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China Seeks Low-Cost Production... In the US (Pt. 2)

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In the first part of this two-part series, we discussed how, in an ironic twist on the much-touted possibility of reshoring manufacturing and jobs to the U.S., China is climbing the economic ladder by investing in U.S.-based factories and labor. We continue here by looking at some of the realities and ramifications of globalization.

Low-Hanging Fruit

Chinese textile, apparel and footwear manufacturers currently supply upwards of 40 percent of those goods to the U.S, according to the AAFA (American Apparel and Footwear Association). For Chinese companies getting squeezed by higher labor and energy costs, and losing business to other lower-cost countries, the U.S. likely represents a fairly quick and easy opportunity for not only expanding their manufacturing businesses and maintaining growth, but it also provides them a foothold in the biggest marketplace in the world.

What this scenario suggests is that once the Chinese open their factories or acquire existing companies in the U.S., they can begin the process of integrating forward, ultimately owning and/or controlling every link in the value chain, including the most important link that connects with consumers: retailers and brands. This will likely be a lengthy evolution, but it is a logical one.

It is also a win-win for those Chinese manufacturers who succeed in vertically integrating and owning apparel and footwear brands and their U.S. revenues. They can export these brands to the rapidly growing Chinese consumer markets. Eventually, depending on volume and growth, they may even open (or re-open), factories in China, where they may have to pay higher labor costs, but will achieve quicker and easier access to their burgeoning marketplace.

"Uncle Sam" Will Hasten the Selling of America

I predict U.S. Federal, state and local governments will hasten the sale of our economic assets. The first stage, in which Chinese factory development in the U.S. increases employment and tax revenues, is a no-brainer and is already happening. The example we discussed last time, the small investment made by Shanghai's Keer Group, was hailed by local and state political leaders as "just the beginning" (of putting people back to work, stuffing their tax coffers -- and helping to get them re-elected). And of course, the perks given to this tiny company to locate in North Carolina will be viewed by some of the giant Chinese manufacturers with a magnifying glass, knowing those perks will be even greater to lure them to "come on down."

As this first stage accelerates, happily bringing manufacturing jobs back to the U.S., and infusing capital into our economy, the foreign-owned manufacturers, with the same strategic intelligence and capitalistic instincts that got them here, will then move their vision downstream to the U.S. consumer markets. They say, "go for it." And they do.

Globalization is a Two-Way Street

So is it really a bad ending if the process of increasing employment and boosting the economy also results in foreign ownership of many of our brands and retail assets? Not necessarily, if globalization means leveling the playing field for all competitors.

Many of our brands and retailers have been expanding internationally for years; however, just as our government provides great incentives for foreign-owned companies to acquire or build businesses in the U.S., they should equally incentivize the global expansion of American companies. One glaring and ongoing issue here is the corporate tax rate. According to the Tax Foundation, the U.S. corporate tax rate, at 39 percent, it is the second highest among the OECD countries (Japan at about 40 percent), which puts U.S. companies at a competitive disadvantage.

Additionally, it actually de-incentivizes companies for returning their foreign earnings back to the U.S. for further investment. Think of the irony: The same government that is paying foreign companies to buy our assets or build businesses in the U.S. is penalizing American companies for aggressively competing globally.

Another issue has to do with the domestically regulated standards by which American companies must conduct business around the world. For example, in Mexico it is a widely accepted practice to hire "consultants" to obtain required building permits. Yet, Walmart is currently under U.S. investigation for possibly engaging in what Mexico views as an accepted way of doing business.

So the world is not the level playing field that globalization would suggest. It's not as flat as perhaps author Thomas Friedman envisioned it.

But that's not to say it shouldn't be. To that end, let's start at home. Let's send our "teams" onto the global playing field with at least comparable advantages to our foreign competitors.

Otherwise we will end up being the hired hands -- not exactly the way we intended to bring jobs back to the U.S..

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Robin Lewis has over 40 years of strategic operating and consulting experience in the retail and related consumer products industries. He has held executive positions at DuPont, VF Corporation, Women's Wear Daily (WWD), and Goldman Sachs, among others, and has consulted for dozens of retail, consumer products and other companies. He is co-author of The New Rules of Retail (Palgrave MacMillan, 2010). In addition to his role as CEO and Editorial Director of The Robin Report, he is a professor at the Graduate School of Professional Studies at The Fashion Institute of Technology.