U.S. Manufacturing Moving Overseas – The New Wave

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American investment into Asia continues – but with one domestic caveat

Op-Ed Commentary: Chris Devonshire-Ellis

Sept. 13 – Recent data showing that that old bug-bear, the U.S.-China trade imbalance, is diminishing is partially good news – not least for American politicians who like to defer domestic issues by pointing fingers overseas. “It’s all their fault!” is the world’s longest running, and possibly oldest human statement.

Yet what is really going on has, in my opinion, nothing very much to do with the trade imbalance – which, incidentally, declined from US$31.5 billion this past July to US$17.8 billion in August. Yes, the Chinese are placing more orders. Hooray! But let’s counter this by suggesting that this is more to do with restocking raw materials than any longer term domestic consumerism, although it does suggest some hope.

What is happening, from where we sit in Asia, is that Corporate America is turning up the heat for another wave of foreign direct investment, and that China, with India, and to some extent Vietnam, will be the major beneficiaries of this. Although political America – a rather different beast from its corporate sibling – is seemingly as diversified in views as ever over the past 10 years, corporate America is doing just fine. Statistics I obtained from Credit Suisse last week show that American cash and assets on hand are at a 51-year-high, as are profits. In short, there’s plenty of money sloshing around the United States.

But jobs remain a concern, and this regrettably is going to be a feature of the American economy for some time. There has been plenty of talk about the Chinese economy recalibrating from being an export-based economy to a consumer-based economy. Everyone agrees this is taking place, will take time, and it remains central government policy. In the democratic United States, longer-term policy is more difficult to assess. Yet market forces are dictating that America must change – it simply cannot retain such a large manufacturing base as costs in the United States are just too expensive. What were once manufacturing jobs must instead be absorbed into the service industry. The United States is moving, albeit slowly, and with not a little political drag, through this process.

Corporate America, ever mindful of the needs of its shareholders (and the American consumer) knows this. What it hasn’t been able to do, until the GFC ripples dissipate – is to plan when to place its funds. Here, we’re waiting for Europe to pull together and sort out its own debt restructuring, and while German politicians cannot agree (they’re having to fund much of the bailouts) the time taken to get the EU back and running lengthens. But I suspect that is going to be resolved, albeit with much zut aloring and “Scheisse!” before the end of this year. Not even Europe can wait for the politicians when global market recoveries beckon.

China of course, will still face the usual accusations of RMB manipulation, and I believe the trade balance decline to be a blip. But with the Chinese economy heading for a soft landing, it means that the domestic consumerism so long promised will begin to take effect. India too, that curious blend of pomposity and devotion, is also steaming ahead, and with growth figures about the same as China’s is an equal bet. That India – when Congress finally get their act together and pass the oft-delayed tax bill, and reduces corporate tax from 45 percent to 30 percent in one fell swoop – will overtake China in GDP growth seems to my eyes, inevitable.

Vietnam too, with its much vaunted “most favored nation” status, and cheaper manufacturing opportunities than China now possesses, will also come to the fore. All this, I believe, is not just crystal ball – it is current. The reason I can say that is that our firm has not only held that development strategy in place for the past five years and seen it develop, we’re also seeing more American clients invest in manufacturing facilities in Asia than at any time since 2008. A friend of mine in a blue chip American law firm suggests the same thing – his American clients are also investing more in China. Our practice in India, meanwhile, has just been enjoying its best ever year in terms of client billings, and our Vietnam practice has recently had to add more staff to cope with demand, much of it from American corporate investors. The money is being spent.

