Business Relocating To Third World Countries Pay Cheap - Case Study Example

Businesses that move to third world countries pay cheap-Morality and business ethics or plain business sense Business relocating to third world countries pay cheap Introduction Over the past decade there have been several instances of businesses relocating their factories to third world countries. With costs of manufacturing and labour going up significantly in the developed countries of US, Germany and France, companies are looking to offshore their factories to lower cost nations in order to capture newer markets and also to manage their balance sheets since most of these third world countries provide cheap labour. Data also suggest that there is no truth to the fact that cheaper countries would inevitably mean poor quality of products. This report seeks to discuss the phenomenon of off shoring business to third world counties, the business reasons for such policy decisions, the salaries and work conditions in these countries and ultimately the ethics of such practices. Trends There have been several instances of how businesses have been able to consolidate themselves by moving to low cost countries. Emerson Electric had devised this strategy way back in the 70’s when it moved its operations to countries in North America and Western Europe. These countries now account for 44% of manufacturing labour expenses and has seen profits shore up for the company with it being able to provide a 19.8% dividend for a shareholder. (Vestring Till, Rouse Ted, Reinert Uwe & Varma Suvir, 2005) General Electric has seen significant relocation to China in early 2000 and its sourcing costs grew to four billion USD by 2005. General Motors also has significant operations in China with auto parts being sourced to the tune of 10 billion US dollars. (Vestring Till et al, 2005) White Goods Co which had about 85% of its manufacturing taking place in first world countries had to face stiff competition from their Korean rivals who were not only making rapid progress in the knowledge field but also had access to cheap labour. With these factors in mind, White Goods started manufacturing specific parts of its product in third world countries. Data shows that this off shoring has lead to it being able to compete with its Asian counterparts like Haier, LG and Samsung. (Vestring Till et al, 2005) Source: Bain & Company, 2005. Reasons There are several reasons attributing to this shift of both the service sector and the manufacturing factories to third world countries. Apart from cheap labour that is available, people in these countries have become a highly educated workforce in terms of manufacturing, R&D and engineering. Countries like India and China have succeeded in providing cheap labour while at the same time maintaining quality. Data shows that 77 global companies have set shop in India. (Vestring Till et al, 2005) Cost of manufacturing in countries like Taiwan and Singapore is one fourth of the cost of manufacturing the same component in countries like Germany. Other reasons why some of these third world countries attract off shoring of factories is that it enables these MNC’s to expand market base. Having a manufacturing hub in Asia or Latin America helps them to cut transportation costs and engage in expanding business operations in these countries. Emerson for example has put up shop in Asia and Mexico with its engineering and manufacturing being done at China, India and Philippines. Source: Bain & Company, 2005 Another major factor is the wide disparity in wages paid in the West and those in third world countries. A job that would require 20-30 dollars/ hour to be paid in the West could be completed in about 1 dollar/hour in China. (Vestring Till et al, 2005) Human right laws and adherence to such practices are also questionable in these countries. Severe lack of job opportunities, inflation and rising poverty indexes make employees work under harsh conditions without questioning authority. These have prompted civil society to question whether this kind of manipulation and exploitation of the third world is fair or whether companies are justified in doing so to keep their business alive and sustainable. Working conditions and payments The working conditions, access to basic amenities for the employed, minimum wages and questionable labour laws regarding work schedule means the people are forced to work under demanding conditions. A case study of the garment industry from around the world is carried out to ascertain the working conditions of those employed in this industry. The industrial term for such factories are ‘sweatshops’ which employ workers at low wages and force them to work in unhygienic conditions for a long period of time. (VIDEA, 2000) It is said that the garment industry in Central America employs 80% women between the age group of 14-26. At Doall, a Korean company operating in El Salvador that makes the famous LizWear and Liz Claiborne fashions; women are made to work from 6.50 am to 10.30 pm with two half hour breaks, one for lunch and the other for dinner. In the rush hour months they have to work for 7 days week clocking roughly 90 hours. Source: Sweatshop at El-Salvador, VIDEA, 2000 To prevent them from sleeping, the company also encourages them to take a ‘No Doze’ pill which is a highly unethical practice. For the first eight hours these workers are paid 60 cents an hour and 1.20 dollars per hour as overtime. (VIDEA), 2000) To sum up a worker would be paid 8.40 dollars for an arduous 11 hour shift which is considered far below the minimum wage requirement. The Liz Claiborne collection is however marketed as very modern, fashionable and sophisticated dress around the world. However if indications are to show the working conditions at the Doall factory in El Salvador is anything but sophisticated. Apart from low wages, the working conditions are pathetic. Air that is full of dust and lint cause breathing problems, skin rashes and other kind of allergies. Bathroom breaks are limited and workers are obligated to work overtime. Failure to adhere to these norms results in suspension or withholding of ‘attendance’ bonuses. Apart from these excesses, new workers are forced to take blood and pregnancy tests to prevent employing pregnant women. Women in the ironing and cleaning sections are forced to stand