Posts Tagged ‘offshoring’

Is Bi-partisan Tax Reform Possible?

Wednesday, April 27th, 2016

Tis the season of talk about tax reform. Every presidential election cycle, the candidates all propose some kind of tax reform. However, once the new president is elected, Congress does not do anything because tax reform becomes the “third rail” to special interests who lobby for or against reforms that would affect them. The last comprehensive tax reform that Congress passed was the Tax Reform Act of 1986, more than a generation ago. Thus, we must pose the question: Is it possible for Congress to pass bi-partisan tax reform.

First, let’s separate fact from the rhetoric:

Rhetoric: Corporations play games to keep from paying their fair share of taxes.

Fact: Out of the 34 countries in the Organization for Economic Co-operation and Development (OECD), a group that includes most advanced, industrialized nations, America ranks first with a 39.1 percent corporate tax rate, compared to an OECD average of 24.1 percent. However, the effective rate for 2014 was 27.9 percent, which was second highest behind New Zealand among OECD countries and 15th-highest among the 189 countries measured. Effective tax rate takes into consideration the tax deductions allowed corporations to reduce the pool of taxable profits.

Some corporations aren’t paying their fair share of taxes because multinational corporations that have subsidiaries or divisions in other countries use legal accounting strategies to transfer profits to lower corporate tax rate countries or set up shell corporations in tax haven countries. This means that American corporations whose only facility is in the U. S. bear the brunt of our high taxes, making it more difficult for them to compete in the global marketplace.

One of the strategies used is what is called “Corporate inversion” by Investopedia, which refers to re-incorporating a company overseas in order to reduce the tax burden on income earned abroad. Corporate inversion as a strategy is used by companies that receive a significant portion of their income from foreign sources, since that income is taxed both abroad and in the country of incorporation. Companies undertaking this strategy are likely to select a country that has lower tax rates and less stringent corporate governance requirements.
How can we get these multinational corporations to pay their fair share of taxes in the United States?

Well, we can follow the example of states that have passed bi-partisan tax reform to address the problem of getting corporations to pay a fair share of taxes in their state. The solution was “apportionment” of corporate income taxes that is a share of taxes to be paid by a corporation to a state based on a particular formula. According to a Policy Brief by the Institute on Taxation and Economic Policy, all but the five states that don’t have a corporate income tax (Nevada, South Dakota, Texas, Washington, and Wyoming) have adopted some type of formula for state apportionment of corporate taxes.

  • “First, if a corporation does not conduct at least a minimal amount of business in a particular state, that state is not allowed to tax the corporation at all. Corporations that have sufficient contact in a state to be taxable are said to have “nexus” with that state.
  • Second, each state where a corporation has nexus must devise rules for dividing the corporation’s profits into an in-state portion and an out-of-state portion — a process known as “apportionment.” The state can then only tax the in-state portion.”

About half the states with a corporate income tax adopted the model legislation worked out in the 1950s, called the Uniform Division of Income for Tax Purposes Act (UDITPA). UDITPA recommends the following three factors to determine the share of a corporation’s profits that can be taxed by a state:

  • “The percentage of a corporation’s nationwide property that is located in a state.
  • The percentage of a corporation’s nationwide sales made to residents of a state.
  • The percentage of a corporation’s nationwide payroll paid to residents of a state.”

Only two states use the percentage of property tax since local government jurisdictions already impose a property tax, and state governments don’t want to encourage corporations to relocate to other states by doubling up on property tax. Only eight states still use the unmodified formula, and many have moved to just sales. Most of the rest of the states have increased the weight on sales, and 18 states “double weight” the sales tax percentage.

One of our members of the Coalition for a Prosperous America, Bill Parks, is a passionate advocate of corporate tax reform at the federal level based on the Sales Factor Apportionment Framework. Mr. Parks is a retired finance professor and founder of NRS Inc., an Idaho-based paddle sports accessory maker. He asserts that “Tax reform proposals won’t fix our broken corporate system… [because] they fail to fix the unfairness of domestic companies paying more tax than multinational enterprises in identical circumstances.”

He explains that multinational enterprises (MNEs) can use cost accounting practices to transfer costs and profits within the company to achieve different goals. “Currently MNEs manipulate loopholes in our tax system to avoid paying U. S. taxes… MNEs can legitimately choose a cost that reduces or increases the profits of its subsidiaries in different countries. Because the United States is a relatively high-tax country, MNEs will choose the costs that minimize profits in the United States and maximize them in what are usually lower-tax countries.”

The way his plan would work is that the amount of corporate taxes that a multinational company would pay “would be determined solely on the percent of that company’s world-wide sales made to U. S. customers. Foreign MNEs would also be taxed the same way on their U. S. income leveling the playing field between domestic firms and foreign and domestic MNEs.”

For example, if a MNE’s share of worldwide sales in the United States is 40%, then the company would pay taxes on 40% of its sales. Mr. Parks states that the advantages of his plan are:

  • “Inversions [and transfer pricing] for tax purposes become pointless because the company would pay the same tax no matter what its base.
  • It would encourage exports because all exports are fully excluded from corporate income tax.
  • It simplifies the calculation for federal, state, and local taxes because the profit to be taxed by the U. S. is determined by a simple formula.
  • Reduces or eliminates the tax incentives to locate jobs, factories, and corporate headquarters offshore, boosting employment and U. S. tax revenue.
  • Ends the disguised income taxes which are actually royalty payments.
  • Allow Congress to raise revenue without raising rates because it stops U. S. and foreign multinationals from being able to place their profits offshore to avoid U. S. taxes.”

