[Paleopsych] NYT: Globalization: It's Not Just Wages

[Premise Checker]

Globalization: It's Not Just Wages
http://www.nytimes.com/2005/06/17/business/worldbusiness/17whirlpool.html

[This is quite an important article and should be read carefully.]

    By LOUIS UCHITELLE

    BENTON HARBOR, Mich. - Who is the biggest exporter of German-made
    washing machines to the United States? Not Miele or Bosch-Siemens, or
    any other German manufacturer. It is the American appliance maker,
    Whirlpool, the company proudly reports.

    Never mind the higher labor cost - $32 an hour, including benefits,
    versus $23 in the United States. The necessary technology existed in
    Germany when Whirlpool decided to sell front-loading washers to
    Americans. So did a trained work force and a Whirlpool factory already
    making a European version of the front loader.

    "We were able to expand the capacity in Germany at a very incremental
    investment," said Jeff M. Fettig, Whirlpool's chairman and chief
    executive. "It was the fastest way to the American market."

    Globalization is often viewed as a rootless process of constantly
    moving jobs to low-wage countries. But the issue is more complex, as
    illustrated by Whirlpool's worldwide operations. What attracts Mr.
    Fettig and other chief executives is a relatively new form of
    globalization that emphasizes first-rate centers of production and
    design in various countries - including the United States.

    Whirlpool's global network, a work in progress, includes microwave
    ovens engineered in Sweden and made in China for American consumers;
    stoves designed in America and made in Tulsa, Okla., for American
    consumers; refrigerators assembled in Brazil and exported to Europe;
    and top-loading washers made at a sprawling factory in Clyde, Ohio,
    for American consumers, although some are sold in Mexico.

    "The really sophisticated multinationals," said Diana Farrell,
    director of the Global Institute at McKinsey & Company, the management
    consulting firm, "are taking advantage of the different locations in
    their global networks without worrying about whether they also sell in
    the countries where they produce."

    The advantage of Whirlpool's approach to globalization is that it
    allows the company to put the earnings of overseas affiliates to their
    best use anywhere in the world, Ms. Farrell argues. The larger
    consequence, she adds, is that parent companies "invest in new
    technologies and business opportunities that will eventually create
    new jobs at home and abroad."

    At the moment, the job growth and the expansion are mainly abroad. As
    its turns out, more than 40 percent of the nation's imports are from
    the overseas subsidiaries of American companies, contributing to the
    lopsided trade deficit, but also making companies more competitive.
    Whirlpool is a typical example: its employment in the United States
    has not risen in years while it has tripled abroad.

    The "global production footprints," as Ms. Farrell calls them, draw on
    a growing network of first-rate suppliers in Mexico, China and
    elsewhere that allow manufacturers to go beyond mere assembly overseas
    into complex production. And the investment, once made, becomes an
    anchor; a sunk cost, as economists put it.

    Sunk cost figured in Whirlpool's decision to ship front-loader washing
    machines to the United States from its factory in Schorndorf, Germany,
    which Whirlpool acquired in 1991 with the purchase of the appliance
    operations of Philips N.V. for more than $1 billion.

    Almost two million of the front loaders have been sold in the United
    States since 2001, at $1,200 apiece, and as demand rises, so do the
    shipments across the Atlantic. The German-made washers load laundry
    from a door on the front that opens into a basket that spins at high
    speeds. Front loaders, long popular in Europe, in part because they
    use less water and electricity, are gaining ground among American
    consumers, who have traditionally favored top loaders that circulate
    the laundry and water using an agitator fitted with fins.

    The [3]Maytag Corporation got into the front loader market first, in
    the 1990's, but soon stumbled. Its Neptune model, engineered and made
    in the United States, suffered from a high repair rate. That gave
    Whirlpool's Duet front loader an advantage, Mr. Fettig said; his
    company avoided the pitfalls by adopting the already kink-free German
    technology.

    Maytag, in a statement, said that it, too, has now resorted to
    globalization to get back into the game. The newest model "is made in
    South Korea through a technology and manufacturing partnership with
    Samsung," Maytag said.

    Whirlpool's executives take issue with analysts who declare that low
    foreign wages, particularly in China and elsewhere in Asia, combined
    with generous subsidies from those countries, will keep the global
    production networks mobile. Company executives say the manpower
    required to make its appliances is declining, diluting the drawing
    power of lower wages. One hour of labor, for example, goes into each
    of the 20,000 top-loaders coming off the line daily at Clyde, down
    from 2.5 hours five years ago.

