Marvell Technology: Global Wage Arbitrage at the Micro Level

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. 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 that Marvell was 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.

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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 will want American exports of XYZ products instead.

Ummm....

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.

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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?]

Comments

[Joe Schmeaux:]

It's quite simple: The Chinese make what Americans want today because the Chinese want what Americans have. Conversely, Americans will start making what the Chinese want when the Americans want what the Chinese have. In other words, when Americans have a lower standard of living than the Chinese, that's when Americans will begin to start thinking about taking on the same menial jobs that many Chinese are willing to take on now. Just go ask the Romans, the Greeks, the Persians, the Assyrians, the Egyptians, and so on and so on. No "superpower" has ever lasted forever. Can the U.S.? Since I live there, it's nice to dream that it might, but, sadly, history has a way of repeating itself, try as we might to buck the trend.

Sep 17 02:21 AM

[jammur:]

I agree completely that as global economy becomes more efficient, with fewer barriers, we'll continue to see more manufacturing and knowledge jobs go overseas. However, if fuel costs or the Yuan rise enough, that will encourage more local production.

Given the technology involved, it only takes a limited amount of skilled labor to perform most manufacturing. I think the question that has yet to be answered is that what will these mid-income Americans be doing in the future? If in order to maintain a high wage, there has to be a commensurate amount of high skill/knowledge, where will the these high / skill high knowledge jobs come from?

If it were pure R&D (the old Bell Labs, IBM R&D, etc), then you hire PhDs, but they are 4x cheaper in China. TraderMark's Marvell example is so perfect for white collar jobs, and we've already seen mfg jobs leave. I honestly do not know where the new jobs will be coming from. We should be able to get some 1M-2M from the energy sector, but we need >20M. Unless we can find a way to get the housing sector going again (fat chance when interest rates begin increasing), we should probably get our minds around unemployment staying above 10% for a long, long time.

Sep 17 06:43 AM

[TeresaE:]

Mark quit looking behind the curtain.

Globalization and Walmartization is good for us. Just ask experts and any CEO that has seen their wages quadruple while American hourly wage plummets (take out the bogus insurance component and see reality).

After all, socks are cheap.

Too bad the group of us that can't afford cheap, imported socks is growing faster than the group that buys them.

China doesn't ALLOW most of our goods in. With a population of nearly 2 BILLION, I do not see them EVER letting them in.

The question I have been asking since off shoring began in earnest (back in the 90s) is the following:

IF 1/2 of our population has an IQ below 90 (they do), then HOW can we think "high tech" jobs will be enough for this country?

Do you want someone with an IQ of 80 designing missile systems or even drawing your blood? I fired my doc a couple years ago because of this very reason. His support staff was so bad that it scared the hell out of me.

I know I'm not comfortable with the inept working on/with me, but looking around it seems everyone else is just fine with it.

Sep 17 09:23 AM

[John Galt:]

> 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. 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.

Mark you said that it's a "good thing" for humanity as a whole. Please don't tell that to the (Financially liberal) Americans who think they are entitled to a good high paying job (regardless of their skill level) and even if it's at the expense of somebody outside of our borders. They are American so they deserve something but that hard working guy in India, China, Mexico doesn't deserve anything... he was unlucky to be born there so screw him.

The people who care about "global poverty" fight against it kicking and screaming when they might have to sacrifice something. They want the people of the world to hold hands and sing Koombaya, as we are all equal, they just don't want to let them compete with us on equal grounds. It's sad.

Sep 17 11:32 AM

[Alan Young:]

Excellent exposition, Mark. All too true.

However, this "inevitable" trend could be reversed quickly by putting an end to the "free trade" mania.

Sep 17 12:09 PM

[tripleblack:]

Equality vs LIberty...

Planned Economy vs Free market...

I would submit that creating and then sustaining a condition under which all individuals have the liberty under the rule of law (equally applied) to seek their own, free, future will take care of whatever outcome resutls.

Doing this backwards just makes trouble.

Sep 17 01:07 PM

[John Galt:]

> I would submit that creating and then sustaining a condition under which all individuals have the liberty under the rule of law (equally applied) to seek their own, free, future will take care of whatever outcome resutls.

America was founded on the idea of equal opportunities, socialism is founded in the idea of equal results.

Sep 17 02:32 PM

[Cormack:]

Labor-intensive work is outsourced offshore in perpetuity as capital always seeks the lowest cost of labor. So knowledge-based industries such as R&D and education would be the only growth areas for OECD countries as the US living standard, median income and quality of life continue to go down.

Sep 17 03:00 PM

[juicyjoo:]

Africa will be the next China.

Sep 17 10:34 PM

[juicyjoo:]

US will be the next Britain, China will still be full of assholes.

