Technology Titans In Trouble

Something strange is happening to America’s titans of technology. At the precise moment when the economy is supposedly gaining strength, and at the very time when technology platforms are evolving in increasingly productive ways, many dominant firms are experiencing dramatic slow-downs (or even outright declines) in sales revenue.

Just last week, for instance, Amazon slashed its sales projections for the upcoming holiday season. Apple revealed that it was losing iTunes music volume to online streaming services. And IBM abandoned its $20 earnings per share “road map” target for 2015, while an analyst complained, “too much of its revenue comes from old-school business lines, and not from potential growth areas.”

But why are such admired firms suddenly struggling to attract customers? After all, IBM rescued itself from collapse by shifting from a hardware focus to a customer focus in the early 1990s. Amazon virtually invented the online sales industry in the late 1990s. And Apple’s iTunes, along with the iPod, revolutionized the music industry in the early 2000s.

All three firms, though, now appear to be struggling to maintain their competitive market positions. Amazon’s initial venture into mobile phones, for instance, flopped earlier this year. Apple is pinning its hopes on integrating its recently acquired Beats music streaming service with its own iTunes service. And IBM industry analysts are now referring to the firm’s predicament with expressions like “a sad national story.”

At first glance, these firms appear to be focused on different technology sectors. Nevertheless, they do seem to share a common problem. Namely, their customers are underwhelmed by their offerings, and they are taking their sales revenue elsewhere.

Unless these firms can rediscover the internal development capabilities that first drove them to prosperity, their days as industry titans may indeed be numbered.

The Michelin Man In Dixie Land

Where would you expect Michelin, the French manufacturer best known for its Michelin Man mascot and its global travel guides, to build new capacity to produce automobile tires?

“The industrial heartland of France itself” might be your first guess. Perhaps “eastern Germany, or the westernizing European Union nations of Bulgaria or Romania” might be your second guess. And perhaps “an Asian nation, such as China, Indonesia, or the former French colony of Vietnam” might be your third.

Most likely, the American state of South Carolina wouldn’t even make your Top Ten list of guesses. And yet that’s where Michelin is placing its newest tire plant, a development that will transform the state into the tire manufacturing champion of the United States.

It may not be surprising that Michelin and other tire manufacturers would prefer to do business in South Carolina than in the rust belt states of Indiana or Michigan. And yet why would they want to manufacture their products in America at all?

From Snow To Kudzu

Ironically, the most recognizable tire in the United States represents a brand that is actually now owned by Michelin; it’s the gigantic Uniroyal Tire that sits at the side of Interstate 94 just outside of Detroit. The eight story tall billboard was originally used as a Ferris wheel for the 1964 New York World’s Fair, and now serves as the symbol of the Motor City. Uniroyal, however, was acquired by Michelin in 1990; it no longer operates as an independent American company.

Nevertheless, the tire industry hasn’t fully closed all of its American tire factories; instead, it has simply moved south and traded the snowy climes of Michigan for the kudzu-festooned environment of the Palmetto State. Last week, Michelin announced that it would join Bridgestone and Continental Tire by greatly expanding its manufacturing base in South Carolina.

For decades, pessimistic economists have predicted that the American manufacturing sector would continue to dwindle in the face of competition from other nations. Steve Jobs himself, in fact, once told President Barack Obama that high technology Apple manufacturing jobs that have been lost to China aren’t coming back to the United States. And yet Michelin, a European company with no historical ties to the American nation, decided to produce tires — a product far less technologically advanced than iPhones or iPads — in the United States.

That clearly raises the question: why would they decide to do so?

Simple Economics

The answer to that question is a simple function of economic competitiveness. Although many other nations maintain far lower labor costs than the United States, and although China surpassed the United States as the world’s largest automobile market two years ago, the American economy remains the largest in terms of Gross Domestic Product (GDP).

Thus, any tire company that wishes to do business on a global level must develop a strategy to produce and sell its product to American consumers. In order to do so, it must inevitably choose between a pair of options: (a) to both manufacture and sell its tires within the United States, or (b) to manufacture its tires outside of the nation and then import them into it.

Although the second option remains a feasible one, it is burdened by the weight of skyrocketing fuel expenses that drive up the cost impact of transporting finished goods across national borders. When we also consider the effect of a weakening United States dollar and a strengthening Chinese reminbi, as well as the recent willingness of the American labor force to accept lower wages and benefits in the face of high rates of unemployment and continuing economic weakness, we can understand why simple economics makes South Carolina an attractive locale for tire manufacturers.