The New York Times just ran an editorial “Is (U.S.) Manufacturing Falling Off the Radar?” and the answer, while not quite as doom-laden as the title suggests, is that to some extent, this is true. Manufacturing is moving to Asia from the United States, quite simply, because it is cheaper to do so. The only question is whether American workers can be retrained, redeployed, and the engineering educational infrastructure redesigned to allow both current and future graduates more opportunities in R&D. America in fact can largely control the pace and direction of global manufacturing – if it invests in, and becomes the dominant player in R&D. That’s the service industry, right there. Let Asia manufacture, and as we’re seeing, let American businesses outsource, or even set up their own manufacturing facilities in China, India and Vietnam. The latter two represent, after all, significant domestic markets for American companies to sell too, and if America wants to sell to the world, it needs to get out there and do so. Vietnam meanwhile, services other global markets, including all of ASEAN, with Mexico convenient for North America itself. So far, so much we know. The difference this time is that the R&D development, the intellectual property that matters, and the know-how, will remain in domestic hands and will not be relocated.

America needs a service industry. The R&D sector will provide this. Keeping that local, while sending the manufacturing aspect to Asia, makes perfect sense. It is already becoming the new American investment trend.

Chris Devonshire-Ellis is the principal of Dezan Shira & Associates. The firm provides legal establishment, tax advice and business advisory services to foreign investors in China, India and Vietnam. Please email the firm at info@dezshira.com, or download the practice’s brochure here.

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8 thoughts on “U.S. Manufacturing Moving Overseas – The New Wave

    Matthew Hall says:

    The flaw in your scenario is that american companies have not and will not invest more in U.S. R&D while manufacturing, and increasingly selling, in Asia. The American professional classes will benefit, but other Americans won’t. The Americans that don’t benefit will increasingly work against a system they rightly understand only works for the interests of at most 20% of the country. The result will be protectionism, further devaluation of the dollar and increasing economic and political nationalism. These will hurt many of the Americans that support these policies, but it will also hurt the professional classes and their ability to operate internationally. Alternatively, the imbalances that are created may push asian countries to act first. Either way, your view is unsustainable. If you are going to try and rationalize certain corporate interests as inevitable, you’ll have to better than this. The professional classes only hope is to invest so heavily in propaganda, much as you have done here and hope that it keeps the other 80% of Americans dazed, confused and divided.

    Matthew Hall says:

    On further reflection, I realize Chris’ comments really are just a sort of rear guard defense of corporate interests on whom he admits he relies for is living. As they slowly and strategically leave the u.s. they don’t want to lose anymore than necessary, so they are quietly sneaking out the door with arguments such as this playing the role of a rear guard defense protecting their still vulnerable remaining u.s interests while they figure out how to fully move them out. By Chris’ own logic, they would be fools not to do so. Some will maintain a vestigial u.s. presence while others will decamp entirely. But, clearly any company that is in anyway involved in making anything will leave by the logic of this argument. Americans will be left to organize an entirely new economy where individual and small group LLPs and LLCs do business with the growing number of non-profit private and state sponsored investment entities using state tax credits, state investment funds, and development authorities many of which already exist. Local credit unions, regional banks and mutual companies will likely form a part of this as will universities and university sponsored organizations. That the country that invented the modern corporation will replace them with something else is indeed a profound transformation. As hard as this kind of economic transformation will be, Devonshire-Ellis should be just fine. But, if i were him I’d make sure his children learn chinese. My children are proudly learning only English.

    Chris Devonshire-Ellis says:

    @Matthew Hall – wow an entire essay on my comments! I’m flattered. There’s several points here so lets examine what you’ve said:
    A) “US Companies, you say, won’t invest in R&D in the States while they move manufacturing to Asia”. I disagree, for three primary reasons (1) if the manufacturing base moves, the US needs to reposition its workforce into the service industry. R&D provides that. (2) Moving R&D to Asia, and especially China, has now been seen to be fraught with difficulties, not least IP ripoffs. Better to protect that by keeping it in the US. (3) The States needs an economic boost and needs to recover its technological leadership. Investing in R&D will provide this.
    B) I have vested interest in making these comments. – I agree, partially. I run a professional services firm with offices in China, India & Vietnam. However I think that most people are aware that these have/are/will be the future manufacturing giants. I didn’t make that happen, that’s a result of largely US driven globalisation policies. But I have taken advantage of that by establishing my business in these markets, where we have been now for 20 years. So it’s less of a vested interest than more of an experienced opinion.
    C) My children grow up speaking English, Mandarin and one other European language of their choice. I’m not going to comment on your parental advice, but in Asia, most local professional people – and their kids – are now bi or tri-lingual. That is another trend associated with globalisation.
    D) You seem gloomy about the prospects for America. I’m not. It just has to go through a period of adjustment, become less distracted by wars, and concentrate on what it has always excelled at – commerce. Thanks – Chris

