Tuesday, August 16, 2011

Wanted: Good Jobs, Made in America

There has been much talk of late about how much of what Americans consume is actually made in China. This latest round of debate was sparked by an August 8 report by San Francisco Federal Reserve economists Galina Hale and Bart Hobijn that basically said - don't worry about importing China's inflation! China only accounted for 2.7% of what Americans consumed last year! The report created a stir on some of the blogs I read - see here and here and here.

It's important to note that the report specifically aims to address the link between Chinese inflation and the prices Americans pay for products like iPads, auto parts and window frames. Most of what Americans consume, the report argues, is made in America. That's because most (two-thirds) of what we consume is services.

They also argue:

"Obviously, if a pair of sneakers made in China costs $70 in the United States, not all of that retail price goes to the Chinese manufacturer. In fact, the bulk of the retail price pays for transportation of the sneakers in the United States, rent for the store where they are sold, profits for shareholders of the U.S. retailer, and the cost of marketing the sneakers. These costs include the salaries, wages, and benefits paid to the U.S. workers and managers who staff these operations. "

A few thoughts:

1. All of this underscores the "total package" argument that US sourcing agents and brands describe. It doesn't matter if it's just Chinese wages that are rising. What matters for US retail prices and the viability of individual Chinese factories is the total package - commodities and other input costs, electricity costs, shipping costs, land costs, warehousing costs AND wage costs. While Hale and Hobjin argue that the Chinese are not yet passing on their inflation to us, when these perfect storms of higher costs hit, the Chinese do pass on some of their higher costs. And they will again.

2. The argument that most of what we consume is made-in-America because it's services doesn't reassure me, because I'm not sure whether these are really such great services jobs. I've long been concerned about the "Work at Wal-Mart in order to be able to afford to shop at Wal-Mart" economy that US companies seem to creating. Can these vaunted service jobs cover all the costs of public services that we're going to have to scale back, UK-style, over the coming years? And aren't we as investors rewarding companies that keep costs down by cutting jobs?

3. Smart people like Gary Pisano and Willy Shih at Harvard have made the argument that we are losing the "special sauce" of competitiveness and innovation by outsourcing manufacturing to other countries. I think they have a point, though that train left the station decades ago, again with American investors on the platform waving it off.

4. What really bothers me is that it's not obvious how to create good jobs for Americans anymore. This problem is not just the result of Japanese-style mindless gridlock in Washington, though that clearly plays a role. It's also, I believe, embedded deeply in the way we reward companies (in America at least) for cutting back their workforces and outsourcing as much as they can to the cheapest possible country. (James Fallows made a similar point on his blog recently.)

Technology start-ups are not the font of job creation they once were, though my brother in San Francisco tells me that we are so short of engineers that there are now billboards to recruit them (so there ARE jobs in America, just not the kind most people can do).

As Tyler Cowen has said, we have plucked all the low-hanging fruit of economic growth. Most ominously, China is taking hold of the playing field with both hands and shaking it violently through its indigenous innovation policies. Despite the blow to China's innovation plans from the recent high-speed rail debacle in Wenzhou, these policies should be at the top of every American CEO's and politician's agenda.Link
My question is: what do we need to do to create more (ideally many) better jobs in America? And what do we need to do to ensure that we have a workforce that can do those jobs?

As some Chinese government officials understand, this is as much a problem for China as it is for America, since China depends on the US to consume the fruits of its labor. Even a massive increase in government jobs, as we've seen in Texas, is not a viable solution. Do we bring back manufacturing to America? Are the cost increases in China really narrowing the gap between the cost of Made in China and Made in America, or is the lure of the Chinese consumer (and the US investor) too strong to dissuade most companies from leaving? Is infrastructure investment - again, an old Japanese stand-by - the answer, or will that, too, be hijacked by political concerns that leave America with the equivalent of bridges to nowhere?

Sunday, April 24, 2011

Is higher education broken?

Education is how countries catapult themselves out of one economic model and into another, as much as it helps individuals and families do the same. But high unemployment and underemployment rates of young people around the world - even as rates of participation in higher education rise to all-time highs - suggests that our higher education systems have become more problem than solution.

Chinese companies complain about the quality of the young workforce, and demand master's degrees as a hiring prerequisite. Japan's highly efficient express delivery services (their equivalent of UPS and FedEx, but better*) refuse to hire high school graduates because only university degree holders can read maps well enough to make deliveries. In America, this report argues that the unemployment rate for Americans aged 16-24 is the highest in six decades. Nearly one in five are out of work.