Growing Old Before Growing Wealthy

Of course, although the United States has maintained an industrial base in tire manufacturing, we cannot assume that America will soon reclaim all of the plants and factories that have been lost to China since President Richard Nixon visited the Communist nation in 1972. Nevertheless, China’s inability to woo tire manufacturers away from the American South does give the United States hope that it will be able to compete with the Asian nation for future manufacturing plants.

The Chinese economy itself is burdened with many handicaps. Its economic growth rate is slowing, its population is aging, and its labor force is demanding wage increases and improvements in working conditions. These demands will inevitably erode its labor cost advantages.

In fact, if its economy hits a wall as Japan’s did during the final decade of the twentieth century, the Chinese government may discover that its population has grown old well before the nation has grown wealthy. Should such a scenario emerge in the future, the American manufacturing industry and its skilled labor force may remain highly capable of competing against their global rivals.

Deficits and Unemployment: Solutions, Any One?

At first blush, the announcement that emerged from Washington DC this past weekend sounded fairly reasonable.

What was the announcement? U.S. House Speaker John Boehner declared that the $4 trillion government deficit reduction target that he had established with President Obama was a bit too ambitious. He suggested that they shoot for a more modest goal instead, perhaps a streamlined plan worth $2 trillion.

$2 trillion still sounds like a impressive number, doesn’t it? In an absolute sense, it certainly is. Nevertheless, when compared to the scope of the overall budgetary challenge, $2 trillion is only a drop in the bucket.

Simple Arithmetic

It doesn’t require any advanced mathematical knowledge to understand why a $2 trillion debt reduction package, or even a $4 trillion plan, isn’t much to get excited about. The accumulated total debt from past and current deficits has already hit its legal ceiling of $14.3 trillion. And according to the Congressional Budget Office, this year’s deficit — which simply will be added to the accumulated total debt — will reach $1.5 trillion.

Furthermore, the $4 trillion debt reduction package originally proposed by President Obama and Speaker Boehner was itself designed to be spread over a ten year period. In other words, its annual impact on the budget deficit would have averaged less than half a trillion dollars per year. Likewise, the impact of a $2 trillion package would only average two tenths of a trillion dollars annually.

So here is the “long and short” of the budget debate. America’s total accumulated debt has now exceeded $14 trillion. It’s still increasing at a rate of $1.5 trillion per year. And a proposal to reduce the rate of increase to an amount that continues to exceed $1 trillion per year has been cast aside because it is purportedly too ambitious.

The Line Lengthens

Complicating the deficit reduction analysis, of course, is the economic scourge of unemployment. The size of the proverbial line of jobless citizens who are actively seeking employment opportunities increased to 9.2% of the work force last week; in addition, the true rate of joblessness, including citizens who have given up entirely on the job market and those who are employed on a part-time basis but who would prefer full-time employment, has now exceeded 16%.

The complexity of the relationship between government deficits and unemployment revolves around the fact that budget reductions usually involve employee lay-offs, which can lead to more joblessness and less economic activity. The 7,500 civil servant layoffs proposed by the Governor of Connecticut, for instance, are expected to increase the Nutmeg State’s unemployment rate from 9.1% to 9.4%.

In other words, any serious attempt to reduce the government budget deficit will likely worsen the employment picture. And that, in turn, can dampen economic growth prospects and thus drive up (yet again) the government budget deficit.

It’s quite a conundrum, isn’t it? Solutions, any one?

The Long View

When faced with such dilemmas of historic proportions, it is often helpful to look back at history itself to identify possible solutions. In these circumstances, though, it is difficult to ascertain whether we should be optimistic or pessimistic about America’s long range prospects.

First, a note of optimism: the American economy has experienced similar periods of extended decline in the past, and has always rebounded eventually. In fact, the 12 year Great Depression that ended with America’s entry into World War Two wasn’t close to being the longest depression in the nation’s history. No less an authority than Wikipedia has proclaimed the era from 1873 to 1896 to be the time of the Long Depression, a 23 year slog that was punctuated by financial crash after crash after crash. Yet America always recovered from these debilitating crises.

A pessimist may note, though, that our mature and aging American population of the early 21st century looks little like the youthful and vigorous emerging nation of the late 19th and mid-20th centuries. As Japan is now learning while it attempts to rebuild from its recent tsunami, an economic bounce-back is extremely difficult to engineer on the shoulders of a geriatric population.

