Foxconn: the face of world manufacturing

Foxconn, the giant Chinese manufacturing company, is expanding worldwide, not only into poorer regions of China but also into Brazil, India, Mexico, Malaysia, central Europe and, in the not-too-distant future, the United States.   With 1.4 million workers in China alone, it is the world’s second largest employer, behind Walmart.

Foxconn suicide nets (Bloomberg News)

The company, whose headquarters are in Taiwan and largest operations are in China, is famous for asking its stressed-out workers to sign pledges to not commit suicide and for putting up suicide nets to catch workers jump out of the windows of its tall dormitories.

Ross Perlin, writing in the current issue of Dissent magazine, says there are good reasons for this.   Work schedules of 12 hours a day and 50 hours a week are common, he said, with up to 100 hours a week during peak production.  He said that wages average $1 to $2 an hour.

Although the company continues to be plagued by wildcat strikes and suicide threats, working conditions have improved slightly, as a result of audits by Apple Computer, a major customer, and a tight labor market in China, Perlin wrote.

But there is a limit to possible improvement.  He quoted an analysis that said only 1.8 percent of the price of an iPhone goes to manufacturers in China, while Apple gets 58.5 percent and the rest goes to manufacturers of high-end components.  He didn’t quote the source of these figures, and I suspect they are exaggerated, but I agree with his overall point.  Profit margins of companies such as Foxconn and other Chinese suppliers are razor-thin, and they can succeed only by operating on a huge scale while keeping costs, including wages, to a minimum.

Perlin said that Foxconn and Apple symbolize the long-standing relationship between the United States and the economies of eastern Asia, including Japan and South Korea as well as China.

[It is based on] a series of dyads: American consumption and Asian labor, American innovation and Asian manufacturing, American debt and Asian savings, American power and Asian acquiescence. In its latest form—the co-evolution of Silicon Valley and China’s Special Economic Zones, particularly in information technology and alternative energy—it can be summed up in the words, engraved on nearly every Apple product: “Designed by Apple in California, Assembled in China.”

via Dissent Magazine.

This economic relationship has existed for a long time, but it can’t go on forever.  It depends on us Americans being relatively rich, and over time it makes us relatively poorer.

There are at least two ways it can come to an end.  One is that the United States government stands up for U.S. workers and does what the Japanese, South Korean, Chinese and many other governments do, which is to allow access to the nation’s market only on condition that the company make a positive contribution to the nation’s productivity.  Currently the U.S. government is on the opposite course.   From Reagan through Clinton to Obama, successive administrations have sought to lock the United States into international trade treaties precisely intended to prevent member governments from asserting national interests against global corporations.

The most likely ending is that we Americans eventually cease to be able to earn enough or borrow enough to be a worthwhile market for Chinese goods.  If and when that happens, the question becomes whether the USA will take down the economies of eastern Asia with us.  Maybe by that time they will have developed a middle class large enough to be a market for their own goods, after having moved their manufacturing operations to Africa or some other poorer part of the world.   Or maybe they or we will have found a better path, in a way I can’t presently imagine.

Click on Chinese Workers Foxconned for Ross Perlin’s full article in Dissent Magazine, which has other articles on China in the Spring 2013 issue.

The engineering of junk food addiction

We human beings are conditioned through natural selection to desire sugar, salt and fat.   They were scarce for our hunter-gatherer ancestors, who ate them every chance they got.  So it is no wonder that we like sweet, salty and greasy junk foods, and that food processors and fast-food restaurants make a lot of money selling them.  Since we Americans are no longer hunter-gatherers, our craving for junk food has many of us unhealthy and obese.

Recently a New York Times reporter named Michael Mann discovered there is more going on than that.  He found, through interviews and a search of court documents, that food processors are able to engineer their products to contain the exact amount of sugar, salt and fat that will maximize the human appetite for more—much as the tobacco companies were able to engineer nicotine to contain the exact amount that would maximize the craving for more cigarettes and cigars.

This is a drawback of competition and free enterprise.  So long as corporate profits depend on producing excellent goods and services at a reasonable price, the free market works for the benefit of the public in a way that no planned system could.  But when profits are increased by doing something that is harmful, any company that holds bag risks falling behind and being crowded out.

We as individuals have the power to refrain from addiction to an unhealthy diet.  I am glad the Food and Drug Administration requires packaged foods to be labeled as to their fat content, and their ingredients.  I have only become concerned about a healthy diet fairly late in life, but I now look carefully at what I buy.  I don’t know what I would do without this information.

Click on The Extraordinary Science of Addictive Junk Food for Michael Mann’s article in the New York Times Magazine.

Click on How the government subsidizes obesity for an earlier post of mine on how the federal government’s grain subsidies make junk food cheaper than healthy food.