A couple of additional benefits listed at www.salesfactor.org are:

  • “Removing the incentives for multinational corporations to leave their profits in off-shore tax havens.
  • Maintaining Congress’ ability to lower rates and/or increase revenue.”

Bill concludes that “Sales Factor Apportionment is simpler and more effective than our current system which attempts ? and often fails ? to tax the worldwide business activities or U. S. corporations. Because it is based on sales, not payroll or assets, it is a difficult system to game. Companies can easily move certain business operations and assets out of the U. S., but few, if any, would be willing to give up sales to the world’s largest market.”

Mr. Parks was part of my team visiting the offices of Congressional Representatives in Washington, D. C. the week of April 11th, and several Representatives appeared quite interested in the Sales Factor Apportionment tax proposal he described. Mr. Parks is the author of a much more in-depth article in the April 4, 2016 issue of Tax Notes (available only by subscription), and I am happy that he gave me permission to write about this topic for my audience. For further information, you may email him at Bill@nrs.com. You can also read the results of several studies on SFA at www.salesfactor.org.

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Posted in Economy, Jobs, Manufacturing, Taxes/Regulations | No Comments »

Is Reshoring Increasing or Declining?

Thursday, January 21st, 2016

In December, two conflicting reports were released, one by A.T. Kearney and one by the Boston Consulting Group. The A. T. Kearney report states that reshoring may be “over before it began”, and the Boston Consulting Group report states that it is increasing. Why the difference in opinion and who is right?

This was the second report by A. T. Kearney, in which their “U.S. Reshoring Index shows that, for the fourth consecutive year, reshoring of manufacturing activities to the United States has once again failed to keep up with offshoring. This time the index has dropped to –115, down from –30 in 2014, and it represents the largest year-over-year decrease in the past 10 years.”

In fact they conclude that “the rate of reshoring actually lagged that of offshoring between 2009 and 2013, as the growth of overall domestic U.S. manufacturing activity failed to keep pace with the import of offshore manufactured goods over the five-year period. The one exception was 2011.”

The authors of the A. T. Kearney report identify the two main factors contributing to the drop in the reshoring index to be “lackluster domestic manufacturing growth and the resilience of the offshore manufacturing sector.”

With regard to the lackluster domestic manufacturing, the report states that data from the U. S. Bureau of Economic Analysis predicted that U. S. manufacturing gross output would shrink by 3.6% through the end of 2015 based on data through November [December data not available.]

On the other hand, the Boston Consulting Group survey results showed that “Thirty-one percent of respondents to BCG’s fourth annual survey of senior U.S.-based manufacturing executives at companies with at least $1 billion in annual revenues said that their companies are most likely to add production capacity in the U.S. within five years for goods sold in the U.S., while 20% said they are most likely to add capacity in China…The share of executives saying that their companies are actively reshoring production increased by 9% since 2014 and by about 250% since 2012. This suggests that companies that were considering reshoring in the past three years are now taking action. By a two-to-one margin, executives said they believe that reshoring will help create U.S. jobs at their companies rather than lead to a net loss of jobs.”

The difference of opinion is based on different data. A. T. Kearney notes that “The manufacturing import ratio is calculated by dividing manufactured goods imports from 14 Asian markets [list of countries] by U. S. domestic gross output of manufactured goods. The U. S. reshoring index is the year-over-year change in the manufacturing ratio.”

In contrast, the Boston Consulting Group data is based on “an annual online survey of senior-level, U.S.-based manufacturing executives. This year’s survey elicited 263 responses. The responses were limited to one per company…Respondents are decision makers in companies with more than $1 billion in annual revenues, across a wide range of industries.”

“These findings underscore how significantly U.S. attitudes toward manufacturing in America seem to have swung in just a few years,” said Harold L. Sirkin, a BCG senior partner and a coauthor of the research, which is part of BCG’s ongoing series on the shifting economics of global manufacturing, launched in 2011. “The results offer the latest evidence that a revival of American manufacturing is underway.”

The BCG survey identified such factors “as logistics, inventory costs, ease of doing business, and the risks of operating extended supply chains” are driving decisions to bring manufacturing back to the U.S. The primary reason for 76% of respondents reshoring production of goods to be sold in the U.S. was to “shorten our supply chain…while 70% cited reduced shipping costs and 64% said “to be closer to customers.”

The reasons cited by the BCG survey are consistent with the case studies that the Reshoring Initiative has captured, but the reshoring trend over the last few years has also been driven by a range of factors including rising offshore labor rates, especially in China, as well as the increased use of Total Cost of Ownership analysis to quantify the hidden costs of doing business offshore. The threat of Intellectual Property theft, cost of inventory (space to store and cost to buy larger size lots to get the “China price,) and quality/warranty/rework are also cited frequently. Longer delivery, cost and time of travel to visit offshore vendors, transportation costs, and communication problems also influence the decision to reshore.

About 60% of companies ignore these hidden costs and only look at wage rate, quoted piece price or at best, landed cost. Because of inaccurate data, many companies make the decision to offshore on the basis of faulty assumptions. The reality is that many companies are saving less than they expected, and in some cases, the hidden costs exceed the anticipated cost savings.

