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INTEGRATION WATCH: The Decline and Fall of the U.S.
By Andrew Binstock
 June 15, 2004 — In mid-May, I attended the World Business Forum in New York City, where I listened to CEOs Jack Welch (formerly of General Electric), Lou Gerstner (formerly of IBM) and Anne Mulcahy (currently of Xerox), in addition to business gurus Jeremy Siegel and Michael Porter. They spoke about many topics, but a recurring theme was the role of outsourcing and offshoring in the current economy. There was a remarkable unanimity of opinion on the topic and also one very scary forecast.
The overall position was articulated by Welch, who was not fired up in the brawler style he made famous until the topic of offshoring came up. Then he became emphatic: “The view that offshoring is bad is one of the most ridiculous ideas I have ever heard. Do you remember in 1991 when [Ross Perot] talked about the great ‘sucking sound of jobs being lost to Mexico,’ because of the NAFTA treaty? What actually happened? For the next eight years, the U.S. underwent the greatest economic expansion in its history. Job protection and complaining about offshoring only ever come up when the economy is not doing well. As soon as things pick up, no one talks about it anymore.”
Continued Welch: “The most common estimates are that the U.S. will lose a quarter million jobs to offshoring this year. In April alone, the US. economy gained 288,000 jobs. So how much is offshoring hurting us? Not at all. It’s helping.” A report released in May by Forrester Research projects that 3.4 million jobs will be offshored during the next 11 years, so Welch’s numbers look about right.
Gerstner pointed out that due to the offshoring trend, unskilled jobs in the U.S. or in most economies no longer exist, and that this trend will continue, while Mulcahy pointed out that all major companies are now offshoring and outsourcing, and that the model of the vertically integrated company (one that designs, manufactures, sells and distributes its own products) that was popular several decades ago is gone forever. It no longer makes sense to do things internally that can be done better and cheaper by other companies or in other countries.
Porter, the guru of strategy and the person who invented the concept of “value chain,” pointed out that the more a company outsources, the less competitive advantage it enjoys. It’s not a subtle point, but it’s an important one: The more services you outsource, the more your company looks like others.
Moreover, as Porter explained, suppose you’re in semiconductors and you outsource fabrication. When you do this, you will lose the human capital you have around fabrication. So, when you go to design a new chip, who will correct your design and point out that it will cost twice as much to fabricate?
Possibly the foundry that does the fab work for you, but its interest will never align with yours, and the crossover intelligence you enjoyed by having both design and fab talent in house will be gone forever. In this sense, you will be losing a competitive advantage by outsourcing a critical function.
The most ominous presentation of the conference was Siegel’s explanation of a key demographic trend. Siegel, professor of finance at the Wharton School of the University of Pennsylvania, pointed out that in 1955, the average U.S. worker retired 1.6 years before his death. Today, with the advent of earlier retirement and longer life expectancy, retirements average 14.4 years (retire at 62, die at 76).
In 1950, there were more than six workers in the marketplace for every retiree drawing benefits. In 2000, it was five workers; by 2025, it will be down to three. Clearly, the trend cannot continue. And of the two trends, life expectancy is the only one that will inexorably rise. Even at today’s 14-year gap, which might not be tenable in the long term, by 2050, we will certainly need to work past the age of 70.
What factors could help to avoid working so long? The first is increased productivity. But according to Siegel, even if productivity increases significantly, the impact will be slight, possibly shaving a year or two off the retirement age. Most likely what will need to happen, opines Siegel, is that a new constituency will have to emerge to produce our goods (offshoring) and buy our assets. That constituency consists of developing countries, whose populations are much younger.
Consequently, Siegel predicts that offshoring will accelerate and our trade deficits with the developing world will increase dramatically. The end result, he feels, is that by 2050, the U.S. will no longer be the center of economic activity worldwide. That center will consist of China and India, with the then-older U.S. occupying the same declining role in the world economy as Europe does today.
Andrew Binstock is the principal analyst at Pacific Data Works LLC
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