Tuesday, July 2, 2013

Forget cheap labor abroad now

Mining cheap labor markets are the leading business ventures of our times, much to the demise of American jobs. 
So, it was with a bit of enjoyment that I took in the spectacle last week of an American CEO being held hostage in his own plant in China by employees who felt he was cutting and running for greener pastures while leaving them high and dry. 
The CEO, Chip Starnes, co-owner of Specialty Medical Supplies(cheap medical equipment), a Florida-based company, was finally freed, but not until he had signed a compensation agreement that provided 97 employees with some $300,000 in severance pay and other benefits. 
The employees became suspicious when Mr. Starnes closed the plant's injection molding division as a precursor to moving that division to India. The closure only impacted 30 employees, but the other employees viewed the move as a signal that the Beijing plant's entire operation was about to move to India. 
I'm not sure whether it was reflected in the final settlement, but the employees were demanding they get the same pay and benefits as the 30 employees who were being laid off. 
In a CNBC interview Friday morning, Mr. Starnes, who is back in the U.S., lamented the lack of support he received from local officials and from the Chinese government. 
"I am really upset how no one stepped in to help or to do anything," he said. 
"I felt like an animal in a zoo, sort of like throwing peanuts to a guy in a cage, 'Hey, you are getting food every single day, be happy. Live in there with the same people in the cage and work it out.' " 
According to a New York Times article, the lack of labor rights protection in China has led workers to increasingly use intimidation and violence to resolve salary disputes. According to the article, for example, 14 women died in a factory fire that police said had been set by a worker who was upset about not being paid some $490 in back wages. 
But with millions of dollars in equipment(medical equipments) tied up in the plant, Mr. Starnes has no choice but to reopen the plant, and to do that he will be rehiring some of the same employees who shook him down, which should no doubt have his business partners and shareholders brimming with confidence. 
He would, however, be having second thoughts if he was a new investor in China. 
"There is a dirty underside to doing business in China," he said in his CNBC interview. 
But for years many American businesses have lived with that "dirty underside," because it was profitable. Labor was cheap, government business regulations were virtually absent. But the Chinese labor market has been changing. 
According to a recent Wall Street Journal "Real Time" look at the Chinese labor force, "China's unit labor costs have risen 68 percent since 2005, compared to a 12 percent rise in Mexico and 8 percent in the U.S." This means that profit margins are shrinking for many of the American companies that have moved their businesses there. 
Mr. Starnes alluded to this when he lamented the country's "escalating salaries," and a business climate he described as "not as inviting." 
Of course, those are the same criticisms of the American labor market that led many businesses to outsource jobs to countries with cheap labor. 
Mr. Starnes' experience should perhaps open his eyes to some of the major pluses of doing business stateside, not the least of which is the rule of law that would never allow employees to benefit from activities that would surely be branded in this country as kidnapping and extortion. 
Of course, Mr. Starnes will only view his experience as time to find another country that will boost his production profit margin.