Click on The Acceleration of Addictiveness for an article by venture capitalist Paul Graham on the synergy between addictiveness and free enterprise.

TTP trade deal would override American law

Right-wing opponents of President Obama say that his policies are a threat to American democracy.  I think that’s true—but not in the way they think.   He claims the right to sign death warrants based on secret criteria.  He has brought government secrecy to unprecedented levels.  His administration protects wrongdoers and prosecutes whistle-blowers.   But all these things will be possible for a future President to roll back.

Not so the TransPacific Partnership agreement, a treaty now being negotiated in secret.  The TPP treaty will be submitted to the Senate under the Fast Track system under which it can be voted up or down but not modified.   It is very possible that it will be enacted before the majority of the American public has a chance to learn what it is all about.

The full extent of the TPP is not known, but some provisions have been leaked.  They are all favorable to global corporations and unfavorable to the public.  The worst provision is the agreement to submit to special courts with authority to overrule U.S. law and U.S. court decisions when they are deemed unfair to “investors.”

Investors will be the only class of people protected by the TPP.   They will be allowed to ask for damages not only loss of business due to labor, health or environmental laws, but for hypothetical losses of future profits.

One purpose of the TPP is to create an 11-nation Pacific bloc in which there are no national boundaries for global corporations, but China is locked out.  But there is no minimum number of nations that have to sign for the TPP to go into effect.  Even if only a handful of nations besides the United States sign on, it will have achieved another purpose, which is to create a body with power to override U.S. laws that are objectionable to corporations.

Under Article VI of the U.S. Constitution, treaties are the supreme law of the land.  That is a necessary provision.  If it were otherwise, treaties would not be binding.  Unfortunately, this opens the door to treaties such as the North American Free Trade Agreement, which set up courts superior to national courts, to which corporations can appeal to overturn national and local laws.  For example, a NAFTA court recently ordered the Province of Ontario to pay damages to a national gas company for future profits lost because of Ontario’s restrictions on hydraulic fracturing.  TPP is NAFTA on steroids.

There are many other pernicious provisions in the TPP.  Click on TransPacific Partnership Will Undermine Democracy, Empower Transnational Corporations for details.

Click on US secretly negotiating NAFTA-like TPP treaty for an earlier post of mine on TPP.

Click on Trans-Pacific Partnership: NAFTA on Steroids for another earlier post.

Click on Barack Obama’s economic legacy: His four must-have items for comment on how TPP fits in with Obama’s overall economic agenda.

A crazy idea from Walmart management

Sam Walton, the founder of Walmart, was a business genius.  But his heirs, to put it as kindly as possible, are not.

Walmart has been foundering of late because it is so understaffed that its employees are not able to keep the shelves of its stores fully stocked.  This is wrongheaded.

Now Walmart management is seriously thinking about giving its customers discounts in return for delivering on-line orders within their ZIP codes.  This is deeply crazy.  No doubt their lawyers and insurance companies will talk them out of actually attempting this.

The Walton heirs are a good argument for keeping estate taxes high enough that important business enterprises do not fall into the hands of the idiot children of great entrepreneurs.  The operation of the free market will catch up with Walmart eventually, but not until a lot of good, hard-working people are hurt.

Click on Walmart faces the cost of cost-cutting: Empty shelves for a report from Bloomberg Business News about the company’s troubles.

Click on Wal-Mart may get customers to deliver packages to online buyers for a report from Reuters about management’s bogus solution.

The changing world economic balance of power

The BRICS nations—Brazil, Russia, India, China and South Africa—are in the process of organizing a new economic bloc that could rival the European Union and the North American free trade area.   They are holding a summit meeting which began yesterday in Durban, South Africa.

Financial Times 2010. Double click to enlarge.

Pepe Escobar, the intrepid foreign correspondent of Asia Times in Hong KongSingapore, explained the significance of the BRICS summit meeting.

The BRICS push is part of an irresistible global trend. Most of it is decoded here, in a new United Nations Development Programme report. The bottom line; the North is being overtaken in the economic race by the global South at a dizzying speed.

According to the report, “for the first time in 150 years, the combined output of the developing world’s three leading economies – Brazil, China and India – is about equal to the combined GDP of the long-standing industrial powers of the North”.

The obvious conclusion is that, “the rise of the South is radically reshaping the world of the 21st century, with developing nations driving economic growth, lifting hundreds of millions of people from poverty, and propelling billions more into a new global middle class.”

via Asia Times Online.

The Economist. Click to enlarge.

The BRICS economies are diverse but complementary.  China and India are important and growing manufacturing nations.  Brazil, Russia and South Africa are important producers of raw materials.