In all three countries, there is a great divergence between the fortunes of graduates from elite schools and (basically) everyone else that reflects a broader widening inequality discussed in pieces like this and this and this. People with brand-name degrees from the US ivies, Todai or Keio, Tsinghua or Beida don't have much trouble finding work. But for the vast majority of graduates, good jobs are increasingly hard to come by.

Why is this, and what are universities around the world missing?

This past week, there were a few disturbing signs coming out of the US. The state of Ohio is moving toward a three-year university system, in hopes of saving young people (and families) money and getting them out in the workforce sooner. But with so few good jobs for young people anyway (I'm not counting the 50,000 new McJobs that got so much press last week) maybe putting kids out on the street sooner isn't such a great idea. As we know, US multinationals aren't hiring at home; they're hiring overseas.

What, exactly, is broken in higher ed and what can be done to fix it?

The anonymous adjunct Professor X argued first in an Atlantic piece and more recently in a book called In the Basement of the Ivory Tower that sending fewer kids to college wouldn't be a bad idea.

Reform-minded Chinese professors argue that their education system should be more multidisciplinary and incorporate more innovation-related training.

Ironically, even as young American university graduates struggle to find jobs, Chinese students are climbing over each other to get to US schools. A Chinese friend with connections at a prominent Shanghai high school tells me a third of students are not taking the gaokao, the entrance exam for all Chinese universities, in hopes of heading to US universities. A Mexican friend working at a US multinational in China says that his company and others prefer to hire foreigners with US university degrees.

What this suggests is that US universities are not broken as brand-issuing institutions, and the farther you travel from America's shores, the higher the value of a US university degree. If you are an American-born-and-bred university student in the US, time abroad and fluency in the language of a BRIC country might now be essential. If you want to compete with the surge of people your age coming onto the global labor market, you have to meet them at least halfway.

The good news is that (unlike Japan, where the numbers of students going abroad has been falling for years) the number of Americans studying abroad has quadrupled over the last two decades, and China was among the top five destinations for US foreign exchange students. But still, only 80,000 American university students go abroad each year, the majority (56%) to Europe.

The less good news: the UK, Italy, Spain and France came before China (or any BRIC country) as destinations of choice.

I spent a summer during high school in France, where I studied the pleasure of chain-gobbling pain au chocolat on a balcony at mid-morning and drinking a gin and tonic at 5pm. These might be fun places to spend a semester, but they are unlikely to help students compete globally.

* By better, I mean: customers can drop off and pick up their express delivery parcels at any convenience store in Japan; Japanese express delivery services don't blink at taking your skis or snowobard from your hotel and delivering them to your door for very little money; refrigerated delivery services are so common and affordable that mothers use them to send meals to their children halfway across the country. Just better.

Photo of Harvey Mudd student council, 1960-61, courtesy of Claremont Colleges Photo Archive.

Sunday, March 27, 2011

Disaster profiteers

A few days after the devastating earthquake and tsunami destroyed cities and killed thousands across northern Japan, I got a note through LinkedIn from an acquaintance in Canada that seemed innocuous enough.

"Hi Alex,

I and a friend in China would like to supply the Japanese government with goods for their relief effort. I wondered if you have any Japanese government contacts who can either contract with him directly or steer him in the right direction."

At the time, I was touched at the number of emails I was receiving from friends around the world who knew my connection to Japan and wanted to help the hundreds of thousands of people whose homes had been destroyed and were now huddled in shelters without adequate food, heat or medicine.

The Canadian's response to my email saying I would do what I could to help was straightforward. He looped in his friend, whom we'll call Kevin, in China, and outlined what they might be able to provide: blankets, food, all "on short notice". That should have been my first clue - of course it's on short notice. These are donations to a disaster zone.

Then Kevin wrote.

"Hi Alex,

i can provide both canned and bulk packed food stuffs. as for the logistics i need to get a better idea of the conditions of the ports as well as the airstrips in the affected zones, if necessary i can go myself to asses this. as for the issue of the jammed roads i can assist with the arrangements and logistics for temporary landing zones for aid helicopters and coordination of air drops, as well as work out a means of opening the roads and coastal shipping channels so that we may move supplies through and around japan. As [the Canadian] mentioned i am available on short notice to meet with Japanese authorities, i can be in japan by early evening if necessary so that we can begin to coordinate our part for the relief effort."