all day causing inflammation in the feet and working ambience is especially unpleasant with supervisors yelling at them for not being able to meet targets. Employers know that any kind of trade unionism with the nature of work involved would cause severe problems for the company. Hence any kind of activity to that effect either by way of organization or by distributing trade union literature is considered subversive. Studies carried out by National Interfaith Committee for Worker Justice Workers in factories of Lavapant, Vaqueros and Cantabria indicate that workers were not paid overtime even though they had worked over 60 hours. (VIDEA, 2000) This is in violation to the Mexican labour law which clearly states that maximum eight hours during the day, seven hours during night and that the first nine hours of overtime are to be paid at double the standard rates. Reports also show that child labour with pathetic wages was being employed in these factories. Statically tabulating the wages, it showed that while a worker in the third world country was paid 60 cents an hour, the same work fetched a person in Canada 9.77 dollars an hour and 10.06 dollars an hour for someone employed in the US. For a Claiborne jacket that was sold around the world at 178 dollars, a worker in the Doall factory at El Salvador was paid 74 cents for the stitching the same. (VIDEA, 2000) The ethics of such practices The ethics of companies off shoring factories to third world countries and managing their business by paying meagre salaries and violating several labour laws regarding minimum wages and working hours are being debated constantly. It is true that to an extent the developed countries do not promote the growth of indigenous industries as it would severely impact their business. Import duties in rich countries on a variety of goods are high which discourages third world countries in developing their own industry. (Birdsall Nancy, Rodrik Dani and Subramanian, 2005) Some multinational companies on the other hand, through questionable deals are able to start shop in these economies and employ cheap labour while at the same time market the finished product to the outside world at exorbitant prices. It was quoted that the money paid to Michael Jordan for promoting its products was more than the total salaries paid to 30,000 Indonesian workers who had toiled to stitch the sport shoes of this global brand. (Meyers Chris, 2004) Apart from meagre salaries the other accusation that has been made against these companies is that expansion of their factories has been made with scant respect to environment. Green house emission gas, water pollution and decreasing agricultural productivity in these host nations are some of the other issues that developing countries need to focus on. The other side of the argument that is made by these multinationals is that in the present context access to cheap labour is the only way forward for sustainability. They argue that the wages paid in these third world companies must not be compared with the wages paid in US, UK or Germany because of their higher standards of living. (Starak Yaro, 2010) The money paid in these poorer countries is well above the average salary being paid in the native country. Higher wages would mean lesser number of people employed and fewer opportunities for companies to expand their business. The argument made is also that none of the people have been forcibly employed and the only reason why they work there is because of the lack of job opportunities elsewhere. They point out the economies of South Korea and Taiwan that have benefited from sweatshop labour. Other examples to prove that such employment have benefited countries are Philippines and Zimbabwe. Manila in Philippines was once considered as the garbage dump of the world and lot of people were employed in waste scavenging and recycling scrap parts. (Krugman, March 1997) The growth story of Philippines is remarkable since such off shoring of such jobs have boosted their economy making Philippines one of the principal providers of labour in the world. Zimbabwe which was also relegated to the bottom has witnessed a boost in economy. Tie ups with the UK vegetable market, employing cheap labour that uses handpicking fresh vegetables, transporting these using old Boeing aircrafts from Harare airport and imposing less duties on entry to UK have meant a win-win situation for both Zimbabwe and UK. (Krugman, March 1997) Conclusion Several multinational companies over the last decade have relocated their factories and businesses to third world countries. This to an extent has managed to open up the economy of these countries by generating employment and also creating foreign exchange. In the face of stiff competition from emerging economies like China the concern of the business houses to look for cheaper avenues of manufacturing is true and needs to be considered. There are several examples of factories in third world countries running as per the stated labour laws of the particular nation but the number of companies doing it otherwise far exceeds those doing it ethically. It is therefore imperative that a fine balance needs to be struck between these extremes since it ultimately boils down to the question of human dignity, basic rights of fair wages, ethical business practices and whether you as a company or a consumer would want to be associated with a product that has been manufactured at the cost of another’s misery. References 1. Vestring Till, Rouse Ted, Reinert Uwe & Varma Suvir, 2005, Making the move to low-cost countries, Bain & Company, p.p 1-12 2. Birdsall Nancy, Rodrik Dani and Subramanian, August 2005, How to help poor countries, Foreign Affairs Volume 84 No4, p.p. 136-152. 3. Krugman, March 1997, In praise of cheap labour: bad Jobs at bad wages are better than no jobs at all, Slate, p.p. 80-84. 4. Meyers Chris, 2004, Wrongful beneficence: exploitation and third world sweatshops, Journal of Social Philosophy Vol 35, No 3, p.p. 319-333. 5. Victoria International Development Education Association (VIDEA), 2000, Sweatshops: clothes-the real cost of the clothes you buy, Global Citizens for a Global Era Vol 1,Issue 1, p.p. 1-10. 6. Starak Yaro, May 2010, Is Outsourcing Exploitation, Retrieved 12nd November, 2012 from www.entrepreneurs-journey.com/.../is-outsourcing-exploitation Read More