If present trends continue (which may not happen) they could dominate the world economy in a few decades.   RT News reported that the governments of Egypt, Mexico and Indonesia have expressed interest in joining the BRICS bloc.

BRICS representatives at the South African summit discussed creating a new Bank of the South that would give Third World nations an alternative to the International Monetary Fund, the World Bank and the World Trade Organization, and pledged $10 billion to the new BRICS bank.   They also discussed creating their own credit rating agency, so that their finances won’t be subject to the opinions of Moody’s or Standard & Poor’s.

China and Brazil signed an $80 billion trade agreement in which they’ll trade in their own currencies rather than dollars.  China recently replaced the United States as Brazil’s largest trading partner.

President Obama’s secret negotiations to create a Trans-Pacific Partnership Agreement, which would lock governments in to current rules concerning corporations and finance, can be seen as an attempt to head off the emergence of a new bloc in which the United States would play no part.

I don’t see that I, as a middle-class American, am threatened in any way by the emergence of BRICS.   I don’t think that the International Monetary Fund or the World Trade Organization operate in my interest or the interests of American working people.  We Americans can thrive if we as a nation turn away from military dominance and devote ourselves to creating a productive economy.

The key BRICS relationship is the one between China and Russia.  It brings to mind my reading about geopolitics years ago—whether world power came from dominating the Eurasian Heartland or from dominating the world’s sea lanes.  The nuclear-powered U.S. Navy commands the seas, but doesn’t affect the present-day equivalents of China’s overland Silk Road.

China is turning to Russia for the oil and natural gas it needs to fuel its economic growth.  Since Russia’s own reserves of oil and gas are dwindling, this means Russia must develop new supplies in the warming Arctic in the long run and control the oil and gas of Central Asia—what Pepe Escobar calls Pipelineistan—in the short run.

Last week Chinese President Xi Jinpin met with Russian President Vladimir Putin in Moscow.  Escobar reported that the result is an agreement by China to pay in advance for Russian oil, in return for a share in Russian oil development projects in Siberia and offshore.  Pipelines across Central Asia will give China access to Iranian oil by land, which would negate any U.S. naval blockade of Iran.  Pepe Escobar explained the significance.

The geopolitical ramifications are immense; importing more gas from Russia helps Beijing to gradually escape its Malacca and Hormuz dilemma – not to mention industrialize the immense, highly populated and heavily dependent on agriculture interior provinces left behind in the economic boom.

That’s how Russian gas fits into the Chinese Communist Party’s master plan; configuring the internal provinces as a supply base for the increasingly wealthy, urban, based in the east coast, 400 million-strong Chinese middle class.

When Putin stressed that he does not see the BRICS as a “geopolitical competitor” to the West, it was the clincher; the official denial that confirms it’s true.

via Asia Times Online.

Nassin Nicholas Taleb explains antifragility

Nassim Nicholas Taleb spoke about his book, Antifragile, to the RSA (Royal Society for the Encouragement of the Arts, Manufactures and Commerce) in Britain.   He summarized the core ideas in his book in a little over six minutes and spent another 12 or so minutes talking with a couple of young Britishers.  One is Rohan Silva, senior policy adviser to Prime Minister David Cameron, and the other is Fraser Nelson, editor of The Spectator magazine and columnist for the Daily Telegraph.

Silva spoke of tax breaks for “angel” investors.  These are people who provide money for start-up businesses, similar to the “angels” for Broadway shows, usually in return for a share of the stock.  They come in at an earlier stage of the business than venture capitalists, and they almost always risk their own money, unlike the administers of venture capital funds.   Since most angel investors are doomed to lose their money, it is right that the few who are successful should get rich.   If you’re going to give tax breaks to investors, they’re the ones who should get them.

Equity investing fits Taleb’s ideas of optionality and “skin in the game.”  An equity investor risks his or her money, but only the amount invested.  The potential gains have no fixed limit, but the equity investor only gains if the business gains.  This is different from a leveraged buyout, in which a company is loaded with debt and the financier gains even if the business fails.

I find Nassim Nicholas Taleb’s ideas always interesting, mostly plausible and valuable not because he provides the key to every problem, which nobody can, but because he sees things that other people don’t notice.

Nassim Nicholas Taleb’s five rules for policy

Rule 1.  Think of the economy as more like a cat than a washing machine.

Rule 2.  Favor businesses that benefit from their own mistakes, not those whose mistakes percolate into the system.

Rule 3.  Small is beautiful, but it is also efficient.

Rule 4.  Trial and error beats academic knowledge.

Rule 5.  Decision-makers must have skin in the game.