As an authorized speaker for Harry Moser’s Reshoring Initiative for the past five years, I have been conducting my own informal surveys of manufacturers that I meet at trade shows and conferences. Most of these companies are Tier 2 or 3 suppliers of assemblies, sub-assemblies and component parts. Each year, more and more companies have told me that they are benefitting from reshoring.

At the trade shows I attended last year and conducted my informal survey, I didn’t meet a single company that hadn’t gotten new business or recaptured an old customer because of reshoring. I believe that there is a great deal more reshoring going on than A. T. Kearney or even the Boston Consulting Group can quantify because it isn’t a whole product. It is an assembly, subassembly, or component part, such as metal stamped part, machined parts, sheet metal fabricated parts and assemblies, plastic and rubber molded parts, printed circuit boards, etc.

I now have slides for 300 case studies of companies that have reshored in the last six years provided to me by the Reshoring Initiative to use in my presentations. I can tailor my presentation to include slides for particular industries or geographical location. For example, when I spoke at the Lean Accounting Summit in Jacksonville, Florida in October, I shared case studies of companies that had reshored to the Southeast and when I spoke at the Design2Part show in Pasadena later that month, I shared case studies for companies that had reshored to California.

The Reshoring Initiative estimates that “if all companies used Total Cost of Ownership (TCO) analysis, 25% of the offshoring would come back.” Their data reveals that about 100,000 manufacturing jobs have already been reshored in the last six years. Harry Moser states, “Excess offshoring represents an economic inefficiency that can be corrected at low cost. It is less expensive to educate companies than to incentivize them.”

During a recent conversation with Harry Moser, he said, “The economic bleeding due to increasing offshoring has stopped. The rate of new reshoring is now equal to the rate of new offshoring. The challenge is now to reshore the 3 to 4 million manufacturing jobs that are still offshored.” He provided me with the following chart to use in the presentations I gave last fall:

  Manufacturing Jobs / Year
  2003 2013 % Change Feasible 2016
New offshoring * ~150,000* 30-50,000* – 70% 20,000
New reshoring    2,000* 30-40,000** + 1,500 % 70,000
Net reshoring -148,000 ~0 -100% +50,000

*Estimated / ** Calculated

In the past, corporate cultures, supply chain reward systems, and investment have been heavily focused on offshoring. Many companies followed each other offshore in what Harry and I call “herd behavior.” We are endeavoring to change the mindset from offshoring is cheaper to sourcing domestically may be the better choice.

Another way would be to change the way buyers/purchasing agents in supply chain groups are being evaluated and rewarded on the basis of their success in achieving purchase price variance; i.e., selecting sources on the basis of the cheapest price. Chief Financial Officers need to allow their company’s supply chain department to utilize expenses in the other accounting categories that need to be taken into consideration in doing a Total Cost of Ownership analysis, such as transportation costs, travel and communication costs related to the supply chain, and the cost of quality problems related to rejected parts and reworking of salvageable parts.

Transforming to the value stream method of Lean Accounting would also facilitate being able to do a Total Cost of Ownership analysis more than Standard Cost Accounting because all of the costs related to that value stream are put into the category of Conversion costs and not put in the separate accounting categories of standard cost accounting.

The reality is that companies will only bring back the majority of offshored work if the economics of producing in the U.S. improve. The actions needed for more reshoring are the same as needed for manufacturing in general. These include developing a national manufacturing strategy that encompasses skilled workforce training, corporate tax reform, regulatory reform, and Border Adjustable Taxes (aka VATs) while addressing the predatory mercantilist practices of other countries with regard to currency manipulation, product dumping, and government subsidies.

Let’s return to the question of the status of the reshoring trend. The government keeps no related data. ATK tries to measure reshoring indirectly by measuring imports. It would be better to measure the actual phenomenon. BCG uses surveys of reshoring plans, but companies’ actions often differ from plans. The Reshoring Initiative counts the actual reshoring cases and jobs reported in the media and privately by companies. Readers can help resolve the dispute by reporting their cases of successful or failed reshoring to Harry Moser or to me, so I can write about them in future articles.

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Posted in Economic Development, National security, Reshoring | No Comments »

Why it is Important to Know Where Products are Manufactured

Tuesday, September 3rd, 2013

At a time when more consumers are paying attention to where products are made and expressing greater interest in buying “Made in USA” products even if they cost more, there are changes proposed that could impact consumers being able to make decisions on the products they buy.

The first reason we need to know where products are manufactured is to have a clear picture of whether the nearly six million manufacturing jobs we have lost since 2000 have been mainly the result of technologic advances and higher productivity in the U. S. or whether outsourcing to foreign countries like China has been the main cause.

For decades, there have been companies referred to as manufacturers that I called “virtual manufacturers.” in my book. These companies have no manufacturing capability in-house. Sometimes they don’t even have the personnel to design the product. The founders of the company may have a concept of the new product they wish to develop and market, but they don’t have the technical expertise to do the design and development themselves. They hire outside consultants to design and develop the product or subcontract the design, development, and prototyping to a company specializing in these services. At the extreme end, they subcontract out everything from start to finish, including engineering design, procurement of parts and materials, assembly, test, inspection, and shipping to the end customer. They may handle marketing and customer service themselves, but sometimes they even subcontract these functions to marketing and customer service firms. There was no real impact on U. S. manufacturing data as long as these U. S. companies outsourced their manufacturing to other domestic manufacturers.