A Matter Of Time

The ultimate solution to America’s economic malaise may simply come down to a matter of time. American consumers will need time to pay down their unprecedented levels of personal debt, and their government will also need time to do the same. Furthermore, the massive demographic bulge of the aging baby boom generation will remain with us for decades to come, a biological and sociological certainty that must inevitably impact our nation’s costs of Medicare, Social Security, and other programs for the elderly.

In the meantime, we can expect to continue to hear a wide variety of proposed “quick fix” solutions, ranging from the privatization of Medicare to the expansion of free trade agreements. Each of these proposals may justify serious consideration, but none is likely to represent the “magic bullet” of a solution to the deficit – unemployment problem.

Labor Unions In Peril: From Wisconsin To The NFL

Last week, Republican Governor Scott Walker of Wisconsin and his colleagues in the state legislature finally launched what some political pundits called, a bit ominously, their nuclear option. The target of their assault? The state’s public sector labor unions.

By the time the smoke had cleared from an arcane legislative maneuver, one that enabled them to pass their law without a single Democratic vote, the devastation was complete. Wisconsin’s public unions were forbidden to negotiate collectively about any issue other than wage increases; furthermore, their annual wage increases were limited to the rate of inflation. They were also forbidden to collect annual dues through routine payroll processes, and they were ordered to submit to periodic referenda by the labor force, elections that will threaten the possibility of union decertification each year.

Such restrictions, in essence, downgrade the power and authority of the Wisconsin public sector unions to levels typically held by trade associations. Somewhat lost in last week’s political hullabaloo over these developments, though, was a story about another trade union that found itself similarly threatened.

Tom Brady, Quarterback … and Union Hero

Although Major League Baseball still refers to itself as America’s national pastime, the National Football League is undoubtedly the most successful and popular professional sporting association in the United States. Its 32 teams collectively earn $9.3 billion annually in revenue; its Super Bowl championship game alone brings hundreds of millions of dollars of economic benefits to each city that serves as its host.

Last week, though, negotiations between NFL management representatives and the player’s union over a new collective bargaining agreement collapsed. In an unusual legal maneuver, the players then chose to decertify their own union, which positioned them to file an anti-trust lawsuit that asks a court to issue an injunction to prevent management from locking them out of training camp. Without such an injunction, the team owners could simply cancel the 2011 season and “wait out” the players, or — even worse, from the perspective of the players — they could hire temporary “scab” replacement athletes to play regular season games as they successfully did in 1987.

The player’s lawsuit was filed by a number of superstar athletes, including current Most Valuable Player Tom Brady of the New England Patriots. Because the names of the athletes are listed by the court in alphabetical order on the legal docket, the case will go down in history as “Brady versus the NFL.”

Beginning of the End … or of a Renaissance?

It would be incongruous, of course, to compare Tom Brady’s reported $18 million annual salary to the far smaller compensation levels earned by Wisconsin’s public sector employees. Likewise, it would be misleading to ignore, in response to last week’s developments, the immense differences between the howls of outrage expressed by laborers in America’s Dairyland and the cool sense of confidence exuded by America’s football heroes.

Nevertheless, within the time span of a single day, the labor movement of the United States found itself confronting a pair of unprecedented challenges at opposite ends of the economic spectrum. With Governor Scott Walker signing Wisconsin’s labor bill into law last Saturday, coinciding with the decertification of the NFL union and the filing of “Brady v. NFL” on the same day, America’s union forces suddenly had reason to contemplate the end of their existence.

It’s possible, of course, that the American public will rally to the defense of its labor force, and that — as predicted somewhat optimistically by AFL-CIO leader Richard Trumka — what we are witnessing is actually the beginning of a labor renaissance. After all, polls have indeed found widespread public support for the continuation of collective bargaining activities by public sector unions. Nevertheless, with state fiscal budgets in tatters, and with NFL owners facing no shortage of ready and willing replacement players, it is not difficult to foresee a potentially catastrophic outcome for the labor movement.

China or Pakistan, Germany or Italy

Pro-management forces, of course, are hoping for just such a catastrophe, claiming that nations like China have become economic dynamos by avoiding unionization activities, and that nations like Italy have become economic laggards by surrendering to union demands. On the other hand, pro-union forces retort that nations like Germany have built export-oriented powerhouses on the foundations of union labor, and that nations like Pakistan are sinking economically despite maintaining few restrictions against low wages and child labor.

