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“But, Why is that Important to Bangladesh?”- Hedrick Smith speaks to Boston Global Forum

In an interview with Boston Global Forum (BGF), esteemed journalist, political analyst and author, Hedrick Smith, lends a political historian’s perspective to explain the reactions of American retailers to the tragic Rana Plaza collapse in Bangladesh, in April 2014. Smith’s book WHO STOLE THE AMERICAN DREAM describes the transition and evolution of the American economy over the latter half of the 20th century. Smith explains how industrial trends like switching from push manufacturing to pull manufacturing, deregulation and changing corporate attitudes have had a deleterious effect on worker safety standards in offshore manufacturing processes.

Hedrick Smith Credit- hedricksmith.come
Credit- www.hedricksmith.com

 

BGF: In the evolution of the American economy, when did large American brand names start outsourcing their manufacturing processes overseas to other countries? And, was this a gradual shift or something that happened rapidly in a short span of time?

Mr. Smith: My understanding is that this shift really developed during the 1980s. Individual companies, like Motorola or General Electric and other American electronic firms, were among those who led the way to overseas production in the 1980s.  At the time, radios and other electronic products and cars were being built in places like Japan. American manufacturers got interested in those countries, particularly in Japan, Taiwan and Korea. While Japanese, Taiwanese and Hong Kong exports were the first to hit the American market in scale in the 1970s, the real acceleration in American companies’ offshore exports to the U.S.  happened much later – much of it under pressure from Wal-Mart. Wal-Mart was very interested in getting what they called the ‘lowest opening price point’ products made overseas so they could offer the cheapest goods available for American customers.  Sam Walton, founder of Wal-Mart, went to Korea and returned fascinated with Asia and convinced that Asia could become a very important source of Wal-Mart’s imports and a real boost to Wal-Mart’s profits. From then on, Wal-Mart’s profit margins on goods from overseas were tremendous.

But the first major change that ultimately led to overseas production by U.S. companies was the shift in economic power here at home from big producers to big retailers. Wal-Mart led the way. It was an enormously powerful influence on American manufacturers, particularly of low-cost goods including goods like garments. Wal-Mart developed the bar code and other logistical systems that gave American Big Box retailers powerful market leverage that they had not previously enjoyed. This resulted in an economic power shift in American manufacturing. We went from ‘push manufacturing’ to ‘pull manufacturing’. ‘Push’ meaning that producers like Proctor and Gamble, other appliance manufacturers and electronics goods manufacturers determined what products they would produce, and they would push these products to the retail networks across the country. Retailers would simply sell the items they produced.

Under ‘pull manufacturing’, Wal-Mart and the other big-box retailers  came to dominate the producers and the marketplace. They became highly organized and efficient by using tools like the bar code.  At the cash register, retailers could far more rapidly, than the producers, see what products were being sold fastest and instantly place orders for more. That information shifted market power to the big box retailers. With that knowledge and its growing volume of sales, Wal-Mart was able to dictate the products it wanted produced to the producers. Not just what products, but what size, what color and what shape! They knew whether straight-legged jeans were selling or flared-legged; were button-blouses in fashion or not; whether large microwaves were popular or small toasters? These big-box retailers had very detailed information on the products they wanted to sell and so they told producers what to make. Then, led by Wal-Mart, which was seeking that low opening price point, they began to develop international supply lines, that is, overseas producers.

China was not the first target for overseas manufacturing. China came along after the Plaza Accord of 1985 in which there was an upward evaluation of the Japanese, Hong Kong, Taiwanese and Korean currencies to offset alarming flow of imports made from Asia to America. At the same time China devalued its currency. From that time onwards, because there was such a difference in the currency valuations between China and the rest of Asian exporters, China rapidly became the destination that American manufacturers went to. So after the Plaza Accord revalued currencies, the Chinese took market share away from the rest of the Asians. By the 1990s, Chinese supply chains took off. And their operations have become a model for other lower cost Asian producers like Vietnam and Bangladesh.

Talking about Wal-Mart’s role in this trend, in Chapter 15 of Who Stole the American Dream?, I described a meeting of Wal-Mart executives with various American producers. I was told that Wal-Mart pushed them hard to move their manufacturing, especially of low-cost consumer goods, overseas and particularly to China. This did not involve Bangladesh at the start, but there was a sequence here. Japan was the first destination, followed by Hong Kong, Taiwan and Korea. After Korea, the American manufacturers went to mainland China, which has maintained a strong hold for a long time. From 2000 onward, China was supplying 80 percent of Wal-Mart’s overseas imports.  From China, the businesses moved to Bangladesh and Vietnam and other lower cost countries.

