off, but there has been one key flaw in the model: Most of the women have little, if any, formal education and lack the management skills and financial savvy to take their business to the next level.
What a wonderful example of investing in an intangible!
As China's competitive advantage shifts (see earlier posting), so does India's. According to Business Week -India Losing Status as Offshore King?:
Fewer global delivery centers were opened in India by the United Kingdom's 20 largest IT services suppliers than in each of the three countries over the last year.
The competitive Indian labor market is driving companies to alternative destinations, say Pierre Audoin Consultants (PAC) in its report.
. . .
China's emergence as a global sourcing hub has traditionally been slow but the report found that BT Global Services, EDS, IBM and Tata Consultancy Services (TCS) have all opened sourcing facilities in the country in the last 18 months.
So, let me get this straight: Chinese manufacturing is moving to India for lower costs and Indian IT outsourcing is moving to China for lower costs.
Only one thing certain in the I-Cubed Economy: uncertainty.
Yesterday, the American Chamber of Commerce in Shanghai released a report on Chinese competitiveness. According to the press release Booz Allen/AMCHAM Shanghai Study Finds Companies Adopting China as Both a Growth Market and Manufacturing Hub Are Two-Thirds More Profitable Than Others:
More than half of the surveyed foreign-owned or foreign-invested companies manufacturing products in China believe that the country is losing its competitive edge in manufacturing to other low-cost nations. As a result, nearly one in five manufacturers surveyed has concrete plans to relocate or expand China operations to other countries, with Vietnam and India seen as the top alternatives to China.
Among the study’s key findings:
* Operations management is a factor: The study found that three out of four companies lack fundamental best practices in their China operations, including integrating the dual functions of export platforms and domestic market penetration. Survey respondents cited a number of best practices that have yet to be fully applied in China. Just 11 percent reported fully applying integrated planning systems such as enterprise resource planning (ERP) software and material requirement planning (MRP). Even fewer companies – only 7 percent – had fully deployed analytical inventory calculation tools and processes, and 4 percent employed best practices for supply chain risk management.
* Declining competitiveness: More than half, or 54 percent, of companies surveyed believe that China is losing its competitiveness to other low-cost countries. Seven out of 10 respondents cited the rising renminbi as a major reason for China’s decline, while wage inflation was cited by 52 percent of those polled. Wages for white-collar managers and blue-collar workers have jumped 9.1 percent and 7.6 percent, respectively. Staff retention is also a major concern, with 33 percent of respondents citing it as a reason for lost competitiveness.
At the same time that costs are increasing, China is lagging behind global standards in many operational dimensions, most notably in logistics infrastructure, trade environment, access to technology, management capabilities, and protection of intellectual property.
The study, China's Shifting Competitive Equation: How Multinational Manufacturers Must Respond and a companion BoozAllen report Integrating China into Your Global Supply Chain are available on line.
We have been hearing these stories coming out of China about rising costs for a couple of years now. Obviously, if the key finding of the report—that “the days of China’s begin considered a cheap labor manufacturing platform are numbered”—is true, it will be interesting to see how multinationals react. Will they chase low cost labor by moving to other sites or will they attempt to upgrade in order to take advantage of the growing Chinese domestic market?
It will also be interesting to see how US companies and policymakers react. Clearly, trading one low wage competitor for another won’t have a big impact on US based manufacturing. Increasing China-based high-end competitors to US-based high-end producers for the Chinese market will have a big impact. As I have said many times on this blog, there is no reason to believe that the Chinese can’t and won’t go up the value chain—especially in their home market. US companies have to figure out a new business model, different from the old industrial age (extended) one they have been following.
That industrial age (extended) model sees the world as a huge assembly line factory, with the US as the engineering and management office in the front. It is unclear that the US can economically prosper in that role—and even if we can sustain that role as the rest of the world changes. Time to find a new model.
I've recently come across the Irish National Competitiveness Council's latest report: Ireland's Competitiveness Challenge 2007. This series of annual reports looks at both the current situation and the recommended policy responses. The 2007 report takes a hard look at the Celtic Miracle:
Ireland has made remarkable economic progress over the past 15 years and current growth rates remain strong. However, the NCC is concerned that non-sustainable domestic factors, rather than international competitiveness, have driven our economic growth in recent years. Maintaining and improving our living standards will depend on improving our competitiveness performance through reinstating exports as a key driver of growth. This rebalancing of growth is dependent on remaining competitive.
Managing costs, improving productivity and building innovative enterprises are the basic policy thrusts recommended by the report. There are a lot more detailed recommendations in the report – most of which will be familiar to anyone who has followed this area of public policy. One thing did stand out to me however – the recommendation about “learning enterprises”:
Research from the National Centre for Partnership and Performance (NCPP) highlights that in response to greater competitive pressures, enterprises are increasingly introducing new products and services and are improving goods or services already provided. Firms are also focusing on training and development and encouraging greater flexibility in their workforce. However, NCPP research indicates that further progress is required in developing a culture of continuous learning which incorporates employee participation and training and development practices. The NCPP’s workplace innovation fund needs to be strongly promoted as well as a partnership approach at enterprise level to develop appropriate action plans.
This is an idea that the US should pay closer attention to. There has been a great amount of research in the US about these “high-performance work organizations” (including some I have done – see Time to Get Serious About Workplace Change). However, little attention has been given to actual public policy to foster such activities. We need to change that.
One of the amusing sideshows to the Presidential debates has been the rush of commentators who in their zeal to "correct" the candidates make outrageous claims of their own. Case in point has been the critiques of the Clinton and Obama statements on trade. Take these two as an example: Zakaria: Dems vs. Free Trade | Newsweek Voices - Fareed Zakaria | Newsweek.com: "There are no serious economists or experts who believe that low wages in Mexico or China or India is the fundamental reason that American factories close down," and Sebastian Mallaby - Democrats, Off Course On Trade - washingtonpost.com: "Manufacturing employment has fallen not because of trade but because of technological progress."
Interesting. These distinguished commentators have apparently not kept up with the economic literature, where there is an ongoing debate over the effects of trade versus technology. From what I can tell, only the hard-core set of economists would deny that trade and low wage competition has had an impact.
I think Pearlstein got it right in his column Mobilization for Globalization:
I have no doubt that Americans overstate the degree to which globalization is responsible for this economic malaise, just as I have no doubt that economists and business executives understate it. We could probably spend the next decade figuring out whether it is free trade or changing technology or the decline of unions or simply the herd instincts of corporate executives that are most to blame for decisions to move production to Mexico or outsource to Lithuania.
But as Matthew Slaughter, a Dartmouth economist and one-time Bush economic adviser has written recently, it doesn't much matter how the responsibility is apportioned. As long as trade and globalization are factors, which they clearly are, then whether they account for 25 percent of the problem of 65 percent, the public will be against them.
Bashing NAFTA may not be the best trade strategy, but denying that we are in a global wage competition is even worse. Simply repeating the panglossian line that trade is a pure positive is a sure way to undermine the credibility of the argument. This head-in-the-sand ostrich tactic on trade policy does the nation and the world a great disservice by making solutions to the problem that much more difficult to find. If the pro-free trade columnists really want to advance the debate, they need to get serious about their own comments. Flaying rhetoric these commentators is as useless as rhetoric from the candidates which the commentators seen to decry.
If we are to set policy for the I-Cubed economy, we need to avoid the Scylla and Charybdis of the “trade-causes-no-harm” and “trade-is-bad” camps. Maybe some of our distinguished commentators could lead the way?
