China’s China: Vietnam

Chinese manufacturers are looking for lower cost production. They are finding it in Vietnam. As today’s Washington Post – (“China Ventures Southward”) puts it:

While few would describe China as a beacon of labor safety or high wages, Chinese investors acknowledged in interviews that Vietnam beckons as an even cheaper, less regulated place to run a factory.

According to the Post:

For now, China’s investment in Vietnam remains in infancy. Since 1988, Vietnam has attracted more than $50 billion, with roughly half coming from Taiwan, Singapore, Japan and South Korea, according to state figures. Mainland China has injected only $734 million while competing for foreign investment.
But much mainland money is filtered through partners in Hong Kong, which has sunk $3.7 billion in Vietnam since 1988, according to state figures. Chinese investment has surged in recent years. China has become Vietnam’s largest trading partner, with two-way commerce expected to reach $7.5 billion this year, according to government figures.
. . .
Chinese manufacturers are now expanding into Vietnam, in part to lock up shares of the Southeast Asian market ahead of the creation of a planned free-trade agreement with China. Textile and garment-makers are shifting to Vietnam to sidestep quotas on their shipments into Europe and the United States.
Some investment is propelled by stricter enforcement of environmental standards in some areas of China. According to entrepreneurs in China who spoke on condition of anonymity for fear of angering government officials, leaders in coastal areas have been encouraging pollution-intensive industries such as plastics, steel and electronics to consider relocating to Southeast Asia. (emphasis added)

So China is already outsourcing some of its basic industries!
Does anyone still believe that we can succeed in the US under the old industrial paradigm of cheaper and cheaper and cheaper? There will always be someone out there who is willing to work cheaper – as the Chinese are finding out.
I doubt that Vietnam will cause much worker displacement in China. Vietnam is just not big enough. But, the trend will undoubtedly push companies (and the Chinese government) along the path they have already decided upon of moving up market. That will continue to present a greater and greater challenge for America – unless we find a way to re-invent the game.
To do so calls for greater attention to innovation — and not just the old style where we invent it and let some one else make it. That static form of innovation is part of the old industrial model. In the I-Cubed Economy, dynamic, continual innovation is required. The new model is one of new products and processes tied to localized manufacturing. It is the fusion of manufacturing and services. And it is production rooted in jurisdictional advantage.
Right now, China is beginning to understand that one does not create sustainable jurisdictional advantage through low wages and low environmental standards. They are actively trying to create a new advantage – based on innovation and design.
We need to do the same.

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Welcoming immigrants

Nashville is becoming the site of a grand experiment in welcoming (and coping with) immigration, according to a recent article in the Carnegie Reporter:

Today, Nashville is a handbook for the nation, an index of mistakes and gains. It is certainly a much more exotic and cosmopolitan city, an eclectic collection of international food, art and entertainment. Three Hispanic-themed films were featured in this year’s Nashville Film Festival. Austin Peay State University opened a Hispanic Cultural Center this year and an exhibit at the Frist Center for the Visual Arts includes the star-spangled couture of Mexican-native designer Manuel. The country music duo Big and Rich has incorporated bilingual rap into their musical repertoire.
But a poll conducted by Middle Tennessee State University in 2002 indicated that negative feelings about immigrants and refugees are increasing in middle Tennessee. Hispanics are making life worse, according to forty-one percent of those surveyed, compared with twenty-eight percent in 1998. Negative reactions to Middle Easterners were reported by thirty-nine percent of respondents, while fifteen percent said the same about Asians. Seventy-four percent of those surveyed believed that U.S. immigration policy is “too open.”
Steven Camarota of the Center for Immigration Studies says Nashville’s reactions to the immigrant and refugee influx is an indicator of the mood in the rest of the nation. “Nationally, there’s always a divide between public opinion and the elite opinion,” he says, “and that’s the case in Nashville and other cities. The mayor, the businessmen and the preacher of the Presbyterian church may have one reaction to their arrival, but the local union president may say another thing.”
So as Nashville is forced to confront a critical crossroads in its history, the perennial question nags: Will the “Tocquevillian paradise” teeter as state budgets are pinched and social service demands increase? Can the city’s economy sustain and tolerate an open-gate policy? Will it provide a blueprint for national immigration reform? Can the city become a truly diverse compendium of mixed races and cultures?

It also remains to be seen whether and how Nashville develops and markets this cultural mélange in today’s creative economy. The question is not so much can the economy sustain the open gate policy as it is whether the open gate policy will pay off economically. So far it has as the influx of workers filled the need in the growing hospitality and manufacturing industries (including at the new Nissan and Saturn plants). Will the cultural mix and the environment of openness now help develop Nashville’s jurisdictional advantage – rather than simply provide bodies to fill existing slots? Stay tuned to this test of the theory of the Creative Economy.