What you’re watching in Bangladesh, today, is really the outcome or the latest phase in this movement to low-cost production.

The second factor that in my mind is important to understanding the American response to the terrible factory conditions in Bangladesh, even though it doesn’t seem related, is the beginning of a push for de-regulation of American industries that began in 1978 under Jimmy Carter. It began with trucking and telecommunications and not with garment manufacturers but this deregulation began a long-term trend that reversed the policies of Richard Nixon, the Republican President from 1969-74. Nixon and his administration probably put in more new regulatory agencies and more new regulations on business than any other president since World War II, certainly more than the Democrats like Kennedy and Johnson. And there was a strong business reaction against Nixon’s regulatory regime. This reaction reached its peak in the mid 1990s, when Newt Gingrich was Speaker of the House and Tom Delay, a Congressman from Texas, was the majority whip. Delay was known as “Tommy Dereg'” because of his aggressive push for deregulation. Deregulation had started under Carter but it really blossomed under Gingrich and the Republicans. You don’t get much re-regulation until the financial collapse of 2008.

But, why is that important to Bangladesh?

It’s important because if you look at the American manufacturers and their response to the collapse of the factory and the fire in the other factory in Bangladesh, they resisted any form of regulation that would make them responsible or accountable for the safety of those buildings. They are responding to it very differently from the Europeans. By 2012 and 2013, the American companies had become accustomed to de-regulation. So they were opposed to any regulatory response to the Bangladesh disasters. The European retail firms have responded differently. They are used to more regulation in their economies, so it was more natural for the European firms and their retail customers to step in and accept both some financial responsibility and some legal and moral responsibility. On the contrary, American manufacturers led by Wal-Mart, Target and some of the others, are staunchly resisting any effort to codify rules of behavior, financial responsibility and legal responsibility for the death, damage and destruction of workers and factories in Bangladesh.

To better understand what’s happening in Bangladesh, it’s important to study these two trends in America: ‘push’ manufacturing to ‘pull’ manufacturing where retailers pushed production overseas, and the deregulation trend that accelerates in the mid 1990s. Understanding those trends helps us understand how U.S. companies behave today, what their attitudes are, what their expectations are and what their corporate culture is.  And their corporate culture has a lot to do with their financial and legal response to the disaster in Bangladesh. Historical roots are very important to corporate habits of mind and actions today.

 

BGF: You raised the point about ‘responsibility’, why do you think there was such a sharp contrast between the reactions of American brands and their European counterparts?

Mr. Smith: That leads to a larger question about the ‘social compact’ and about corporate ethic. In the last 30-35 years, we in America have experienced a breaking of the old social compact and the Europeans have not had that. Earlier on, in America, we had labor agreements and labor contracts that determined pay and working conditions. But over and above that, there was a sense among American business leaders and the government that corporations had some responsibility to society. Charlie Wilson, head of General Motors, once said “what’s good for America is good for GM and vice versa.” But now American multinational corporations make a point of stating that they don’t think of themselves any more as American corporations. Typically, they call themselves “global” and they no longer say what Charlie Wilson said, that what’s good for our country is good for the company, too. In Europe, there’s still that sense of a social compact that corporations have an obligation to society as a whole. They have an obligation to their workers, they have an obligation to their customers and they are economic and social citizens, not just corporations.

In Chapter 16 of my book, I describe the change in corporate culture in the US when American corporate leaders came to reflect the new attitude that they are no longer American corporations but global corporations. “We just happen to have our home office in America,” they say. This change starts to happen significantly in the 1990s but it really accelerates in the 2000s after the US – Chinese trade agreement following which there’s a great rush by large American corporations to set up shop in China.

How does that relate to your question? It helps explain the different European and American responses to the crisis in Bangladesh. Well, if you as a business don’t feel rooted in a country, you don’t feel any particular obligation to your customers in that country or to your workers in that country. So as American firms globalize their operations, they look at the problems of their Bangladesh suppliers strictly on a profit-and-loss basis. They’re response is-“What does it cost us to get out of trouble in Bangladesh? We don’t want to take on any permanent responsibility there.” But European companies are looking at Bangladesh and saying, “How do we maintain credibility with our domestic customers?  And how do we remain a good German or French or Dutch or Danish corporate citizen in our country? We would be regarded as a bad citizen if we buy garments and make a profit from a country where there are scandalous working conditions.” The Europeans have a responsible corporate ethic at work.

