Monday, September 14, 2009

Global Wage Arbitrage at the Micro Level: Marvell Technology (MRVL)

I often speak about the leveling out of wages among nations as a long term trend that is happening, slowly but surely - not easily seen in any 1 year, but like a slow erosion. I've said this is *good* for humans as a whole across the globe, as it promotes more equality regardless of where you randomly were born - but for the middle / working class in nations that were above the global mean it won't be quite so nice; while of course it will be a much better outcome for those workers in nations where incomes are below the global mean.

I usually talk about this in sweeping terms as I have read countless stories through the past decade which illustrate this happening - if you choose to look for it. But since I saw this piece last week in the Wall Street Journal on a company I follow relatively closely, Marvell Technology (MRVL), I thought it would provide a great illustration of what is happening in the general economy and why employment is structurally (not cyclically) shifting in the States.

Last week:
  • Marvell Technology Group Ltd. plans to add staff at its Shanghai design center as the U.S. chip maker experiences increasing demand for consumer electronic chips in China. To meet strong demand in China, Mr. Sutardja said Marvell plans to increase its staff at its Shanghai design center to at least 1,000 by the end of 2010 from 650 now. The company also plans to expand the Shanghai design center's building.
So 350 new jobs in Shanghai in the coming year. But I thought to myself, didn't I just read of Marvell being one of the companies slashing staff to "make the number" one of these recent quarters. So using the powers of the internets (sic) I googled it, and lo and behold - dateline: March 2009
  • California’s Marvell Technology Group will cut 15% of its workforce, or 850 jobs.
  • The job cuts will come from all areas of the company. The firm has imposed company-wide salary freezes, cut some salaries, suspended bonuses and consolidated facilities.
So, 850 jobs gone in March from United States of People Who Make Too Much, and 6 months later, 350 jobs gained in Shanghai.

I am sure these are completely unrelated developments.


So let's talk about this for a moment. As an investor, I am thrilled - I am able to hire smart people at far lower wages than the Americans I let go, and with a lot less benefits to boot. Plus the workers are where the real growth will be in the coming decade. I love this move. In fact I love it so much I will look the other way when the top level execs shower themselves in options for their ability to "beat the number" in the coming quarters.

As an American citizen? Perhaps it's not quite so wonderful. Here is what I have to hope per economic dogma - some string of perfect outcomes that are predicted by a textbook: By (a) these 350 jobs going to China, (b) a new small group of middle class will be developed. As I extrapolate this 350 jobs to countless others moved overseas - (c) a huge swathe of middle class will eventually be built. Who will then, (d) in some number of years, demand products from America ... which will allow (e) the 850 people I fired in March to have work in America creating something the Chinese want. At some point in the future - but who knows when.

That all sounds quite convenient and fantastic on the surface - as long as I can figure out a place to stuff these people in the near term (Walmart? more restaurants? bars? can we please reinflate the housing bubble so they can be a realtor, broker, or construction worker? More healthcare jobs we cannot afford?). But some questions
  1. How many years will take place between the displacement of "today" in America and the "middle class demanding things in China" from America?
  2. What do we do with those workers in the meantime aside from plugging them into government work or pseudo government (health care)?
  3. What will happen to the income of said "displacements" as they move out of jobs from a very good high tech company to... (crickets chirping)?
  4. What exactly are Americans making today that the Chinese want and need to import excluding large scale industrial weapons / defense?
  5. What exactly will Americans be making in "some day in the future" (5? 10? 15 years?) when the Chinese middle class get to a level of wealth and can buy things from us... ?
  6. Whatever those products are you named in question 5, why can't the Chinese make them internally in 5, 10, 15 years?
I don't know these answers - I am just here to ask them, since almost everyone I talk to is in the happy boat of "it will all work out in the end; that's what the textbooks say". A rising tide lifts all boats - that has a nice ring. In 15-20 years a massive class of middle class Chinese will stop demanding products already made in their own country (have you been through a Walmart of late to see where the stuff is from?) and suddenly want American exports of XYZ products instead.


The reality is a lot of this is unstoppable - it's not the fault of anyone; with a flattening globe, and borders meaning less than anytime in history - this is the eventual fate. What is also unstoppable seems to be the denial of this happening.


I am giving you one example - please feel free to extrapolate over the past 10 years, the coming 20 years... rinse it, wash it, repeat it, and roll in the dogma while you are at it. Anyhow, in the time I wrote this I believe 0.6 federal government jobs and 1.3 health care jobs were just created so there is hope yet (cough). How are we paying for those jobs (now 1/3rd of the total job force and growing) you ask.... with a faltering tax base? Certainly we cannot ask large corporations to pay their share or the jobs will be moved overseas - and we can't ask the executives to pay for their share or they will move overseas. Hmm... it's like we are backed into a corner... we spend spend spend like drunken sailors (have to keep the peasants distracted with new cars and homes via government handout)... but we cannot tax anyone except for middle class peasants. They seem to be the only entities in the country who cannot threaten to move if you dare to attempt to balance this yawning national deficit on their backs.

Anyhow, I don't worry about these things anymore as I connect back into the Matrix - just thinking out loud about things that certainly will work out in the end. Dogma tells me it will, and dogma has gotten us so far these past few decades. In the meantime, I see a can on the ground. I'm going to go kick it.

[Aug 14, 2009: No New Normal Say Some Economists, Prosperity Without Jobs?]

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