Are U.S. Based Multinationals Destined To Do Poorly In Asia?
- USA based multinationals are not faring well in Asia.
- The problem in general is that American's believe in an arm's length relationship with foreign governments.
- This is in contrast to native business which allows itself to be the government's arms and legs.
I am always sensitive to business overhead - the lower you drive overhead, theoretically the higher your profit.
Overhead costs are expenses associated with running a business and not DIRECTLY related to producing a product or service. A simple criteria of overhead is costs that are fixed whether one produces a million or a zillion products or services. Direct costs are those that go up with each product or service produced. Some costs are semi-variable - with portions fixed and portions that go up with each product or service produced.
Obviously there are grey areas, and depending on the business sector, a particular cost may be overhead or direct.
Overhead cannot be zero - it takes a certain amount of overhead costs to effectively run any organization. For instance, research and development for a new product is overhead, as well as payroll costs.
The same thoughts of overhead and direct costs can be applied to government operations. Some of the government operations - say education - mostly varies by the number of students. Other operations - such as elected officials - are purely overhead. One would expect a general correlation to population or total employment.
I prefer correlations to employment - because it would include productivity variations. One would think this relationship between employment and government workers should be rather constant - but it is not. Part of the reason would be the transfer of government services to contractors. But no one knows the number of employees contractors employ. Some think the number is around one million but, if so, it makes little difference in the ratios (less than 5% of the total government employees).
Because the goverment employment relative to the private sector is shrinking, the above graph is saying that there is some combination of:
- less government enforcement (such as audits to ensure compliance with codes and laws);
- less coordination between government and business;
- less government involvement in the education of the work force
This could mean that foreign business which are being provided with their government's support have an advantage in the USA.
In the USA, both business and government strive to minimize the interface with each other - believing it allows the free market beast run loose. The theory is that less interference by government will produce a stronger and faster reacting marketplace.
Why is this important to investors?
In Asia, government plays a role in business - from pushing R&D for the advancement of the country, overseeing employment (educating workers, ensuring enough jobs), providing adequate infrastructure, supporting exporting of goods and services, and overall ensuring business executes government's strategic and social agenda.
I have been working in Singapore this past week - one of my stomping grounds in my past life as an expat. Watching events brought back old memories of the close relationship between business and government/society. [Singapore is not unique in Asia - I have witnessed the same relationships with some methodology differences all across Asia]. Business in Asia is used as an extension of the government's master plan.
American based multinational corporations operate with a cowboy culture - wanting minimal interface with foreign governments. In fact, executing a foreign government's agenda (especially for elements at contlict with USA government policy) is heavily rejected or resisted..
This culture does not serve American based companies well in Asia. Any business that resists executing government policy is destined to be the runt of the litter. Asia is the economic growth engine of the global economy - and getting a relatively small slice of the action only means the continued shrinking of American multinationals portion of global economic growth.
Long term investors should concentrate on stocks in companies that are doing well in the Asian markets as they will be the global leaders in the years to come.
My usual weekly wrap is in my instablog.
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