I was a little taken aback by Kevin's note - he needs to "get a better idea of the conditions of the ports"? didn't he have a television? - but this still didn't set any alarm bells ringing. As I had done with other requests, I sent out a note to a network of friends in Japan and the US asking for contacts in Japan who could help facilitate what sounded like a generous donation of much-needed supplies, from China no less. I even introduced him to a Japanese businessman friend who had found a way to donate the products his company made and get them up to the quake zone.

Kevin then emailed my friend:

"Hi Daisuke,
>> firstly i would like to commend you on your tremendous efforts thus far,
>> it is rare to meet people such as yourself and i only wish it could have
>> been under better circumstances. If you will be willing to work with me,
>> and help put me in contact with the right people to organize large scale
>> shipments of supplies to Japan i can also assist you with the logistical
>> aspects of distributing the goods to all the victims. first i must come to
>> japan to asses the status of the air strips, roads, and ports: i will need
>> your help to gain permission from the local authorities to travel to these
>> areas. at the same time i can arrange for fast shipments of goods such as
>> blankets, clothes, shoes, batteries, flashlights, and raw dried foodstuffs
>> such as rice, red beans, and dried corn. I will need your assistance with
>> finding out the budget for these supplies as well as arranging the
>> contracts etc. depending on the status of the ports and air strips i will
>> determine the quickest way possible to get goods into the country. if you
>> will be able to help me arrange a meeting with some of the coordinators of
>> the relief effort i can be on the next flight to japan. once in japan i
>> will be able to better coordinate the air drop sites as well as the
>> alternative routes for getting supplies to victims in all areas. please
>> feel free to contact me any time day or night ..."

It was only with this email that Kevin's real game became obvious to me. Kevin and the Canadian saw the earthquake as a perfect business opportunity for their sourcing company. Though they clearly had no experience in selling goods into a disaster zone (if they did, they never would have asked me for help) they were perfectly happy to monopolize the time of local officials, the military and others who were working around the clock to help - all in order to make a quick buck. This, while people who actually knew what they were doing were rushing to get donations to the affected areas.

When I wrote Kevin to ask if this was his intention, he insisted that he was not trying to make any money at all, but that this was "billions of dollars worth of supplies" that needed to be paid for, and the Japanese government had the money. He even thought this a good moment to plug his own business. "now," he wrote, "i am able to get the cheapest prices and the quickest ship dates ...".

Yes, after a decade and a half of writing about business, even having spent time working with hedge fund managers, I was still surprised at the complete absence of a moral calculus here. I told Kevin and the Canadian that I was only helping people who were making donations, not trying to profit from disaster.

A week later, I received an email from the Canadian with the subject line "You are right". As an elected local official, he said, he proposed a fund-raising event to offer donations to Japan. Would I be interested to help?

Would you have helped him?

Friday, January 7, 2011

State in statis: Japan

In Osaka again for Yomiuri's Wake Up Plus!, and once again the topic of the hour is Japanese politics. I suspect most people's eyes glaze over at those two words (with good reason - Japanese politics have almost no international relevance anymore) but as often happens, I have lots more to say that I didn't get to say on the show.

Today's debate focused on the tough year ahead for the Kan administration. It's hard to find people who say nice things about Naoto Kan and his team - even the show's makeup artist was furious. Kan is trying to push through several hard policies at once: a tax hike to cover mounting social insurance costs, entry into the free trade agreement known as the Trans-Pacific Partnership (TPP) and the agricultural policy changes it will necessitate, and a cabinet reshuffle. And of course amendments to the alliance with the US.

The things that struck me about the debate is how infrequently Japanese politicians (including members of the administration) use numbers to justify their policies. There is so little persuading the public here compared to the US - politicians and cabinet ministers all appear to be talking to each other, rather than to the public. And nobody uses numbers to explain precisely what the costs and benefits of a program (like TPP or the consumption tax hike) are.

Another thing that stands out is how Japan's frequently changing administrations (Kan's most recent cabinet reshuffle was in September last year) take a toll on the country, both domestically and internationally. Domestically, constant change contributes to a commonly held public perception that all politicians are equally corrupt and useless. Internationally, these changes make Japan harder to read and more irrelevant. If there are different people in power all the time, how can Japan craft a solid vision on any foreign policy issue and make its voice heard overseas?

The last thing that everyone - even politicians themselves - seem to agree on is that Japanese politics doesn't attract the most promising members of society. Smart, ambitious, public-minded Japanese people these days don't go into politics. They go into business. Politics has such a bad reputation - and so demonstrably doesn't change anything that ails Japan - that clever young people don't even consider it as a career.