Taxing creative works

I am in process of writing a follow up to our white paper on Reporting Intangibles. This second paper is on the monetization of intangibles. In the course of my research, I am delving into the wonderful world of taxation – and getting an education on the difference between financial accounting and tax accounting. Not surprisingly one of those differences concerns their treatment of intangibles. The rules for taxing intangibles are not the same as booking intangibles.
Now one of the rules for taxing intangibles maybe changing. Two different provisions were added to the House and Senate tax legislation (HR 4297 – Sec. 304 and S.2020 – Sec. 567) that would change how the sale of music catalogs are taxed. Under the Senate proposal, a buyer or creator of a musical work would be allowed to amortize the cost of the over 5 years, rather than use the income forecast method of accounting. Under the House bill, sales of music catalogs would be treated as capital gains and taxed at a lower rate.
Interestingly, it only applies to musical works – not all copyrighted works. This may be because songwriters must be paid royalties – and pay taxes – immediately; writers can already spread out payment and taxes over a number of years.
It is estimated that the House provision will cost $25 million over 10 years while the Senate will actually increase tax revenues by $32 million over 10 years.
The House provision will clearly increase the revenues of songwriters. The change would also encourage songwriters to sell their portfolios by lower the rate, according to the Wall Street Journal – “Music to Songwriters’ Ears: Lower Taxes”.
The Senate provision works differently. Rather than change the tax rate, the Senate bill would allow songwriters to amortize their expenses over 5 years. The provision is also likely to help spur the sale of music catalogs, since the cost of buying the catalog could be amortized over years.
Neither provision is guaranteed to make it into the final bill – if there is a final bill. The House will vote this week on their version; the Senate passed its version last month. After the House vote, the bill will go to a conference to reconcile the two. At that point, either, both or neither of the provisions may remain in the legislation. However, since both the House and Senate have passed something on the issue, something is likely to stay in the final bill. It is just unclear what it will be.
More later.

Getting the currency data right

From WSJ.com – Citigroup Unveils New Currency Measure Using Investor Fund Flows

The dollar has fallen 10% since the end of 1999, according to the popular U.S. Dollar Index, which measures the buck’s performance against a basket of currencies. But Citigroup argues it is more accurate to say the dollar has tumbled less than 6% over the same period.
Why the discrepancy? Citigroup is rolling out a new way to measure changes in currency values. Instead of studying international trade flows to get a sense of the relative weightings of the world’s currencies, the new Citigroup Flow Weighted Index looks at flows of capital back and forth among international investors. Citigroup argues that this is an important change because nowadays portfolio managers and speculators — not large companies — are responsible for the bulk of foreign-exchange activity.
. . .
Citigroup, one of the largest foreign-exchange dealers, estimates that about 70% of all currency transactions world-wide these days are related to investor fund flows, including trading done by stock and bond portfolio managers, hedge funds and other speculators, commercial banks and central banks. Only 30% of foreign exchange is related to transactions from the corporations that are measured in government trade data, Citigroup says.

This just confirms what a number of us have been pointing out for years: capital flows are driven by investment transactions, not trade. Trade accounts aren’t even the tail – and they certainly don’t have the power to wag the dog.

The Information Society with less information

From today’s LA TImes: “Thousands of Firms Could Stop Reporting Emissions”:

For nearly 20 years, the national Toxics Release Inventory has allowed people to access detailed data about chemicals that are used and released in their neighborhoods. In about 9,000 communities, the annual reports identify which industrial plants emit the most toxic substances, whether their emissions are increasing and what compounds may be contaminating their air and water.
Seeking to ease the financial burden on industry, the U.S. Environmental Protection Agency has proposed eliminating some requirements for smaller facilities that must monitor their emissions and file the complex annual reports. The EPA will make a final decision on the proposal next year, after a public comment period.

And I thought that a principle of the Information Society would be better access to information. Silly me.
(BTW – one of my favorite New Yorker cartoons, published at the height of the dot.com frenzy, shows a group of executives sitting at a table surrounded by computers, etc. The caption reads “We have lots of information technology, we just don’t have any information.”)

