The LA Times published a report on companies increasing their investments overseas. It shouldn't come as a surprise to anyone who has been paying attention to annual (and quarterly) reports from various industries. Apple's profits now come from overseas more than the US market and is still growing. The Big Three automakers have been drawing profits from China for some time now. Matter of fact it may be opined that without the Chinese market GM et-al would have probably gone under a while ago.
The reason for all of this is clear. Capitalism. Capitalism has a rule: Grow or die. It's that simple. It's not merely profits. In corporate capitalism, one must grow a company in order for the shareholders to profit. If a company is stable, that is, it is not growing but is profitable in it's operations, the shareholders don't see any "return" on their investment and therefore don't make money. So a company must grow (increase profits). The two easiest ways to do so is to squeeze the cost of labour and to expand the market (sell more stuff). US capitalism has done the former by outsourcing as much as it can to low cost nations. Those are the ones where there are lax environmental laws, lax labour laws and a large population of desperate people for whom 5 bucks a day, if that, are princely sums. The problem with this procedure is that eventually every competing company has offshored and so the relative advantage of cheap labour disappears (race to the bottom phenomenon). Thus one is forced to option two: expand the market. Unfortunately the US (and much of western Europe) is what we call a saturated market. The consuming class (middle class) has the car, clothes, etc. already. They have brand loyalties. Except for break out items like the iPad and iPhone, there is little growth going on in these markets. So if you're looking to grow and return dividends to your shareholders what do you do?
Well right across the Pacific is this country with a middle class population that is as large as the entire population of the United States. Let me say that again: There is a country with a middle class population as large as the entire population of the United States. Oh, and that population is growing. There's another country on the Indian sub-continent with a huge population of bright people who are like this other country is growing it's middle class at a fast rate. If you are a company looking to grow and profit would you be looking to America or looking to these places. Don't think too hard now.
GM and BMW are in the process of making models of their vehicles specifically for the Chinese market. Buick is alive for the sole reason that the Chinese, for reasons I am yet to fathom, adore the brand. China has a number of Android phones and iPad knockoffs (among other things) that makes the American market the definition of an "not-free" market by comparison.
But back to the American market. Anyone who's been paying attention has seen the writing on the proverbial wall. Offshoring of manufacturing jobs coupled with the huge debts racked up by the "middle class" which represents the bulk of US GDP and the continued off-shoring of revenue to tax havens (legal tax evasion). As discussed earlier the race to the bottom is creeping into the middle class as occupations that require expensive college educations that commanded high 5 and 6 figure salaries can be (and are being) sent to anyone with a fast internet connection and a PC. They will gladly do for $20k, if that much, what you ask $100k for. You do the math. The S&P downgrade is really a reflection of the dire future of the American market. If there is going to be debt payment, much less growth, then there are structural issues that the US will have to deal with. Currently the US is a "first world" country with a "third world" economic mentality. A lot of the reaction coming out of Washington has been generally "we've always paid so what's the problem?" Well you know what I tried that on my auto insurance company. I told them that as long as I've been driving they haven't had to pay out a single cent so why hasn't my premium been going down? Well apparently I'm still "a risk". So the issue is not what I've been doing but what my alleged current situation says to them. The minute it was clear that a part of the US governing establishment would even consider not paying their international bills, that was all S&P needed to see. As a matter of fact I'm surprised that the other rating agencies haven't done the same. S&P is probably thinking that if by some chance the same folk who threatened default were to actually occupy the White House they may actually carry out such a plan. They also recognize the unwillingness of this government to tax the very people who have the means. It's all very bad. Line this up with BRIC and the increase talk of moving away from the US Dollar as the reserve currency there's not a lot of reasons for the ratings bodies to be confident.
So again, you're a company, the US market and finances are not looking very good, what do you do? 300 million middle class Chinese. Think about it. But don't think too hard.
(17 years of informed commentary)