The corporate ethic at work in America today is the ethic of ‘shareholder capitalism’. Our goal is to maximize the return to our shareholders, our owners. Our focus is on the stock market price of our company shares. That also matters to European firms, but they are operating on a broader stakeholder basis. They are talking about ‘stakeholder capitalism’. The Europeans believe that their stakeholders include owners, shareholders, workers, customers, and the communities they operate within. They want to maintain good relations with all their stakeholders. So when they look at the terrible working conditions in Bangladesh, they’re looking at how to protect those relationships between their corporations and the home society where they sell their products.

The American CEOs are thinking what’s profit and loss? They’re thinking, “If I’m going to take a loss here because American customers are upset for a little while about the collapse of a factory in Bangladesh, what do I have to fork up now? What do I have to do to make myself look good for the moment because these people are going to forget about this in another six months.” It’s a crass profit and loss calculation, very different from the Europeans. I believe that’s why they’re behaving differently. American businessmen used to believe in a pretty similar corporate ethic to the Europeans. And some do now too, I think Costco is quite different from Wal-Mart. I think Costco is much more concerned about its relationships with its customers and employees. In general, they behave like a good corporate citizen, but for other companies, the Wal-Mart model is more prevalent. I would say that’s the third great change.

So I see three long-term trends affecting the corporate responses to what’s going on in Bangladesh today:  the change in the corporate mindset and social contract at American companies; the shift in economic power from ‘push’ production to ‘pull’ production; and the growth in corporate expectations of deregulation and their freedom from legal and financially accountability so that they can make maximum profit at minimum risk and minimum cost.

 

BGF: It took a factory collapse that killed 1100 people to start a conversation about worker safety. What could bring about a change in American corporate attitude akin to the kind that Europe is reflecting now? What is that catalyst for change, if there is a possibility for one?

Mr. Smith: I have to admit that, as far as American businesses are concerned, I’m skeptical. In Europe, social pressures, laws and regulations, and a pact among the major European retailers are going to change their conduct. European retailers have committed themselves to take action, make investments to improve working conditions in Bangladesh and monitor conditions there. I am skeptical that the American retailers are going to change fundamentally unless there is continued public pressure and public unease about buying goods from companies in which there is blood on the hands of the Bangladesh producers. They have been making a profit by failing to protect their workers and blood was spilled. There was an immediate reaction of horror in North America as well as in Europe but public concern has subsided substantially in America now. I think unless there is public pressure or legislative action, most American retail giants will carry on pretty much as they have in the past, without taking direct corporate responsibility to improve the situation. The $100 million pledged by American brands, is a loan fund, not a direct investment by the American firms in safety improvement. They’re offering to lend the money to the Bangladesh producers, but it is up to the Bangladesh producers to spend the money and pay back the loans. The Bangladesh producers have already established themselves as unconscionable on these issues of worker safety. Counting on the Bangladesh manufacturers to improve the situation is like waiting for the tooth fairy.

The American firms have said they will demand that Bangladesh producers comply with certain standards but their standards are vague, so it will be pretty hard for the rest of us to know whether the Bangladesh garment manufacturers will have done enough to improve the situation. And who’s going to monitor progress and on what basis? Theoretically that kind of corporate monitoring has been going on all along, but when the factory collapsed, American firms were quick to deny that they knew about those bad conditions. I would like to believe that from now on that there is hope for improvement, but this is not a new situation. It’s been going on a long time and not just in Bangladesh. There are bad factory conditions all over China. They have not had one single disaster as bad as in Bangladesh. So there’s no single incident to highlight Chinese working conditions. And theoretically, U.S. firms monitor working conditions there, periodic revelations show that not very much has been done to significantly improve working conditions in China, not by firm such as Wal-Mart, which is getting a huge percentage of its products from China. So on that basis, I don’t see these American retailers taking an aggressive initiative in Bangladesh without there being an intense amount of public pressure or some new disasters.
And we would all hate to see that it required more disasters to generate sustained pressure for improvements. That would be terrible.