However, in the past 20 years, these virtual manufacturers have increasingly outsourced most or all of their manufacturing offshore. This resulted in U. S. federal agencies involved in economic data labeling them as “factoryless goods producers” and classifying them as “wholesale traders,” if they didn’t do any domestic manufacturing themselves. Apple, Nike, and Cisco are some of the more well known “factoryless goods producers” because of having their manufacturing outsourced offshore.

Now, U.S. federal agencies involved in economic data want to change the way they classify companies that have outsourced their U.S. production to foreign manufacturing companies. They are proposing to reclassify these “wholesale traders” as “domestic manufacturers.” This means that their sales would be counted as U.S. production and their products that are made offshore and imported into the U. S. for sale would no longer be counted as imports.

As reported in the August 20th issue of Manufacturing & Technology News, the purpose of this change is supposedly “to determine how much products are been offshored and to pinpoint the number of American companies that are linked to manufacturing, even though they don’t make the products they design and sell.”

For the past decade, “U.S. statistical agencies found that the North American Industry Classification System (NAICS) did not provide a clear definition of companies that outsourced their production overseas, but that still owned the design and controlled the production and sale of goods from that foreign production.” A Manufacturing Transformation Outsourcing Subcommittee was formed in 2008 by the Economic Classification Policy Committee “to define outsourcing and identify “characteristics of establishments that outsource manufacturing transformation activities.” The committee was made up of representatives from the Bureau of Economic Analysis, the Bureau of Labor Statistics, the Census Bureau and the White House Office of Management and Budget.

“The committee decided that all factoryless goods producers should be classified in manufacturing, the specific industry classification based on the transformation production process used by the contractor”  and recommended that the classification changes be implemented in the 2017 North America Industry Classification System.

There is disagreement on whether this change would be beneficial as it would impact a dozen major government statistical series, such as industrial production, producer price indexes, and industrial productivity.

In my opinion this change would result in data that is misleading and wouldn’t be giving a true picture of American manufacturing. We would not be able to know how much is actually being produced in the United States if we count imports from offshore as if they are domestic production. This change could radically increase U.S. production statistics and reduce our import statistics making our trade balance artificially look better.

A better way to find the answer to this question has been provided by San Diego entrepreneur and businessman, Alan Uke in his book, Buying America Back:  A Real-Deal Blueprint for Restoring American Prosperity. Mr. Uke writes, “Our future as a nation and as individuals is being threatened. Since our spending habits as consumers have contributed to this situation, we can change our spending habits to reverse it… in order for a change to happen, consumers must demand to be more honestly and completely informed about what they are buying and where their money goes. To this end, we are starting a consumer movement to bring this to the attention of Congress…The goal of this movement and of this book are to encourage people to change their buying habits toward purchasing things that help the U. S. economy and job situation.”

He points out that the current information provided on country of origin labels is “misleading, incomplete, inaccessible, or all of these…In order to support our economy and American industries, we must have easily accessible, clearly communicated, and truthful information about a product’s entire origins.”

Mr. Uke recommends that consumers be provided the country of origin information they need at the point of sale whether at a store or online and presents a proposal for the U. S. government to require detailed country-of-origin labels for all manufactured products similar to the nutritional information labels now required on packaged food products. He feels that it is important for consumers to “see the last place where the product was manufactured” and “to discern what portion of its components came from other places” by use of what he calls a “Transparent Label.” It would include the cost by country of origin by both percentage and trade ratio, as well as the location of the company’s headquarters. The percentage is the total cost of the product that is produced or transformed in a particular country. The trade ratio describes the amount of exports vs. imports for a country in relation to the United States. This label would enable consumers to make better decisions when they buy manufactured goods.

The second reason we need to know where products are manufactured is to protect ourselves from unsafe, defective, toxic, and counterfeit products. The U. S. Consumer Protection Safety Commission’s website provides a monthly list of products that have been recalled, and month after month, more than 90% are made in China.

A label similar to Mr. Uke’s recommendation would help companies comply with the new product safety standard (ISO 10377) recently released by the International Standards Organization (ISO):  The “Consumer Product Safety — Guidelines for Suppliers” standard (ISO 10377). The summary written by Dr. Elizabeth Nielsen, Chair of ISO/PC 243, Consumer product safety and a Canadian government Scientist, Regulator and Policy Analyst, states, “Regardless of company structure and organization, ISO 10377 will affect all suppliers irrespective of their role in the supply chain and all types of products whatever the origin.”

“Products should be traceable and carry a unique identifier that is labelled, marked or tagged at the source. This also goes for raw materials, components and subassemblies. Suppliers should insist on properly identified products from vendors and be able to trace products back to their direct source and identify the next direct recipient of the product in the supply chain.”

This standard has a different purpose for labeling than Mr. Uke’s label:  to protect consumers from unsafe, defective, toxic, and counterfeit products. “Products are safer when they carry documentation about the product, its design, its production and its management in the market…Suppliers should be able to recognize a product’s development through its documentation and trace its design, risk assessment, hazard analysis and testing decisions back to its conception.”

