Buffett on Outsourcing

By Ramesh Akkineni

Warren Buffett on Manufacturing and Outsourcing

Berkshire Hathaway started the textile business; in fact it goes back into the 1800s if you go to all the predecessor companies. I got in in 1964. We had a couple thousand employees in New Bedford; it was down from 12,000 by the time I got there. Twelve thousand had cut down to two thousand. We had a couple thousand people—very decent workers, working for low wages. It was a lousy job in terms of pay. They were skilled at what they did. Mostly Portuguese. New Bedford was a whaling town and there wasn’t one thing wrong with that labor force. And we got killed, basically. If you talk about comparative advantage in this world, people are willing to work a lot cheaper someplace else. And there wasn’t any answer. And when you talk about retraining people—these were people 55 years of age. I mean, a prosperous society has to provide a safety net for people like that. Through no fault of their own, they were in a position of being a horse when the tractor came in. There’s no other way to put it. They didn’t have the ability, at 55 or 60, to find work as computer experts. The free market did them in. The free market, of course, does all kinds of good things in this country, but you have to take care of people like that. That happened in textiles; it’s still happening in textiles. It’s wiping out the Burlington industry, WestPoint companies, Tultex. Bankruptcy after bankruptcy after bankruptcy. They won’t come back.

I also got into shoes. This country literally—Americans buy 1.2 billion pairs of shoes a year. We’re a nation of Imelda Marcos’s. I buy a pair of shoes about every ten years or so. But a billion 200,000 pairs a year. Practically all of that was made in this country except the very high-price lines, 40 years ago, you know Rockford, Massachusetts. It’s down probably under 4% now. We were one of the last American manufacturers of American shoes. We did them up in Dexter, Maine. I bought the company some years ago and they had terrific styling and the whole works. We had a great labor force. Management loved the people, the people loved the management and we were making decent money and the money just went down the tubes. Because somebody else was willing to work for one-tenth of the wages of the people of Dexter, Maine. There is no domestic shoe industry as a practical matter today.

The same thing is now happening in furniture as Bill Child will tell you. Bill, twenty years ago, I don’t know what percentage of your purchases were made over there. But they went to North Carolina, they went to Drexel, to Broyhill and all these people. And now we go there and a lot of those people are buying over in China, so we go directly and buy it ourselves. We’re big enough so we can make our own direct purchases instead of somebody else buying it and stamping their name on it and marking it up 20%. The furniture industry, at least in anything but high labor content, is leaving us and it’s not the fault of the workers at all. It’s just the nature of the globalized sourcing, in effect.

Now you mention Shaw Industries. Shaw is the largest manufacturer of carpet in the world. We have sales of 14.5 billion now. Labor’s only 15% of carpet. As a practical matter, if you analyze all the cost factors and everything, it will go there. We also own Fruit of the Loom. That manufacturing, 80% of it has gone to Central America. First it went to Mexico and now it actually goes to Guatamala and places like that. As long as we believe in free trade in this country, you’re going to have all those high labor content businesses—actually even things like software, now India has become a real factor in that industry. And Bill Gates with Microsoft is working more and more with people in India. It’s a real problem in this country. I don’t know what industries are next. But you’re talking millions of people when you go from textiles, and shoes, and now furniture, and there aren’t great replacement jobs for those people. They’re not going to move into all kinds of wonderful jobs.

There’s a significant percentage of your population that is non-productive so that productive people have to turn around and be offered more. It puts more and more strains in the economy. The fact is, we’re seeing some of that.

I’ve learned the hard way. I’ve learned in the shoe business and the textile business. And I’ve learned the hard way. There are times you cannot fight. You cannot fight with labor at X here and at one-tenth, or even a fifth, or fourth X someplace else. People aren’t going to buy it from you just because it says “Made in America” on it. They’ll go to Wal-Mart and if our Fruit of the Loom underwear—forget the quality—if it has the best price on it, we’re gonna sell it. If somebody figures out how to do it for 50 cents-a-three-pack or something cheaper, then we’ve got a problem. We’re okay because we’ve got 16,000 people working for us outside the United States and about 4,000 people working for us in the United States.

Popular posts from this blog

It Pays to be a Nervous Wreck

By Ramesh Akkineni
from an article in Livemint Two weeks ago, Microsoft issued the sort of quarterly report usually seen of a company in finest mettle. Redmond’s sales were up 15% and profit double that, excluding certain deferrals. And the rest of the year, it projected, would be just as sanguine—certainly unlike in the economy as a whole. Elsewhere, that would be a mandate for staying the course. In Redmond, though, they were crossing off days on their calendars, waiting until Friday, the first day of February and thus the first opportunity Microsoft would be able to truthfully state, “Okay, Yahoo, it’s been a year since we talked to you guys; where’s the beef?” Microsoft remains obsessed about Google because it reads the same things everyone else does about how Google’s style of free, “in the cloud” computing means the slow and steady decline of Windows and Office. That’s a technical debate, one in which both sides have good arguments. But....
Read more

Korean Model

By Ramesh Akkineni
from an article by Ha-Joon Chang in the Guardian In my lifetime Korea has lived through one of the greatest development miracles – half a century ago, its annual per capita income was around £50, less than half that of Ghana at the time. Today, it stands at £12,000, putting it on a par with Portugal and Slovenia. How was this possible? Korea of course did things that most people agree are important for economic development, such as investment in infrastructure, health and education. But on top of that, it also practised many policies that are now supposed to be bad for economic development: extensive use of selective industrial policy, combining protectionism with export subsidies; tough regulations on foreign direct investment; active, if not particularly extensive, use of state-owned enterprises; lax protection of patents and other intellectual property rights; heavy regulation of both domestic and international finance. The Korean experience shows that sustainabl...
Read more

Maxims from Poor Richard 3

By Ramesh Akkineni
Image
from Poor Richard's Almanac, 1735 Look before, or you'll find yourself behind. Bad Commentators spoil the best of books, So God sends meat (they say) the devil Cooks. Approve not of him who commends all you say. By diligence and patience, the mouse bit in two the cable. Full of courtesie, full of craft. A little House well fill'd, a little Field well till'd, and a little Wife well will'd, are great Riches. Old Maids lead Apes there, where the old Batchelors are turn'd to Apes. Some are weatherwise, some are otherwise. Dyrro lynn y ddoeth e fydd ddoethach. The poor man must walk to get meat for his stomach, the rich man to get a stomach to his meat. He that goes far to marry, will either deceive or be deceived. Eyes and Priests Bear no Jests. The Family of Fools is ancient. Necessity never made a good bargain. If Pride leads the Van, Beggary brings up the Rear. There's many witty men whose brains can't fill thei...
Read more