Sometimes I wonder whether Japan doesn't need a crisis (domestic or abroad) to wake up to the size of its problems. I wouldn't wish a major crisis on any country, but for a state in stasis, a wake-up call might be just what Japan needs to save itself.

Monday, November 22, 2010

Who earns more in China, college or junior high school graduates?

The Wall Street Journal's China Real Time blog has written up research on a subject I've been mentioning for a while in talks: the tiny premium a university education may offer in China today.

The research, by a giant in the field of demographic research in China, Cai Fang of the Chinese Academy of Social Sciences, finds that Chinese university graduates earn, on average, only RMB300 or about US$44 more than migrant workers. Migrant worker earnings are converging with university graduate earnings. Remember that many workers in China's export factories didn't even graduate from high school - many often stop after junior high. In Guangdong province, the situation may be even more extreme: According to my own unscientific studies, in Guangzhou today, you can hire a university graduate with good, serviceable English for RMB2200 or US$331 a month. Factory workers in the same city or nearby Foshan might earn the same. (On an hourly basis, migrants still likely earn less, because they work longer hours.)

Given what we know about Chinese factory worker wages lagging behind economic growth, I have long been fascinated to know how this situation compares with the US. We know there is an emerging shortage of people who see work on a Chinese assembly line as a career - this is driven by demographics, in part, but also by a shift in worker mentality (that is itself difficult to separate from the demographic change). And we know that there are lots more people going to university in China, as there are in lots of other countries.

How does this compare with the situation in the US? Are wages for comparable jobs in the US already the same? It's very hard to do an apples to apples comparison, given how different these economies are, and how many possible professions there are to compare. But the US Bureau of Labor Statistics does conduct surveys of annual wages. Taking two jobs that might be similar to the ones I'm thinking of in China (factory worker and entry-level white collar administration job), the salaries are not that different, according to this data: They're both around US$31,000 a year.

I'm loathe to draw larger conclusions yet, but given what we know about what's happening with Chinese factory wages, it's likely that Chinese factory wages will soon exceed those of the entry level administration positions, at least in shortage-prone areas like Guangdong. Depending on where you sit (in Bentonville, Arkansas, say, or the offices of a labor advocacy group in Hong Kong), this might be a good thing or a bad thing. But it does put the value of a university education in China in a new light. What do you think?

Friday, November 12, 2010

Japan's Pentagon Papers

I'm in Osaka for Yomiuri TV's Wake Up Plus! again, and the theme of the hour is the posting on You Tube by a member of the Japanese Coast Guard of the entire video of the September collision between a Chinese fishing trawler and a Japanese Coast Guard boat.

Yomiuri TV is playing a central role in this story, because the Coast Guard member, who is male and 43 but whose name is not yet public, recently called YTV and told his side of the story before coming clean to his boss. The Coast Guard member (whom I'll identify by the handle he used on You Tube, sengoku38) is now in his second day of questioning, though he has not been arrested.

There are lots of issues wrapped up in this story, but a few thoughts:

1. This story has the potential to become Japan's Pentagon Papers. While Americans and Europeans are familiar with WikiLeaks, Japan hasn't had to contend with this kind of leak before.
2. If I were a Japanese potential whistle-blower, this event would give me a degree of confidence. My hope is that there will be a trickle-down effect in other areas, such as companies and government organizations, where Japanese come forward with evidence of misconduct.
3. Acting against point two is that the Japanese public, from what I can tell, is not entirely supportive of sengoku38. Many of the people YTV found on the street were critical of sengoku38's decision to release secret information (though some questioned why the video itself should have been a secret).
4. There are a lot of contradictions in the Japanese government's response to the collision, as the lovely Takenaka Heizo, who sat to my right, pointed out. They arrested and detained for two weeks the captain of the Chinese trawler, and insisted they had grounds to do that. Then they set him free, all the while insisting they had video of the event that would make the situation clear. Instead of showing this video to the public, they showed a brief portion to Diet members. Now they are questioning for two days the man who has from the beginning said he posted the video on You Tube. How could there possibly be two days worth of questions in this situation?
5. Whether or not sengoku38 is arrested appears to be a political decision. The Kan government is watching public opinion closely. There is no consensus among lawyers and other academics I have seen interviewed on whether sengoku38 broke laws.