Sep 17 10:34 PM

[paulnews:]

Comparing to other countries, USA is fortunate. America still has all the natural resources and established economic systems to excel for the next, say 100s years, comparing to other countries. Think, there's relatively large usable lands, resources, still much less populated per sqft (and will continue to be). As a developed country, people here (not sure about elsewhere, but at least west coast) are still working hard, and there are many conglomerates investing their staff/revenue all over the world.

What will happen, though, is that the world will not consist of single superpower - others will rise; US growth could go moderate but stable. World will move towards equilibrium though in reality it will never be perfect. To resolve the global competitiveness issue, dollar will likely devalue or other currency rise, and so at some point US wages (rising much slowly compared to others) will be relatively competitve, then some manufacturing jobs will remain with more robotics or intelligent workers to counter for the newly rising countries. At some point the double digit wage inflation at India/China will get expensive.

Relatively US still have much higher purchasing power, even for houses. One part of it, this is due to abundance resource such as lands and less population. The other part of it, due to relatively higher currency value. This is gradually changing, and bet you feel the purchasing power will be affected (inflation now in disguise due to recession). At some point, you will feel Walmart prices start inceasing (Yuan increase in value; China wages increases), and you will feel Europe/Asia vacation no longer cheap. You start seeing streets are less clean because no budget to clean it; schools start increasing class size since no budget to sustain 1:20 (dude many Asia countries has class size of 40; some 50s). That's exactly part of what other cheaper developing countries citizens have to suffer/feel all the while. So, American need to start get use to this considering the debts the country owe.

But as said, US has relatively abundance of resource. If managed well, prosperity will continues after this recession/adjustment. One thing though is that there's lack of population if we really want to increase internal consumption. There's lack of population to strive hard making money for the country, if we want to be grow GDP by double digit compare to developing countries. If we want that pie, it will mean more congested neighbourhood and more expensive lands like other countries (dude China/India middleclass mostly can afford apartments/condos only, no land for SFH). If we don't want that way, then don't compare that level of growth.

Lastly, there are some of US systems are simply broken - e.g. Healthcare and Education. This needs to get fixed, and at least during recession now the goverment has chance to fix them. (Think - monthly medical insurance itself can cost $1-2K per family if no company subsidies; this sum itself is equivalent to family income of many countries.) Without addressing the healthcare cost, US can never be competitive further and companies and employees here will suffer. Education systems kinda wasteful as well because all school districts are spending their own resource to established independent systems and teaching materials etc. There are benefits for this, but somewhat wasteful. If some of the functions (not all) can be federal/stately centralised, it could save some money. Or, if we can do it well, outsource the education system to some countries which do very well (jokingly). Nonetheless, I don't mean the tertiary education system - US has some best universities and colleges that attract students all over the world.

Sep 18 04:34 AM

[Robert0713:]

You either foolishly naive or lying. Read up on Comparative Advantage in a standard econ text. Then read up on Absolute Advantage. You're not likely to find it in Samuelson or any regular undergraduate text. Try the internets.

The point is: Absolute Advantage posits what is obvious (but doing so rips away the justification for laissez faire), that capital is not immobile and never was. The marginal return assertion of classical economics depends on capital being immobile. Without that assumption, we see reality: capital moves to where labor is cheapest. Labor is cheap where government is fascist. End of story.

In the end, as Marx posited, capitalism implodes. Getting there is a period of increasing income inequality, both locally and globally. China is proof of that. Growth there, and here, is concentrated in the hands of capitalists and its managers. Growth, with laissez faire, is not distributed among the population; again, either locally or globally. You can make any fairy tales you like to justify exploiting the Chinese or Indians or American auto workers; you're still lying to cover your evilness.

Sep 18 10:30 AM

[opa-opa:]

Yeah companies are taking advantage of "cheap" hi-tech labor in China right now, but I'm not sure how long that's going to last. Shanghai is already one of the most expensive places to live in Asia. Wages for hi-tech workers there are rising and in a few years won't be much different from those in the US.

Sep 22 10:14 PM

[paulnews:]

On Sep 18 10:30 AM Robert0713 wrote:

> You either foolishly naive or lying. Read up on Comparative Advantage
> in a standard econ text. Then read up on Absolute Advantage.

Hi Robert0713,
I am not sure if you were responding to me, or this article in general. FYI, I am not econ students and not interested in reading up about economics. What I have expressed is purely personal view after having actually lived in different countries for years, experiencing through developing, booms, bust, inflations; from youth till establishing families myself. I am just doing some layman comprison of "life" essentials such as grocery cost, residential costs (renting/buying), wages (welfare, retirement savings, bonus, annual increments), education (public schools/private schools/colleges), healthcare (private hospitals, government hospitals, insured/uninsured, immunization, young/old, accidents/complains etc).

I am surely not commenting with the context of professional econ background, but what I knew is many of those so-called "economists" could be wrong, what more from many of the average econ field employees with paper theory? Bottom line, it all boils down to commoners in a broader scope.

I am not disagreeing with you that it can never be fair/same across the globe.

Sep 24 04:55 PM