ISO 10377 is “aimed at small and medium sized enterprises (SMEs) as well as larger firms and offers risk assessment and management techniques for safer consumer products. This standard will allow retailers and OEMs to trace every part and component of a product through the supply chain to determine exactly where a defect or a counterfeit has occurred.” The standard is divided into four main sections outlining general principles that promote a product safety culture in a company, safety in design, safety in production and safety in the retail marketplace.

Either Mr. Uke’s “Transparent Label” or the label required by ISO 10377 would satisfy both reasons for wanting to know where products are manufactured. This type of label would provide protection for consumers from unsafe, defective, toxic, and counterfeit products and would help us to recognize the main cause of the loss of manufacturing jobs in the United States. We need to face up to the true cause of the loss of manufacturing jobs before we can get any consensus of what to do about it by means of our national policies. We need to oppose reclassifying “wholesale traders” as domestic manufacturers and support “country of origin” labeling by contacting our Congressional representatives.

 

 

 

 

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Posted in General, Jobs, Manufacturing, Outsourcing | No Comments »

Reshoring is Answer to Corporations Cutting U. S. Jobs and Adding Jobs Offshore

Tuesday, August 20th, 2013

As originally reported in a Wall Street Journal article in April 2011, U. S. Department of Commerce data shows that major U. S. corporations cut their work forces in the U. S. by 2.9 million jobs during the 2000s while increasing their employment overseas by 2.4 million.

This trend continues according to data revealed by Trade Assistance Adjustment (TAA) filings made to the U. D. Department of Labor in a recent article in Manufacturing & Technology News. TAA provides benefits and training to workers displaced by trade and sifting manufacturing offshore. The article lists 50 companies that laid off workers in the first three weeks of July, about 80% of which were manufacturing jobs. Other types of jobs displaced were customer service, technical support, information technology, data processing, and even engineering design. TPA assistance is like putting a bandage on after your arm was cut off.

While over 25 companies were shifting manufacturing offshore to China or India, it was surprising to see that Mexico was the next highest location to which manufacturing was being shifted. The reason for this is that new data produced by the Bank of America shows that labor rates in Mexico could be lower than China by as much as 20%, quite a change from 10 years ago when Mexican labor rates were 188 percent higher than China.

Other reasons for this switch to Mexico are lower transportation costs, faster delivery, higher productivity from automation, more reliable quality, and better payment terms than from China. As a resident of the border region of California and Mexico, I have seen this first hand. “Nearsourcing” to Mexico is occurring when reshoring to the U. S. is not economically justifiable at the present time.

Our major regional organization, CONNECT, has a Nearsourcing Initiative focused on matching San Diego companies in need of outsourcing with the region’s local manufacturers. “The program includes workshops that educate the region’s innovation entrepreneurs on the benefits of contracting with local manufacturers, including reduced time to market, increased innovation and reduced risk and costs; and a matchmaking program that helps San Diego innovation companies in need of outsourcing to Innovate Locally, Grow Globally – to connect and contract with qualified San Diego production resources.” Educational workshops and networking meetings have been held over the past two years, and manufacturers are encouraged to seek local vendors or even be matched with regional vendors by using the www.connectory.com database of primary industries, developed by the East County Economic Development Council, and the CONNECT Resource Guide.

CONNECT’s SME (Small-Medium Enterprises) Operations Roundtable group has also taken the lead in educating San Diego’s regional manufacturers on how to use the Total Cost of Ownership EstimatorTM developed by Harry Moser of the Reshoring Initiative, by means of a presentation I gave with a local contract manufacturer in February as an authorized speaker on behalf of the Reshoring Initiative.

It is crucial for American companies that do not have offshore plants to be trained on how to do a true Total Cost of Ownership Analysis using the TCO Estimator as a counter to the continuing trend of offshoring manufacturing jobs by multinational corporations that have facilities all over the world. For multinational corporations, the U. S. market represents a smaller piece of a bigger whole in the global economy. While offshoring may no longer be a relentless search for the lowest wages, many corporations go to Brazil, to China, to India, and other countries because that is where their customers are located.

I believe that training people performing two particular job functions is one of the keys to facilitating more reshoring ? supply chain personnel and Chief Financial Officers (CFOs). I have had the pleasure in the past year of speaking to three regional APICS’ chapters and a four-state regional conference last weekend. APICS is composed of supply chain/logistics people. I learned that in the 13th edition of APICS’ dictionary, the definition of Total Cost of Ownership is:  “In supply chain management, the total cost of ownership of the supply delivery system is the sum of all the costs associated with every activity of the supply stream.” This is a good definition, not as complete as mine, but good. If supply chain personnel had utilized this definition in the past decade, a great deal of offshoring would never have occurred.

My question to conference attendees was what prevented the utilization of this good definition. One answer was:  We were not allowed to consider anything but the piece price and sometimes transportation costs in making the decision to select domestic vs. offshore vendors. Another answer was:  We were being mandated by upper management to outsource to China to save money. Others thought that their managers were doing what everyone else was doing; i.e., going to China to save money. In other words, they were following the “herd mentality” like buffalo were driven off a cliff by American Indians in our past history.