Initially, I felt this story was another distraction, another example of Japanese politicians playing domestic games with international consequences. To a certain extent, I still agree with that, but I am more in favor of a rigorous domestic debate about this story. As Jeff Rosen, a professor at George Washington University and an expert in this area, put it to me in an email overnight: "I hope this case will provoke widespread reflection in Japan about the values of free expression versus the government's interest in avoiding embarrassment in foreign policy: in practice, plugging leaks is difficult today, even if the Japanese government wants to take a hard line."

This will not be the last time a Japanese person leaks politically sensitive information to You Tube. A new era has begun, a little later in Japan than elsewhere.

Saturday, October 9, 2010

Could better logistics revive American factories?

Could logistics help revive American manufacturing? I have been thinking about this question since my latest meeting with Bill, a Canadian inventor. I'll keep his full name out of this for now, but the basic outline of his story is simple: A couple years ago, Bill invented a new kind of shower head. He had hoped to have it manufactured in the US, but all the factories he spoke to insisted Bill pay up front the tooling costs to build a prototype.

Through a personal connection, Bill found his way to Sichuan province, China. A giant factory there was happy to cover tooling costs and make him a prototype. Soon, though, it became clear that there were some parts of the shower head that the Sichuan plan couldn't produce. Bill shopped around, exclusively in China at first. Nobody could do it. For all their strengths, Chinese factories are not always kind to small inventors - they're all about volume, and often about the quick win rather than building a long-term relationship. (This is a chicken-and-egg problem, it seems to me, since Western companies have also churned through their factories quickly. Who was teaching whom to think short term?)

Bill ended up buying the two components he needed from American factories, both in Pennsylvania. American factories are still competitive - hooray! But the final assembly was still going to be done in Sichuan. These two components - both rubber, very light and small - were going to need to be shipped by air to China. The factories suggested FedEx or UPS. Bill did a cost analysis and realized that FedEx and its brethren were going to eat up any profit he made from his shower head. FedEx was asking 75 cents per item. The US Postal Service, by contrast, was only charging 30 cents. Plus, the USPS offered the same tracking number system that FedEx and other express carriers did. For Bill, it was a no-brainer. He chose the postal service. "America has got an untapped resource, and that is its postal service," he told me recently in Hong Kong.

This all sounds hopeful, right? American factories, American services have a crucial role to play in global supply chains. Without those two parts, Bill would not have a shower head.

But that's when things started to break down. Both of the US factories he was buying from refused to ship by the US Postal Service. Part of the problem appeared to be concern about reliability; another was a fairly off-the-wall worry that the USPS, as part of the government, was evil. In the grim, shrinking world of small US manufacturers, managers are still willing to impale their businesses on these kinds of opinions.

Bill now has a friend physically pick up his components and hand-deliver them to the post office in Pennsylvania. He hasn't had a single problem with delivery to Sichuan. He thinks this is because government services - the US Postal Service and China Post - design their schedules to fit well together.

It sounds far fetched, I'll admit, but it did get me thinking. I asked a friend in the US, a very sharp veteran board member in tech and other sectors, and he asked some of his colleagues what they used to ship out of the US. They preferred DHL, and used the other services selectively by region, depending on their network. "The USPS. . .that got a head scratch," he wrote, describing his conversation with his logistics colleagues. "'If we were sending letters,' my logistics friend said, 'we might look. But anything with any size--it's hard to think the Post Office would be competitive.'" In short, the USPS is missing a trick. Nobody trusts them.

My friend feels the problem goes even deeper. He wrote: "From my own perspective, the USPS feels like it's running under 20th-century rules. Their revenues and market share are falling so they are raising rates and cutting services. 25 years of technology marketing should have convinced them that protecting share is all about lowering prices and adding services."

Talking to someone in the furniture industry this past week, he said nothing short of a major terrorist attack in a port or $250 oil would shift manufacturing back to the US. The Planet Money podcast in the link above describes 70-employee high-tech, R&D-intensive factories in New York as the model for prosperous American manufacturing. They are better than nothing, but they don't seem to be, in and of themselves, very big job creators.

A lot of American industries have simply lost the capability to make things they used to produce. A friend here in Hong Kong just raised his prices 25% for Chinese-made building materials and got no pushback from his US customers. Why? Because the US customer had nowhere else to go. They couldn't bring production of that component back in-house because they had sold the machines, closed that line, fired those workers. And who, in this environment, was going to invest in restarting manufacture of a low value-added product?