International Business Contributes to Bad Business Practices

Globalization has had one effect that is seldom talked about: using off-shore labor has allowed some very poorly run businesses to succeed while well-run native business has failed. The reasons for this are varied, but the very fact that multi-nationalism in the business world is generally seen as progressive and forward-thinking and tends to lend credibility to many businesses that don't deserve it. The cloak of business respectability hides the fact that there are no business values left but short-term profits. The cost to the local economy and citizens is never considered.

Consider the company that markets the common widget-widely used, competitively priced and using local labor. Their profit margins are modest-steady but modest. All-American Widget contributes to the local economy, gives generously to the local United Way, Girl Scouts and the homeless shelter. The executives' children attend the local school and they have a vested interest in not only their own well-being but that of their workers. They realize that, as good corporate citizens they must give back to the community. Again, their modest profits don't excite Wall Street and venture capitalists aren't beating down doors to get a piece of the action.

Enter competition from International Widget. Started by a new-comer to the business world, it's CEO decides he can make widgets cheaper if he outsources the work overseas. A fast talker and good promoter, the new CEO sets up a business plan based on the outline in the latest popular business magazine, has a manicure and his hair styled and heads to New York to pitch his budding business to the money-men. Some forward-looking Fund, with cash to spare, makes a deal for a return from profits provided he give them some operations control. They then steer our new CEO to contacts to find the overseas manufacturer who can do the job. It turns out there is already an existing Asian manufacturer who can manufacture widgets-in fact, the Asian widget looks identical to the All-American widget. Of course, it's identical because this Asian manufacturer is creating knock-off widgets, avoiding development costs and skimping on the cost of labor and materials. Our new CEO is a bit worried about the legal and moral ramifications of the knock-off widgets, but the Fund managers remind him he has promised to provide them with a healthy share of the profits and this is how they expect him to make them.

Our new CEO flies over to look over the manufacturing plant and is somewhat concerned over the working conditions. The Fund manager, however, tells him this is how international business is done and not to worry about it. . .remember the profits!! So, the new CEO creates a contract, secures shipping and takes a well-deserved holiday in Aruba where he calculates his profit-margin. Even with shipping costs, and warehouse cost back at the home base, he can sell the imported widgets for 75% of what All-American can. He goes home, secures a warehouse-and a large tax rebate for starting new business and hires a few warehouse employees. He enrolls his kids in the new private school and contracts with a builder for his new Mc Mansion.

Daily, he fields calls from the Fund, suggesting ways he can increase his profits. He transfers his shipping contracts to cheaper carriers, then out of the country entirely. But, he has limited customers: his proposed customer base is still loyal to All-American Widgets. So, he goes after the competition. He actively courts All-American's customers, giving them volume discounts and daily specials. He picks up customers, but his high profit margin drops a bit from all the advertising and specials. The Fund manager calls with disproval-he must bring profits back up to their previous level. In fact, the Fund had expected to see better profits by this time. The cash won't be forthcoming for the new loading dock equipment until profits improve. The Fund suggests he cut employee health benefits. He does so-but manages to keep benefits, lucrative stock deals and extra holiday pay for himself and his highest managerial employees.

Mr. International Widget is by now getting plenty of perks in the way of glowing business reviews and write-ups based on his high profit margin. Meanwhile, things aren't looking quite so rosy inside International Widget; it seems he's getting plenty of new business with the advertising campaigns but repeat business has dropped to nearly negative numbers. It seems that the "guarantee" attached to International Widget requires that defective products-and there seem to be many of them-be shipped back to the manufacturer. Since International Widget isn't the manufacturer, the warranty becomes nearly worthless. So, customers may buy one International Widget, but don't buy a second one when the first breaks or wears out. Some irate customers sue for better response to warranty problems. Mr. International Widget is required to cut short his vacation at the seashore to deal with both the lawsuit and the required replacement widgets. This costs the company big time as lawsuits are expensive and free widgets are a net loss.

So, as Mr. International Widget goes over the books with his finance officer, sweating profusely, the Fund Manager calls-and this time, he isn't even polite! Profits-and along with them, the Fund's share-have dropped precipitously. Mr. Funding manager makes serious demands, telling Mr. International Widget he MUST increase profits if it means he must load the trucks himself! He is told in no uncertain terms to cut costs by turning off the air conditioning in the warehouse, reducing employee breaks to the legal minimum and cutting payroll costs. Mr. I.W. calls home to tell his trophy wife they will have to sell the new yacht; she threatens him with divorce and community property and hangs up on him.

Now, Mr. I.W. is already paying $2 an hour less to his employees than competitor All-American Widget. He's done away with health insurance and most other benefits. He has cut breaks to a minimum, shut off the air conditioning and raised the prices of the soda vending machine to $1.75. His employees are NOT happy-many quit. That solves Mr. I.W.'s dilemma about having to lay off employees and pay unemployment benefits-they quit so they're not eligible. Mr. I.W. promptly calls the new temporary employment agency in town and tells them to send him 20 of the cheapest employees they can get. The temp agency tells him he will need a bi-lingual foreman.

Meanwhile, across town, All-American Widget is struggling. Competition from International Widget, with their cheaper prices, has cut into their profits. All-American cant cut prices as they pay a decent wage and benefits to their employees. They make the product right there in the factory and thus employ more people. They contribute as much as they can to local programs and enjoy being a valued member of the community. Mr. A-A W cant in good conscience shut off the air conditioning or lower his employees' pay-or even do away with the ever-increasing costs of their health care as the local medical community struggles to keep the doors open in the face of the many uninsured illegal users. He knows his employees depend on him and he intends to do the best he can to see that they can maintain a decent standard of living.

Eventually, All-American Widget is forced to close its doors. The loss of a major employer is devastating to the town, as they already have high unemployment due to International Widget's use of illegal labor. International Widget ends up being touted in all the business magazines once again as a successful model for American business. But now, the tax incentives are about to run out on the warehouse and the Fund is concerned about the additional taxes. They inform Mr. I.W. to look for another location for the business-one that will give a whole new set of tax incentives. And they suggest a specific legislative district-one in which they have contributed heavily to the local representative and garnered favorable tax legislation. So, Mr. I.W. polishes the pinky diamond and heads off in the Lexus to the next municipality that can be victimized by the Fund Manager's schemes. He knows the drill, promises much he doesn't intend to give and soon abandons the warehouse one dark night, moving the business to another state where he will put another small town into the red.

Many will say International Widgets is an example of good business practices. After all, many see continued profits as the only business concern that should be taken into account. The problem here is that many people, including an entire town, have been exploited and abandoned. The profits from International Widget benefitted few people-the members of the investment fund and a few senior officers. Employees did not benefit. The town did not benefit-they got increased taxes to make up for the tax incentives International Widget was given. The public did not benefit-they got cheap, unreliable widgets that a few managed to sue to have replaced. In fact, the public can no longer buy decent widgets because the business practices of International Widget forced competitors out of business. It is questionable if the workers in the off-shore factory benefitted as there is no way to measure their improved standard of living. The entire national economy was damaged because International Widget exported every possible job and service out of the country. Municipal, state and national treasuries were all damaged as low-wage and unemployed workers pay fewer taxes, buy less and travel less.

This type of business practice is ultimately disastrous for all involved. Mr. I.W. and his investment controllers can only play this game a limited number of times. As everyone else who can manage it is doing the same thing, eventually there will be no one left to buy widgets. Mr. I.W. and his investors will likely be out of business. As for the over-seas factory, they will no longer need American markets-they will be selling those widgets to their own rising middle-class. International Widgets and those of their ilk are in essence, eating their own. Good business practices? I hardly see how.