Understanding Globalization

When I was teaching economics back in the mid-1990s globalization had not yet made its way into the textbooks in any significant way.  Golden Gate University had a very international student body. Some of the students, who had come from other countries, intended to graduate and stay in the US; some intended to return to their home country.

The basics of economics can be applied to any marketplace, but I often found myself making references to specific American companies or advertising campaigns that were not recognized by everyone. Rather than approach the topic from a US perspective, I tried to find more universal examples in order to explain to the students how the competitive business world was likely to be trending during the first 20 years of their working lives.

The one business model, with which every student was familiar, regardless of their country of origin, was a sweatshop. The image of a group of people huddled over sewing machines in less than ideal working conditions is a universal experience.

Sweat shops are in almost every country. When I gave this lecture in the mid-1990s there were sweat shops within walking distance of the San Francisco financial district where the GGU campus was located.

Sweat shop workers typically get paid by the piece, as opposed to an hourly wage. They get no benefits and if they get ill or injured or fail to produce a sufficient amount of goods, they have no job security whatsoever.  In many countries they are willing to work for a ridiculously small amount because the job is the only thing keeping their families from hunger.

The very first requirement for teaching economics is finding a way to keep the students awake.   I focused the lecture on a fictional pair of entrepreneurs. I told the class that these characters had formally been GGU students that had made a lot of money based upon what they had learned in class. That got the students attention.

The two fictional protagonists were Jane who had studied marketing and was working as a buyer for a small chain of stores selling casual wear in Seattle and Eduardo who had grown up in Manila, studied management and returned home after graduation. Eduardo worked in a factory that made shirts and slacks. The business that they founded together I called JESSE, Inc. (Jane and Eduardo’s Sweat Shop Emporium).

The product that brought them together was unremarkable, except for its price. It was a short- sleeved men’s pull over sport shirt made of woven cotton. Generically they were called “tennis” shirts.  At the time they were very popular with two brands in particular dominating the market.

One of the dominant brands was European; the other American. Neither shirt had a breast pocket; each had their firm’s distinctive logo embroidered on the left side. The European firm had an alligator; the American firm had a polo pony.

Both firms had been around for a while and the shirts were somewhat of a staple among those who played tennis or polo which traditionally had been wealthier people.  Wearing one of these shirts conveyed a certain wealth or status.  They were sold only in upscale retail stores and the retail price at the time was around $60 per shirt. To be fair, the shirts were made from high quality, thick woven cotton.  They were well made and lasted for a very long time.

There were a lot of cheaper shirts on the market that were similar but they were made of thinner cotton or a cheaper cotton/polyester blend. Those shirts were available in less than high-end stores and had an average retail price of $20.

Eduardo worked as a manager in the factory outside of Manila where one of the better shirts was made.  The factory was not a sweat shop. It was clean and well lit. The workers were paid an hourly wage and worked an 8 hour day. The factory was able to deliver a shipping container full of shirts to the company’s distributor in Los Angeles for about $12 per shirt.

The US based distributor paid for an expensive advertising campaign and paid sales people to reach out to buyers representing high-end chain stores and shops. The wholesale price to the retail stores was about $30 per shirt which permitted the stores a 100% mark-up from their cost.  The US distributor was able to derive a nice profit after its costs and paid US taxes on those profits.

Jane approached Eduardo with the idea of producing a similar shirt, different from the cheap knock-offs because it would use the more expensive high quality woven cotton. Except for the distinctive logos the shirt would have the same look and feel of the higher priced shirts because the cloth was the same.

Eduardo initially arranged to buy a single bolt of the material from his boss. He took it to a local sweatshop, along with finished shirts in 4 sizes which were used for patterns. Jane designed her own logo, a palm tree, and created a story about Jesse, a beachcomber who didn’t wear shoes but still wanted to look good. The story would be printed on the outside of the plastic bags that each shirt came in.

Using the sweatshop labor, Eduardo was able to deliver shirts to Jane in Seattle for $8 apiece and still retain a handsome profit.  Jane took a suitcase full of the shirts to a buyers’ convention where she gave them away to other buyers in attendance and began writing orders.

Because she was running a lean operation without a national advertising program, she was able to sell the shirts at a wholesale price of $15. The retail stores could offer them to customers at $30.   Consumers got a product that looked a lot like the shirts that cost twice as much and significantly better than the $20 knock-offs that these same stores had been offering.

As you might imagine, the business took off; new products were added and both partners made a lot of money.  Jane was paying more and more taxes on the profits that she was making.

After a while Eduardo wanted to expand and offered Jane a simple solution to both of their problems. Eduardo raised the price that he was charging Jane to $10 per shirt.  He used the extra $2 to allow Jane to buy into his manufacturing company to fund his expansion.  Jane made a smaller profit and paid less US taxes. She now owned a portion of a Philippine company that was taxed at a far lesser rate.

When I first gave this lecture the internet did not have the bandwidth for moving pictures. Jane was a necessary part of the story because someone had to be the conduit to the US retailers who interacted with the ultimate purchasers.  In the modern internet era, Jane and the retailers are no longer necessary.  Eduardo can have an entire catalog of products on his website. DHL or FedEx will deliver the product directly to the consumer’s door regardless of where in the world that consumer lives.

Eduardo was happy to sell his shirts wholesale for$8-$10 each. He can now sell the same shirts, factory direct to consumer for $25- $30.  Advertising costs using social media and targeted digital ads have never been lower.

When I was young, New York City had a thriving garment center. Much of the labor was unionized. Those jobs are gone because a union shop in the US can never compete with a sweatshop elsewhere. It is not even the cost of the labor that was the determining event in this transition. It was the overnight package delivery which did not become a part of the system until the mid-1970s.

What has happened in the 20 years since I gave that lecture? APPLE for one manufactures overseas using cheap labor and adjusts the price to leave much of the profit overseas exempt from US taxes. Remember that when you are tweeting about the loss of jobs in the US on your iPhone.