Another problem mentioned was that in the cost accounting systems used by most corporations,  transportation costs, travel costs to vendors, rework costs of defective parts, cost of inventory, etc. are in separate accounting categories and there wasn’t any software available to do a true Total Cost of Ownership analysis until Harry Moser developed his TCO estimator. This is why I believe that CFOs are critical in turning the tide towards reshoring vs. offshoring.

 

Yes, I believe that as wages continue to rise offshore, especially in China, transportation costs continue to increase, and risk factors such as political instability, intellectual property theft, and counterfeit parts take their toll, more and more companies will see the economic advantage and wisdom of reshoring.

 

However, we can accelerate reshoring if we can expand the reach of our education and training on understanding and using a true Total Cost of Ownership analysis to CFOs and other C level management. Harry Moser and I are no longer the only persons singing the “reshoring” tune. Consultants at the Manufacturing Extension Programs nationwide, such as California Manufacturing Technology Consulting (CMTC) and Manex are being trained in how to use the Reshoring Initiative’s Total Cost of Ownership EstimatorTM. I have even met former “offshoring” consultants who are rebranding themselves to be reshoring consultants. I urge everyone to do what you can to promote reshoring if you want to help create jobs and save American manufacturing.

 

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Posted in Jobs, Manufacturing, Outsourcing, Reshoring | 1 Comment »

What Do American Manufacturers Owe Their Country?

Tuesday, February 5th, 2013

Last week The Economist conducted an on-line debate on the question:  Do multinational corporations have a duty to maintain a strong presence in their home countries? After a very intense written debate between Harry Moser, former president of GF AgieCharmilles  and founder of the Reshoring Initiative, and Jagdish Bhagwati, Professor of Economics and Law, Columbia University, the vote was 54% “yes,” and 46% “no.”

The moderator of the debate was Tamzin Booth, European business correspondent for The Economist, who introduced the topic by stating, “after the Great Recession, with high levels of unemployment persisting in rich countries, politicians are putting enormous pressure on firms to either keep operations at home or bring them back. The offshoring and outsourcing of work overseas have never been more unpopular. So strong is the backlash against firms which shift jobs abroad that many companies are choosing not to do it for fear of igniting a public outcry. And a “reshoring” trend, bringing factories home to America from China and elsewhere, is gathering pace and support from several American multinationals, including General Electric and Ford Motor Company.”

While Mr. Moser acknowledges that multinational corporations (MNCs) “have a responsibility to enhance shareholder return and obey relevant laws and regulations,” he believes that “MNCs also have a duty to maintain a strong presence in their country of origin,” which he defines “as investing, employing, manufacturing and sourcing at least in proportion to their sales in the origin country.”

He states, “This duty has two sources. The first is a quid pro quo for the special benefits that their charter provides. The second is based on understanding that a strong presence is almost always in the interest of their shareholders.”

In his pro argument for the first duty, Mr. Moser quotes Clyde Prestowitz: “Corporations are not created by the shareholders or the management. Rather they are created by the state. They are granted important privileges by the state (limited liability, eternal life, etc). They are granted these privileges because the state expects them to do something beneficial for the society that makes the grant. They may well provide benefits to other societies, but their main purpose is to provide benefits to the societies (not to the shareholders, not to management, but to the societies) that create them.”

This view is corroborated by a recent essay, “The American Corporation,” by Ralph Gomory and Richard Sylla, in which they provide a brief history of corporation formation in America. From 1790 to 1860, over 22,000 corporations were chartered under special legislative acts by states, and

several thousand more were chartered under general incorporation laws introduced in the 1840s and 1850s. These state granted charters were not perpetual and had to be renewed periodically, “with its “powers, responsibilities?including to the community?and basic governance provisions carefully specified.”

The essayists comment that general incorporation laws were the answer to the problem of corruption in legislative chartering, but created their own problems in the late 19th Century with the rise of “Robber Barons, both the business leaders who amassed great power and wealth in the rise of mass-production and mass-distribution industries, and the great financiers of Wall Street who collaborated with them.” The concentration of wealth and power in the hands of so few led to the passage of antitrust laws and corporate regulations at both the federal and state levels regulations in the 20th Century to prevent or rein in monopolies.

The stock market crash of 1929 and the Great Depression resulted in a multitude of “New Deal” reforms and regulations on the corporate and financial sectors to protect and inform stockholders and the general public.

Gomory and Sylla write that for decades after WWII, “the problem of corporate goals seemed under control,” and “the interests of managers, stockholders workers, consumers and society seemed well aligned” while the U. S. and the Soviet Union were fighting a Cold War.

As late as 1981, the U. S. Business Roundtable issued a statement recognizing the stewardship obligations of corporations to society:  “Corporations have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” In addition, “The long-term viability of the corporation depends upon its responsibility to the society of which it is a part. And the well being of society depends upon profitable and responsible business enterprises.”

Establishing plants in another country in order to do business in that country and be closer to your customers is a reasonable business decision for many companies whose products are sold globally, such as Coca Cola and other food and beverage manufacturers. I concur with Mr. Moser’s statement. “We do not question multinational companies’ right to invest offshore.” However, it is another thing to transfer all or most of the manufacturing of your products to be sold mainly in the U. S. market to another country, at the cost of hundreds, if not thousands, of American jobs.

