General Motors and Ford have both recently announced plans to restructure their parts supply arrangements, the result of which will be the loss of thousands of middle-class manufacturing jobs. These plans involve slimming down the number of suppliers, as well as forcing domestic suppliers to match the lowest global price (the \u00e2\u20ac\u0153China price\u00e2\u20ac\u009d) if they wish to retain business.<\/p>\n
Every day factories close across the United States, but only occasionally do we get a clear look into the brutal logic of corporate globalization. Geologists learn the most from extreme events such as earthquakes. Likewise, events such as the Ford and GM announcements give us a window into the economics of global out-sourcing. And what we see is that U.S. manufacturing is now converging rapidly on the Wal-Mart model, a model that drives the \u00e2\u20ac\u0153race to the bottom.\u00e2\u20ac\u009d<\/p>\n
Understanding the Wal-Mart model requires understanding the \u00e2\u20ac\u0153big box\u00e2\u20ac\u009d discount store revolution in American retailing. These discounters are epitomized by Wal-Mart, which is the most efficient at squeezing workers globally (as well as the most efficient at squeezing American workers). Their business model rests on scouring the globe for the lowest price, putting firms and workers in global competition with each other.<\/p>\n
This process started forty years ago, when the newly established discount retailers (Wal-Mart was founded in 1962) started putting California suppliers in competition with New York suppliers. Since all operated in the United States under U.S rules and labor laws, the process was not unfair. However, even then there were flaws because U.S. law permitted different labor laws across the states, thereby creating incentives and pressures for manufacturing to move south to non-union, so-called \u00e2\u20ac\u0153right-to-work\u00e2\u20ac\u009d states.<\/p>\n
Since then Wal-Mart has gone global with its buying strategy, and it now puts Chinese suppliers in competition with suppliers from Mexico, Indonesia, Sri Lanka, as well as the United States. This global buying strategy would have posed little threat thirty years ago. But that was an era of classical free trade, and the rules of classical free trade no longer apply. Globalization has changed everything by making technology and methods of production mobile, and by lowering business coordination costs. These techniques were developed in America, and American multi-national companies took them global. The Wal-Mart global buying strategy plugs into this new economic order and moves it into hyper-drive. In effect, the big box discount retailers have changed the nature of global competition, and have become an even more important mechanism of global labor arbitrage than foot-loose production by multi-national corporations.<\/p>\n
The Wal-Mart global buying strategy is now being adopted by the automobile industry and manufacturing. Having pioneered multi-national production, the producers are starting to supply themselves using the Wal-Mart business model. It is in this sense that manufacturing has met Wal-Mart. The Big 3 auto producers \u00e2\u20ac\u201c GM, Ford and Chrysler – used to be vertically integrated companies that significantly supplied their own parts. The first stage of the game involved Ford and GM spinning-off Visteon and Delphi, who were then put in competition with other U.S. auto parts suppliers. Now, the game is going global, and U.S. suppliers (including Visteon and Delphi) are being made to match the \u00e2\u20ac\u0153China price.\u00e2\u20ac\u009d This is the logic embodied in the Ford and GM announcements.<\/p>\n
Moreover, the process is also happening in the aerospace industry, though there it has been slower to get going owing to greater national security and quality control constraints. However, Boeing\u00e2\u20ac\u2122s new 787 will be built using the Wal-Mart model, and the implication is that Boeing supplier workers have a rendezvous with Wal-Mart in their future.<\/p>\n
If \u00e2\u20ac\u0153Manufacturing meets Wal-Mart\u00e2\u20ac\u009d is Act I, there may yet be a second act that can be labeled \u00e2\u20ac\u0153Manufacturing meets The Gap\u00e2\u20ac\u009d The Wal-Mart strategy has auto manufacturers outsourcing parts supply but retaining most of their assembly operations in the United States. However, it is easy to imagine a future in which assembly is also shipped offshore, and GM and Ford just slap a badge on cars and then sell them through their domestic distribution networks. This is The Gap model of globalization. The Gap does not own factories, but instead sub-contracts production, brands the product, and then charges for the brand in its stores. This has already happened for appliances and tools: think of Black & Decker. The auto producers can also clearly go this way. However, for reasons of quality control, in the immediate future they will either own the factories (as in Mexico) or enter into joint-ventures (as in China). Making cars remains more difficult than branding T-shirts and compels greater involvement for the time being.<\/p>\n
The Wal-Mart \u00e2\u20ac\u201c Gap business model reveals the inexorable and cruel competitive logic of globalization. No company can avoid it since any company that does not go that route will be competed into extinction by others that do. This reveals that the problem of globalization cannot be addressed at the individual company level. The problem is systemic, and must therefore be addressed systemically (I\u00e2\u20ac\u2122ll be writing about \u00e2\u20ac\u0153how to\u00e2\u20ac\u009d in future blogs).<\/p>\n
However, while it is true that the market\u00e2\u20ac\u2122s economic logic compels individual companies to pursue this path, it is not the case that companies are innocent. American manufacturing, as represented by the National Association of Manufacturers, has collectively worked hard to create the current system. Manufacturers supported NAFTA, PNTR with China, and most recently CAFTA, and they opposed the inclusion of labor standards in all of these agreements. The commercial logic of the system they helped create is now coming home to roost, and they bear some responsibility for the system\u00e2\u20ac\u2122s creation.<\/p>\n","protected":false},"excerpt":{"rendered":"
General Motors and Ford have both recently announced plans to restructure their parts supply arrangements, the result of which will be the loss of thousands of middle-class manufacturing jobs. These plans involve slimming down the number of suppliers, as well as forcing domestic suppliers to match the lowest global price (the \u00e2\u20ac\u0153China price\u00e2\u20ac\u009d) if they […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[],"class_list":["post-19","post","type-post","status-publish","format-standard","hentry","category-globalization"],"_links":{"self":[{"href":"https:\/\/thomaspalley.com\/index.php?rest_route=\/wp\/v2\/posts\/19","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thomaspalley.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thomaspalley.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thomaspalley.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thomaspalley.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=19"}],"version-history":[{"count":2,"href":"https:\/\/thomaspalley.com\/index.php?rest_route=\/wp\/v2\/posts\/19\/revisions"}],"predecessor-version":[{"id":1693,"href":"https:\/\/thomaspalley.com\/index.php?rest_route=\/wp\/v2\/posts\/19\/revisions\/1693"}],"wp:attachment":[{"href":"https:\/\/thomaspalley.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=19"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thomaspalley.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=19"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thomaspalley.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=19"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}