Patents and injunctive relief

Normally I think that Steven Pearlstein is one of the most perceptive business commentators around. But I think he got it wrong in today’s column – “Big Firms Caught With Their Patents Down”. Pearlstein is taking the side of the little guys in the two major patent fights:

Despite the propaganda emanating from the high-tech lobby, which has rallied to the defense of eBay and RIM, these cases have nothing to do with “patent trolls,” those unsavory characters who buy up obscure patents to extort money from innovative and law-abiding companies. Campana and Woolston were trained engineers who came up with genuine innovations for which companies like Yahoo and AutoTrader are currently paying good money.
Moreover, the patents held by Stout and Woolston are entitled to the same legal protection whether they aim to build operating businesses around the patents or merely license them to others. The high-tech industry is full of companies that boast entire business units dedicated to licensing their patent portfolios. It is pure hypocrisy for the industry to argue that this is somehow illegitimate when done by small inventors.
What these cases are about is legal thuggery — big companies, with their endless motions and discovery and appeals, abusing the legal system no less than the plaintiffs’ attorneys they always complain about. The only way to end these wars of legal attrition is for courts to issue business-threatening injunctions that force the parties to the settlement table.

This sounds great — but there are two problems with this argument.
1) in the eBay case, there has been a settlement! There is no need for “courts to issue business-threatening injunctions that force the parties to the settlement table.” And that settlement happened years ago. The only reason for an injunction in this case, as far as I can see, is punitive. Rather than end the legal-war of attrition, such an attitude is likely to provoke it.
2) in the RIM case, Pearlstein admits that “RIM came up with its technology all on its own — there’s no dispute about that.” So RIM is to be executed – for that is what the injunction is likely to do – for a flaw in the patent system that gives the patent for the technolgy they came up with to someone else? Yes, maybe there needs to be a court-ordered settlement. But putting RIM out of business for using a technology that it developed on its own is, once again, not the way to end the legal warfare. It will just encourage it.
I’m as much in favor of protecting the little guy and ending the legal warfare that, as Adam Jaffe says, it throwing sand into the gears of innovation. But, the knee-jerk granting of injunctions, as in the eBay and RIM cases, is not the answer.
Steven — please, tell me where I am wrong.

Mixing manufacturing and services

In my paper on our new competitiveness challenges, I made the point that there is a fusion between manufacturing and services. Part of that fusion is new – as design takes a preeminent role. But part is old – the remanufacturing and repair of products. Caterpillar is a case in point, as Business Week points out in Cat Sinks Its Claws Into Services:

Services, however, are the key to Cat’s strategic shift. The Peoria (Ill.) company has three service divisions today — Financial Services, Logistics, and Remanufacturing — which account for 15% of Caterpillar’s revenues and perhaps 20% of its net income. Because of their fast growth, [CEO James W.] Owens says, they should generate 20% of sales by 2010, which would put the troika’s combined revenues at $10 billion. Since these also are higher-margin businesses, their bottom-line contribution should increase even more, to as much as 30% by the end of the decade, calculates Ann Duignan, an analyst with Bear, Stearns & Co. (BSC ).
Cat Financial extends credit for three-quarters of all Caterpillar sales, so it has soared right alongside the equipment business. The division, which averages 95,000 customers a year, opened its first office in China earlier in 2005. No surprise, then, that it’s having a record year, with expected revenues of $2.3 billion and a $350 million profit. Cat Logistics, meanwhile, is prized for its steady income stream. The unit warehouses and delivers replacement parts for 60 industrial customers, including Bombardier Inc. and Harley-Davidson Inc. (HDI ). In October it signed a $100 million contract with General Motors Europe (GM ) that will pay out over a decade.
The remanufacturing division is the newest of the service units. Caterpillar got into the business almost by accident: It dates back to a favor Cat reluctantly did for Ford Motor Co. (F ) in 1973. To lower its own costs, Ford’s truckmaking subsidiary wanted a source of rebuilt engines, which generally sell for half the price of new ones. As Caterpillar executives tell it, management saw Ford’s demand as a chore. But because supplying Ford with new engines would be such a money-maker, the company consented and opened a repair shop in Bettendorf, Iowa. By 1982 the business had grown enough that Caterpillar bought a vacant factory in Corinth, Miss., to reclaim used crankshafts. Still, even into the late 1990s, after Caterpillar built a second plant in Nuevo Laredo, Mexico, and a third in Prentiss, Miss., remanufacturing was considered a sideline. “It was something we had to do,” recalls Steven L. Fisher, president of the division.
In 2000 management realized that this handful of ancillary factories represented a hidden opportunity. The business had become reliably profitable, and the marketplace was full of mom-and-pop outfits, making it easy for the company to pick up business through acquisitions. Caterpillar’s own numbers argued for expansion, too. As new-equipment orders were falling amid a plunge in the industrial economy, revenues and profits from Caterpillar services continued to climb. Since then, as the company has built and acquired more facilities, Cat Remanufacturing’s results have doubled.

Design-build-finance/sell-service/repair. Its all part of the value chain – and smart companies (and countries) realize there are opportunities at each stage.