It is hard to imagine labor unions ever disappearing entirely from the American scene, just as it is hard to imagine Medicare, Medicaid, and Social Security (to say nothing of America’s system of free public education) ever vanishing from the national landscape. Nevertheless, at a time when Wisconsin laborers and all-star NFL quarterbacks find themselves facing similar existential threats in their respective labor disputes, it is reasonable to wonder whether a fundamental shift is now occurring in the American economy.

America Invades Canada: A Retail Onslaught!

Ever since the American army invaded Canadian territory two times in less than forty years – first in 1775, during the war for American independence, and then again during the Napoleonic War of 1812 – the northern neighbor of the United States has been a bit jittery about being over run by the world’s most powerful nation.

The Canadians have struck back from time to time, of course. During the 1990s, for instance, the brief establishment of a Southern Division of the Canadian Football League (CFL) threatened America’s powerhouse National Football League. In fact, the emergence of the CFL’s champion Baltimore Stallions in 1995 shook two nations, as Canadians found it unnerving to applaud an American champion of their Canadian sports league, and as American football fans found themselves torn between their own home grown league and a foreign rival for their affections.

The CFL’s incursion into the United States didn’t last very long; the following year, the NFL arranged for its Cleveland franchise to move to Baltimore, and (fearing direct competition with a far stronger rival) the Stallions moved north to Montreal. The other CFL franchises in the United States simply folded, and the Canadian sports incursion into the United States faded away.

This past month, though, the Americans struck the Canadians again! Not with their military forces or professional sportsmen, but with their mighty retail industry organizations  instead.

New Targets and More Walmarts

Walmart, America’s largest discount retailer, has operated stores in Canada since 1994 when it purchased the Woolco store chain; it has since grown to become the largest discounter in Canada. In fact, Walmart Canada has even been able to expand in areas that have eluded it in the United States; for instance, Walmart convinced Canadian regulators to permit it to launch its own banking institution, a request that was denied by regulators in America.

A single retailer – even one as powerful as Walmart – may not necessarily qualify as a full blown invasion, but two gigantic store chains are a different matter. Thus, the retail sector was abuzz earlier this month when Target, Walmart’s tenacious rival in the United States, announced its entry into the Canadian market with its $1.8 billion purchase of the lease agreements of Zellers, the second largest discount store chain in Canada. Over time, as the leases expire, Target plans to convert most of the locations to its own branded establishments.

In other words, the two largest discount retail store chains in the United States are well on the way to becoming the two largest such chains in Canada as well! And in response to Target’s announcement, when Walmart announced its own $500 million expansion plans for additional Supercenters in Canada, America’s retail conquest of its northern neighbor appeared to be inevitable.

Meanwhile, Retrenchment in the States

This figurative Gold Rush of American retailers into the Canadian market is particularly striking in contrast with their own development plans in the United States. Just this past week, for instance, Walmart shocked its foes by unexpectedly abandoning plans to develop a new center in Virginia on the eve of the launch of a legal appeal of a previous decision that favored the retailer.

Apparently, Walmart had secured the requisite legal permissions to develop a site in Virginia’s Orange County, a site that is contiguous to a protected Civil War battlefield. Although some local residents welcomed the store because it offered a much-needed boost of economic activity, a loosely defined group of local residents, small businesses, and site preservationists were about to petition the courts to reconsider those permissions.

Why would Walmart abruptly walk away from a set of legal permissions that it had already secured, thus abandoning an expansion strategy that has served it extremely well during its decades of immense growth in America? Although a spokesperson for the retailer claimed that its business executives had simply changed their minds about the opportunity, it is quite possible that Walmart has decided to focus on the greater potential of the Canadian market instead of the American market.

Eurosclerosis in America?

Although economists in the United States have long taken note of their nation’s loss of economic capital to newly emerging countries, the loss of such vital resources to its northern neighbor is a relatively new concern. And it is a highly worrisome one at that; after all, how can America expect to compete for the investment capital of foreign corporations when it is struggling to remain at the center of the development strategies of its own home grown retail organizations?

Back in 1985, German economist Herbert Giersch invented the word Eurosclerosis to describe the inability of the European democracies to sustain significant economic growth in the face of high taxation rates, a generous social safety net, and extensive government regulation policies. Has the United States reached the point where Amerisclerosis has become a concern as well?