14 Apr Of Jobs, Trade and Fairy Tales
Presidential campaigns are aptly referred to as “the silly season” and this year surely lives up to that moniker. Outlandish claims and unfounded accusations fly like fur in a dumpster catfight.
This year, nearly all the candidates are making references to U.S. jobs having been “stolen” by China, Vietnam, Mexico and others, paired with angry promises to bring the jobs back, or else.
Indeed, millions of manufacturing jobs have left our shores for those locales in the last few decades, but “stolen” hardly fits reality. We are tempted to picture Xi Jinping or Enrique Peña Nieto with a SWAT team of guys in black clothing entering the sourcing offices of U.S. companies, guns drawn, shouting “Off to Xiamen for you!” And, “You come with me to Guadalajara!” In fact, what has actually happened is American product managers, supply chain leaders and executives, in efforts to contain costs, lower selling prices and boost EBITDA have continued their pursuit of ever cheaper labor markets. There was no coercion. Comically, even within our relatively tiny outdoor industry, sourcing people bump into one another all over Asia as we chase “cost out” initiatives, cheaper factories and shorter lead times.
To be sure, “reshoring” jobs will have a great benefit to domestic economies, and we applaud when that occurs. There are tangible examples of this trend, as well as “demonstration projects” that help prime the pump. But in our haste to bring American jobs back and tout “Buy American” labeling, we have to ask ourselves “What types of jobs were really lost and which are prime to be reclaimed?”
In our outdoor industry, for example, a great deal of what we design, market, retail and consume is “cut and sew” product, or some iteration of jackets, shirts, shorts and so forth. When it comes to cutting, assembly, sewing and finishing, backpacks use many of the same construction techniques as a rain jacket. Sleeping bags, tents, luggage and other sewn products are similar in their “apparel-ness”.
While levels of automation such as computer-generated patterns and markers, laser cutting etc., have become common in cut and sew industries, at the end of the day skilled sewing machine operators sit at banks of hundreds or thousands of high tech sewing machines stitching together our fleece vests, down jackets, climbing packs and four-pound tents. And they do this work accurately and at a furious pace, for anywhere from 10% to 25% of the U.S. federally mandated minimum wage of $7.25 per hour.
Let’s look at an example of a technical, premium quality backpack made in Vietnam that retails here for $200.00. Forgiving the “ball-parking” of these costs, this pack leaves Vietnam for, at most, $50.00, and let’s agree maybe $20.00 of that cost is labor. If we try to make this pack in the U.S., we will save, roughly, nine dollars in duty and freight, but we will pay over $150.00 labor — if we can find skilled workers to make this pack as fast and who will work for $7.25 an hour. This pack now becomes one that must be sold for at least $400.00 at retail, with several conservative fudges in the numbers. The question for American consumers of packs is, “Are we committed enough to the concept of re-shoring and full employment for our neighbors to pay this much for this pack?” The question for American workers is, “Will you take this job?”
The New Normal Consulting view is that, unless there are global disruptions beyond those currently imaginable, or unless consumers are prepared to pay wildly higher retail prices for these types of products, we will not see these categories “reshored” in any meaningful volume, any time soon.
To address some of the unhinged charges about foreign-sourced products, consider:
- The issue is not lack of protectionist duties: This backpack already carries a duty rate of nearly 18%; double that of many other outdoor products. Other commodity categories such as knit and woven fabric apparel products carry duty rates in the 20% to 30%+ range.
- The issue is not artificially low wages: Minimum wages in Vietnam have increased over 50% since 2012. Bangladesh workers enjoyed a 60% increase to minimum wage last year alone. U.S. workers would appreciate this type of wage escalation. And yet, Vietnam and China are still having trouble getting young workers to fill factory assembly and sewing jobs. Owning a dot.com start-up sounds like a lot more fun to Asian millenials.
- Sooner or later, some of these venues, China in particular (though still the most productive setting to manufacture in Asia) will become cost-ineffective. But sourcing managers will not pause and reconsider making product in the U.S.. Rather they are already exploring, researching and manufacturing in Myanmar, Cambodia and other less costly locales that resemble Vietnam or China decades ago.
- The U.S. dollar versus the Vietnamese dong has strengthened slightly in this period of time, but currency fluctuation would come nowhere close to meaningfully addressing the offsetting labor cost differences.
- And, finally, the days of the “Asian sweatshop” charge are mostly past. These days, social and safety compliance are ”Sourcing 101” for those American companies making goods overseas. Wal-Mart has raised the bar and it now sets the gold standard for factory compliance and penalties for non-compliance, and others companies follow suit. And fines are levied on factories that fail, and ultimately, refuse to work within the established standards. Asia manufacturing partners are often more up-to-speed than U.S. companies are on U.S. consumer laws such as CPSIA and California’s Prop 65.
We sincerely applaud current efforts to reshore manufacturing that has left U.S. soil. Some of the results are meaningful, more are seen as demonstration or marketing messages. Even the latter gets us all thinking in the right direction. But the most “movable” manufacturing will be in product categories that enjoy a high level of automation or mechanization, which necessarily does not address the “jobs” problem. Building duty “walls” around the U.S. is a retrograde direction with certain political, social and diplomatic blowback. These are not solutions. These are fearful and uninformed reactions.
Our collective task, as our country moves more wisely into the future, is to find new products, new projects and new industries within which to employ Americans at much higher wages. Not to return to the early 1970’s. We know of a few bridges, highways, schools and airports that need work.