This brings us to Mr. Moser’s second pro argument to the question; namely, “a strong presence is almost always in the interest of their shareholders.” He states that his experience with the Reshoring Initiative’s free Total Cost of Ownership Estimator™ has shown that “in their excessive focus on offshoring of manufacturing, many MNCs make suboptimal decisions, actually reducing the long-term return to their shareholders. Thus many MNCs will more fully maximise returns for shareholders if they maintain a stronger presence.”

This is because most MNCs do not accurately measure the “Total Cost of Ownership” or “landed costs” in making decisions regarding where to manufacture their products. They ignore the “hidden costs” of doing business offshore about which I have written extensively in my book , such as:  quality problems, legal liabilities, currency fluctuations, travel expenses, difficulty in making design changes, time and effort to manage offshore contract, and cost of inventory.

In addition, Mr. Moser states that the behaviors of MNCs include:

  • “Ignoring a whole range of medium-term risks: IP loss; impact on innovation; and loss of competence and control due to increasing reliance on offshore outsourcing firms. The further a firm is removed from the manufacturing of its products, the harder it is to evolve and make future related products.
  • Ignoring longer-term catastrophic risks associated with shifting their presence offshore, including the decline in American economic, technological and military strength: risk of losing sales and assets in developing countries, especially when competing with local state-owned enterprises (SOEs); loss of the government-funded R&D that gives them a head start in many technologies; loss of strong origin-country defence and legal systems that protect the corporate charter; loss of “Pax Americana” that protects their trade around the world; and populist calls for anti-MNC political actions resulting from income inequality driven by a shriveling middle class.”

One important risk that Mr. Moser did not mention is the risk of theft of Intellectual Property by offshore manufacturers, especially in China. For many years, China has been doing this by reverse engineering, counterfeiting, and cyber espionage, but it has been made easier in the past two years by the mandatory technology transfer required by the Chinese government for corporations who set up plants in China.

In his con argument, Professor Bhagwati asserts that global sourcing and locating plants around the world has happened already, and “there is little point in tilting at reality.” He states, “Multinationals’ products, after all, can now hardly even be defined as American, French or any other nationality when their parts come from every corner of the world. All that matters, he argues, is that worldwide operations bring profits to the multinational, thereby benefiting the country in which it is headquartered. , “MNC investment abroad is good, not bad, for America unless it is a result of distorting tax policies that lead to overinvestment abroad. Asking MNCs to have a presence at home, and subsidising or forcing them under threat of penalties to do so, makes little sense unless you claim that this presence produces some externalities…the benefits to the MNC, and hence to America most likely, will accrue regardless of where the MNC does R&D, in Bangalore or Boston.”

In is rebuttal, Professor Bhagwati states, “Compelling an American MNC to retain a strong presence in America would be the wrong prescription no matter which of the two rationales you accept…Forcing them to produce at home when that makes them uncompetitive in world markets is surely the wrong prescription: it makes them uncompetitive in markets which today are fiercely competitive.

While I realize and have written about the fact that American manufacturers are under a disadvantage in dealing with countries like China that practice “predatory mercantilism,” it is my opinion that American multinational and national manufacturing corporations have more than a “duty to maintain a strong presence in their home countries.” As American citizens, we “pledge allegiance to the Flag of the United States of America, and to the Republic for which it stands, one Nation under God, indivisible, with liberty and justice for all.” Thus, we owe “allegiance” to our country, which is defined as “the loyalty of a citizen to his or her government.” Other synonyms are:  fidelity, faithfulness, adherence, and devotion.

Obviously, if you are a loyal, faithful, devoted citizen of the United States this means that you take actions in your personal and business life to support your country and do not purposely take actions that may cause harm to your country. Moving a majority of manufacturing to other countries, especially China is doing harm to your country since China has a written plan to replace the United States as the world’s super power. Therefore, American multinational corporations and other American manufacturers owe allegiance to the United States of America by maintaining a strong presence in our country.

 

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What Could We Do Right Now to Create Jobs?

Tuesday, January 17th, 2012

There are numerous ideas and recommendations on how we could create jobs that range from the cautious to the extreme.  Most job creation programs proposed by commentators, politicians, and economists involve either increased government spending or reductions in income or employment taxes at a time of soaring budget deficits and decreased government revenue.  Other recommendations would require legislation to change policies on taxation, regulation, or trade that would be difficult to accomplish. Many of these solutions involve borrowing money or taking money from one group of citizens or a future generation to give to another.  Let’s start with what we as individuals can do from the viewpoint of entrepreneurs, business owners, employees, and consumers.

If you are an entrepreneur starting a company, find a niche product for which customers will be willing to pay more for a “Made in USA” product.   Plan to sell your product on the basis of its “distinct competitive advantage” rather than on the basis of lowest price.  Select your suppliers from American companies as this will create jobs for other Americans.

If you are the owner of an existing manufacturing company, then you could do a Total Cost of Ownership analysis for component parts that you are having made offshore to see if you could “reshore” some of all of them to be made in the United States.  Check out www.reshorenow.org for a TCO worksheet estimator to conduct your analysis.  Also, you could choose to keep R&D in the United States or bring it back to the United States if you have “offshored” it.    Every manufacturing job you keep or bring back to the United States will create an average of three to four support jobs for other Americans.  If you are a service company, you could choose to keep your customer service department in the United States or bring it back if it is “offshored.”  If enough manufacturing is “reshored” from China, we would drastically reduce our trade  $600 billion trade deficit .  We could create as many as three million manufacturing jobs, which would, in turn, create 9 – 12 million total jobs, bringing our unemployment down to 4 percent.