Nassim Nicholas Taleb is a successful Wall Street options trader and author of a new book, ANTIFRAGILE: Things That Gain from Disorder.  In a recent article in the Wall Street Journal, he laid down those five wise rules for economic policy-makers.

The economy is organic, like a cat, and not mechanical, like a washing machine.  Every kind of stress on a machine causes it to wear out faster.  But a living animal thrives on stress, up to a point.  Animals and other organic systems are best left alone, except in dire emergency.

One of Taleb’s examples of businesses that learn from their own mistakes is the airline industry.  Every time there is an airplane crash, the airline companies study the causes of the crash and incorporate that information into their practices.  In a sense, every airline crash makes the airlines safer.  Another example is Silicon Valley, where failure is not regarded as a disgrace and the idea is to “fail quickly” so you can go on to try something.   The opposite of this is the Wall Street banking industry, where every bank failure weakens the overall system.

An industry is strongest when it consists of many small units, where the failure of an individual business makes the survivors stronger.  Taleb cited the restaurant business, in which the failure of an individual restaurant is common but the failure of the restaurant industry as a whole is unimaginable.  Failures mean the best restaurants survive, and so the industry is ever-improving (assuming, I would add, that the big chain restaurants don’t drive the individually-owned restaurants out of business).  Government is least harmful, he wrote, when it is vested in the lowest and possible unit, as in Switzerland.

We should honor failed entrepreneurs in the same spirit that we honor warriors who fall in battle.  It is through their individual sacrifice contributes that society as a whole survives and prospers.

He is skeptical of top-down planning, whether done by government, corporations or some other form of corporation.  The best economic and social system is one that allows trial and error in which the errors are small and are a source of knowledge and improvement.  Experimentation and tinkering, not theory, is the source of technological and economic progress.

The trouble with most journalists, academics and government policy-makers is that they suffer no penalty for being wrong, not even a loss of reputation.  Even worse are Wall Street bankers, who are able to pocket the gains from their successes and push their losses onto the taxpayers.   He said the government in a humane society ought to provide for the weak and help the unlucky get back on their feet, but it should never bail out a failed business.  If a business is too big to fail, he said, nobody in that business should receive greater compensation than the most highly-paid civil servant.

Taleb admires Ralph Nader because he is the opposite of a Wall Street banker.  Nader accepts personal risks and sacrifices in order to confer benefits on society as a whole.

How to live in a world you don’t understand

Nassim Nicholas Taleb is the author of  ANTIFRAGILE: Things That Gain From Disorder,  which is about how to thrive in a world that is basically unpredictable.  Taleb said that individuals and societies become stronger when they expose themselves to moderate amounts of stress and risk, and become vulnerable when they try to eliminate stress and risk.   He said it is impossible and unnecessary to predict the future.  What is possible, on an individual and societal level, is to arrange things so that you have more to gain than to lose from change.

In this video he talks about his ideas to his friend Daniel Kahneman, author of Thinking, Fast and Slow, which is about how people make most of their decisions on the basis of intuition, and how thing can lead us astray, particularly when thinking about risk.

I give you fair warning that this video is an hour and nearly 20 minutes long.  I thought it was interesting and maybe you will, too.   Here are some quotes from the book which I hope will pique your interest.

My characterization of a loser is someone who, after making a mistake, doesn’t introspect, doesn’t exploit it, feels embarrassed and defensive rather than enriched with a new piece of information, and tries to explain why he made the mistake rather than moving on.

He who has never sinned is less reliable than he who has only sinned once.  And someone who has made plenty of errors—though never the same error more than once—is more reliable than someone who has never made any.

As a rule, intervening to limit size (of companies, airports, or sources of pollution), concentrations and speed are beneficial in reducing Black Swan risks.  These actions may be devoid of iatrogenics—but it is hard to get governments to limit the size of government.

My idea of the modern Stoic sage is someone who transforms fear into prudence, pain into information, mistakes into initiation, and desire into undertaking.

The true hero in the Black Swan world is someone who prevents a calamity and, naturally, because the calamity did not happen, does not get recognition—or a bonus—for it.

Anything that needs to be marketed heavily is necessarily either an inferior product or an evil one.

If there is something in nature you don’t understand, odds are it makes sense in a deeper way that is beyond your understanding.

Government spending cut without a sequester

Double click to enlarge

If you look at government employment and government spending, you have to look at state and local government spending as well as the federal government.  Efforts by the Obama administration to stimulate the economy have been offset by austerity on other levels of government.

The current economic recovery has had weaker job growth than in any recovery since the Great Depression.   I think the reasons for this are deeper than lack of governmental economic stimulus, but the charts show that is false to say that increased governmental spending has caused the recovery to be weak.

Hat tip to occasional links and commentary.

That seems wrong to me, too

Hat tip to jobsanger.