    "We may pay $23 an hour in Clyde, including benefits, versus $3 in
    Mexico versus $1 in China," Mr. Fettig said. "But for one hour of
    labor, the difference won't begin to cover the shipping costs, let
    alone the investment it would take to build a new factory in Mexico or
    a new factory in China."

    The Clyde factory, which employs 2,000 people, is billed as a jewel in
    Whirlpool's production network - an efficient, partly automated
    operation whose experienced workers possess a "tribal knowledge" of
    their product that pays off in quality and cost saving. But if the
    Clyde factory did not already exist, Mr. Fettig would not put it
    there. "I'd probably put it in Mexico," he said.

    Whirlpool's total of 23,000 employees in this country has not changed
    in a decade, while the overseas work force has tripled, to 45,000.
    Yet, American consumers, not foreigners, account for two-thirds of
    Whirlpool's annual revenue, which was $13.2 billion last year, up from
    $10.3 billion in 2000.

    Parts suppliers - the small companies that mold plastic parts or
    machine metal ones, for example - play a big role in determining where
    new factories are put, or existing ones are expanded. In the last 15
    years, suppliers have set up shop in growing numbers near the new
    production centers in China, India, Southeast Asia and Latin America.
    Without their presence, Whirlpool says, it would not have been able to
    concentrate the manufacture of microwave ovens in southern China.

    "It is much more difficult to operate outside of an industrial country
    without that supplier base," said Mark Brown, senior vice president at
    Whirlpool for global sourcing.

    The concentration of suppliers in northern Mexico helps explain why
    Whirlpool has decided to produce a less-costly front-loading washing
    machine at its existing manufacturing complex in Monterrey.

    The high-end, $1,200 model will continue to come from Schorndorf. The
    smaller Mexican front loaders, on the other hand, will be for the
    majority of American consumers and will be priced several hundred
    dollars less, too low to absorb the $50 in freight to cross the
    Atlantic, the company says.

    "We looked at making them in the United States," said David L. Swift,
    Whirlpool's executive vice president for North America, "but since we
    did not already manufacture any front loaders here, this country did
    not have an advantaged position. Because of the shipping cost, we knew
    we had to make them in Mexico or America, and since the suppliers were
    already in Mexico, we thought we might as well go there."

    Using Mexican workers, Whirlpool could have matched the efficiency of
    Schorndorf's labor force, said Roy Armes, Whirlpool's vice president
    for Mexico. Indeed, Mexican engineers, foremen and supervisors have
    gone to the German plant for 18 months of training, and line workers
    are also getting special instruction.

    But Whirlpool calculated that it could afford more workers at Mexican
    wages, so it did not purchase the most advanced automated machinery
    for Monterrey. "When you have lower labor costs, it is hard to justify
    that higher investment," Mr. Armes said.

    Companies like Whirlpool differentiate between skills that can be
    taught in a few weeks or months, and those that take longer to
    acquire. The harder-to-acquire skills anchor the one last Whirlpool
    factory in Benton Harbor, where the company got its start in 1911 and
    still has its headquarters.

    The company closed a washing machine plant in Benton Harbor in the
    mid-1980's, consolidating production in Clyde, but kept open a parts
    factory that makes the steel gears that are the heart of the washing
    machine's agitation mechanism. The machining to make the gears, and
    the nickel plating to prevent corrosion require a skill level not
    easily duplicated.

    "You can find lots of machine shops and some plating operations, but
    you rarely find the two together," Jim F. Spicer, the plant manager,
    said. "And when you do find them together, you almost never find the
    volumes that we require."

    The gears are trucked to the Clyde plant, four hours away. The 208
    hourly workers (many of them long-termers; there has not been a layoff
    in more than 15 years) earn $14 to $20 an hour. At the low end of the
    scale are the 178 operators of the automated machining equipment, a
    skill that can take up to a year to master.

    The remaining 30 employees are mechanics and electricians who repair
    the machinery, having acquired these skills during a four-year
    apprenticeship that costs $200,000, a sum that Whirlpool pays, Mr.
    Spicer said, when it cannot find people already trained. One
    apprentice is in training; three recently graduated.

    "In my opinion, the reason we are here and not outsourced," Mr. Spicer
    said, "is that we do excellent quality work. If we don't have that, we
    don't have anything."