    Matthew Hall says:

    How clumsy of me, I meant to insult your self-serving argument. Though I must admit that even I didn’t think you would be as open as you have been. Sometimes things are exactly what they appear to be. I quess it is because the process I describe and that you make money from is so far along that you feel you can openly admit it. Still, we would expect you to continue to argue that American workers have anything to gain from this process as a part of a proganda campaign to distract them while your clients slip out the door, keeping their remaining U.S. tax and legal advantages. Just because the “States”, or the U.S. as we Americans call it, need investment has nothing to do with when, where, and how such investment will come. The only ‘Americans’ benefitting from what you do is you. You are the equivalent of the ‘nice young man’ who volunteers to help the rich old lady while secretly stelling her jewels and forging her signature on her checks. The only value of your essay for American workers is to remind them that your clients will never be a source of meaningful growth in the U.S. and we will have to organize and expand new ways of concentrating and focusing capital in the U.S. as I described here. The sooner we realize that you and your clients have nothing to offer America, the sooner we, meaning americans, can get on with it. You may have a U.S. passport, but i doubt most americans would consider you a compatriot. Bring on the U.S. import tarrifs, cyber attacks of chinese ‘companies’, expansion of U.S. naval presence in the western Pacific as part of a chinese containment policy, continued dollar devaluation, and even more borrowing for massive u.s. infrastructure investment. Sometimes you have to fight fire with fire.

    Chris Devonshire-Ellis says:

    @Matthew Hall – Insult accepted, apart from one thing: I’m not American.
    Kind regards,
    Chris

    Walt Lowe says:

    Aloha! Well I’m ‘Merican, and I agree more with Chris over his observations. The theme with Matthew Hall’s argument about US manufacturers moving overseas seems to be all about labor. It doesn’t seem to be about US companies chasing overseas markets, which of course we should do and we should invest in them markets. But about labor. lets say I manufacture, and employ US engineers, and I sell, but those overseas Asians and Chinese just keep whupping my ass on the price. Ain’t a damn thing I can do about it except challenge that by reducing my costs. I either do that, or I goes broke then everyones out of a job anyhows. So theres no solution there. What I can do is relocate part (or if necessary all) of my US manufacturing to Asia to get that cheap labor so I can compete. Now I’m sorry about boys like Matthew, that don’t make it easy for him. But at least I get to keep my business. And guess what? I still have to pay taxes in the US.
    Its the lesser of two evils Sir, you want me stay 100% Stateside and go broke and lay off all my staff and destroy my company so it don’t pay nuthing to the IRS, or you want me go overseas where OK you may lose your American job (you’ll need to retrain, son) but at least I still contribute taxes to the US society. Its a hard choice, but its one we all must face here in the US. Matthew my only advice is get your kids learning another language. Don’t give them the same redneck BS that is now getting you into outmoded uneducated trouble. Thats a big world out there and if its impacting you need to adapt.

    Chris Devonshire-Ellis says:

    @Walt Lowe – thanks for that. You hit it on the head. I may also add that the current wave of the IRS led interest into US owned offshore bank account holdings is to ensure that American businesses investing overseas do indeed declare and pay their taxes back in the United States. The Government knows it’s that US manufacturers are moving abroad, and it is making sure they still can get their hands on the tax income to assist folk like Matthew get retrained or supported through the social system. Matthew – you need to ensure you elect a Government that will spend that money on what you and your kids need. I can’t do that – but you can. Thanks – Chris

    Jordan says:

    why is it that the manufacturing industries are moving from the united states to go over seas did the countries overseas buy them out or what can anyone answer that for me please and thank you

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