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Footloose Companies–What Loyalty? Consumers on Steroids

June 21, 2010

Updated July 20, 2011

In two recent posts I looked at two big change drivers: technology and global labor markets and their impacts on society and business decisions. Today we’re hitting what’s called footloose companies (firms with no national loyalties and which are flexible in moving their operations anywhere very quickly) and consumers on steroids in emerging markets.

The concept of footloose firms is not a new concept; it’s something I studied in the mid seventies when I was doing my first economics degree. However, 35 years ago people were not talking about the Internet, massive container ships, or the offshoring of manufacturing and services to China, India, Mexico, Brazil, Indonesia, Honduras, etc. In fact, back then “Made-in-Japan” was still scoffed at. The Detroit (Big) Three automotive manufacturers were as pumped up then as Arnold Schwarzenegger. Buy a Japanese car? Yeah, right!

Not only did the Japanese teach the Detroit Three, along with other Industrialized Western economies, a lesson about product quality and efficiency, but more recently several emerging markets (also called emerging economies) are again showing what can be achieved when you’re keen and hungry as a nation. The Chinese, for example, have been on a very steep learning curve as they move their industries up the value-added chain.

China’s steadily rising labor costs have resulted in hundreds of thousands of layoffs and the closures of hundreds of manufacturing plants as work is transferred to such lower-cost countries as Cambodia and Vietnam. This is a trend the American and Canadian media tend to ignore, instead dwelling on China sucking up the world’s manufacturing operations.

Sidebar: I’ve been struggling of late with the concept of “Emerging Markets/Economies” because it’s unfair to China, India, South Korea and Brazil to label them as such. Sure I can see Vietnam, Cambodia, Turkey, Honduras, for example, as being emerging economies. But what how should we label the first set of countries? This hasn’t been addressed by economists. Maybe they should be called The New Competitors, or how about The Brazen Bunch. Better yet, what about Breaking the Industrialized Barriers? Post your suggestions and you may win a free subscription to my blog!

The advent of virtual production, whether it’s reading the x-rays of a Cincinnati patient in Bangalore, India; the processing of insurance claims in the Caribbean; the manufacturing of Yamaha pianos in Indonesia; or the fabrication of a Montreal-designed men’s suit in coastal China, means just that: anytime, anywhere. And if as a company we become dissatisfied with the costs of production or providing services (read wage rates) then “we’re outta there! Tomorrow.”

This creates, of course, huge challenges for national, state, provincial, and municipal governments when they try to determine the best ways of attracting and retaining companies. The dynamism of how firms are continuously adapting technology to their operations, identifying and securing access to new markets, and assessing where the costs of production are optimal is becoming increasingly complex.

One example I’ll give is the effects that the Great Recession and previous skyrocketing oil prices had on global container shipping traffic. The decline in business and increased transport costs led many companies to reassess where their manufacturing operations should be located. Some companies have repatriated parts of their manufacturing operations to America. However, just as one trend begins another sudden event strikes, again changing business decisions.

Combined with location decisions is the rapid growth of new middle classes in the emerging economies. China’s middle class is estimated at almost 300 million, the size of the entire U.S. population, or nine times Canada’s population. Of significance is the requirement by China to have foreign firms locate their operations on its soil if they wish to have access to its expanding consumer market. General Motors is but one company that was worked hard at gaining a foothold in China.

South Korea is another country that plays hardball when it comes to reciprocal trade agreements. This country is still underestimated, and in fact mostly ignored, for its incredible achievements in the past 20 years. Its population is keen and hungry to improve its standard of living and parents sacrifice to ensure that their children are obtaining the necessary education to succeed in a brutally competitive global economy.

Attempting to practice effective corporate leadership in this volatile environment is not for the faint of heart. It means learning to live with a lot of ambiguity, conflicting signals and trends, and constantly changing forecasts by economists and business analysts.

Two important skills to develop in this global turbulence are:
a) the ability to synthesize information and to sift out the core messages,
b) becoming comfortable with living and leading in uncertainty, along with the flexibility to move quickly when it comes to making business decisions.

The only function of economic forecasting is to make astrology look respectable.

– John Kenneth Galbraith

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