If you are an inventor ready to get a patent or license agreement for your product, select American companies to make parts and assemblies for your product as much as possible.  There are some electronic components that are no longer made in the U. S., so it may not be possible to source all of the component parts with American companies.  As I’ve written previously, there are many hidden costs to doing business offshore so that in the long run you may not save as much money as you expect by sourcing your product offshore.  Don’t forget about the danger of having your Intellectual Property stolen by a foreign company that will use it to make a copy-cat or counterfeit product sold at a lower price than your product.

If you are fortunate enough to have a regular, stable job, do everything in your power to contribute to the success of your company.  Do your job to the best of your ability.  Be willing to learn new job skills to increase your value to your employer.  No matter what your job, adopt the marketing mindset where you realize that everyone in a company is part of the marketing team regardless of their job function.  Every interaction that a customer or potential customer has with anyone in a company influences his or her opinion about doing business with that company.  Even though you are being paid by your employer, it’s actually your company’s customers that provide you with a job.

You may not realize it, but you have tremendous power as a consumer.  Even large corporations pay attention to trends in consumer buying, and there is beginning to be a trend to buy ‘Made in USA” products.  Pay attention to the country of origin labels when you shop and buy “Made in USA” products whenever possible.  Be willing to step out of your comfort zone and ask the store owner or manager to carry more “Made in USA” products.   If you buy products online, there are now a plethora of online sources dedicated to selling only “Made in USA” products.   Each time you choose to buy an American-made product, you help save or create an American job.  There is a ripple effect in that every manufacturing job creates three to ten other manufacturing jobs, depending on the industry.  If 200 million Americans bought $20 worth of American products instead of Chinese, it would reduce our trade imbalance with China by four billion dollars.  During the ABC World News series called “Made in America,” Diane Sawyer has repeatedly said, “If every American spent an extra $3.33 on U. S.-made goods, it would create almost 10,000 new jobs in this country.”

Now, let’s consider what Congress could do to create jobs.  First, Congress must enact legislation that addresses China’s currency manipulation.  Most economists believe that China’s currency is undervalued by 30-40% so their products may be cheaper than American products on that basis alone.  To address China’s currency manipulation and provide a means for American companies to petition for countervailing duties, the Senate passed S. 1619 last fall.  Even though the corresponding bill in the House, H. R. 639, had bi-partisan support with 231 co-sponsors, GOP leadership bottled up the bill in committee and prevented it from being brought up for a vote, so the session ended without action to address this serious issue.  The 112th Congress lasts two years, starting in Jan 2011 and ending December 2012, so there is the opportunity for the bill to be voted on this year.

We  voters need to pressure our elected representatives in the House to pass this bill this year so that American products can compete against Chinese imports.  It’s an obvious fact that if American companies can increase sales of their products, then they will be able to hire more workers.

Second, Congress should pass legislation allowing American corporations to “repatriate” income earned by plants in foreign countries at a reduced tax rate of 5-5.5% if the income is permanently reinvested in the United States.  This would bring nearly 1.2 billion dollars of monies back to the U. S. to be invested in R&D, plants, equipment, and hiring workers.

Third, Congress should strengthen and tighten procurement regulations to enforce “buying American” for all government agencies and not just the Department of Defense.   All federal spending should have “buy America provisions giving American workers and businesses the first opportunity at procurement contracts.  New federal loan guarantees for energy projects should require the utilization of domestic supply chains for construction.  No federal, state, or local government dollars should be spent buying materials, equipment, supplies, and workers from China.

My other recommendations for creating jobs are based on improving the competitiveness of American companies by improving the business climate of the United States so that there is less incentive for American manufacturing companies to outsource manufacturing offshore or build plants in foreign countries.  The proposed legislation would also close tax loopholes and prevent corporations from avoiding paying corporate income taxes.  They are:

  • Reduce corporate taxes to 25 percent
  • No negotiation or ratification by Congress of any new Free Trade Agreements
  • Make capital gains tax of 15 percent permanent
  • Increase and make permanent the R&D tax credit
  • Eliminate the estate tax (also called the Death Tax)
  • Improve intellectual property rights protection and increase criminal prosecution
  • Prevent sale of strategic U.S.-owned companies to foreign-owned companies
  • Enact legislation to prevent corporations from avoiding the U.S. income tax by reincorporating in a foreign country
  • Change the tax code to a “partial exemption system” to eliminate incentives for companies to move offshore by taxing all corporate income at a reasonable rate once

In this election year, it is unlikely that legislation proposing any of these recommendations would have a chance of being passed by Congress.  The problem is that no Democrat would want to allow any credit to go to a Republican, which might help them win re-election, and no Republican would want to allow any credit to go to a Democrat, which might help them win re-election.   We will need to wait until after the 2012 election before we have any hope of such legislation being considered.

Finally, the Obama administration is considering a high-level task force to manage China trade enforcement issues. Such a task force is desperately needed and long overdue.  The challenge will be to ensure that the task force has the authority to take bold steps to lower our trade deficit with China.  Holding China accountable for their compliance with terms of their membership in the World Trade Organization would be a major step in helping American manufacturers compete in the global marketplace to be able to succeed, grow and create jobs in America instead of China.

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