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Electronics Production | April 17, 2009

Will CEOs be called heroes, or were they just dead wrong?

Corporate social responsibility means different things to different interest groups. Since a corporation's ultimate responsibility is to its shareholders and not to society, if those interests collide, the corporation's management must favor profitability over any other greater good.
Those who seek to persuade managers to do the "right thing" must make the convincing profit argument first. That type of conversation is fraught with speculation and risk, and is only verified through hindsight. The trouble is, there is typically little motivation to do the analysis about decisions after the fact.

When managers of global multi-nationals decide to build manufacturing facilities in what appears to be a low labor cost region, the profit argument in the electronics industry generally is twofold: low labor costs and the ability to capture emerging marketshare for electronic products. The investment typically involves more than the corporation's own facility: education, infrastructure and supply chain come along with the territory. When times are good, and the global economy is booming, it all seems to fall into place nicely.

But are shareholders and other local stakeholders really better off with these decisions? Was Motorola really a winner in that company's gamble on China in the late 1980's? Would Motorola be trading at $4.87/share if it hadn't invested so heavily in China? A Fortune magazine article written in 1996 is an interesting history lesson. Even then many had doubts about Motorola CEO Gavin's obsession with China, and whether it would be profitable doing business there:

"Is this gamble paying off? Motorola's sales in the PRC and Hong Kong have shattered expectations, nearly doubling over two years to reach $3.2 billion in 1995--almost 12% of the corporation's worldwide revenues. The company declines to break down those figures by product line, but cellular phones account for a substantial chunk, and the potential market for these handy gadgets is enormous--three million new cellular phones a year until the end of the decade, according to a Chinese government estimate. P.Y. Lai, head of Motorola's China operations, divulges his predictions of future sales growth by pointing to--and through--the ceiling. Ah, but what about profits? Lai is vague about details, but he denounces as "totally inaccurate" a Wall Street Journal report early last year maintaining that the company loses money on every cell phone it makes and sells in China. Price competition is brutal, Lai concedes, but, he insists, "we are making good profits in China." '

And what happens when the global economy goes south and plants are closed, e.g. Intel's recent decision to shutter plants in the Philippines and Malaysia? There is a cost to the local economy, and to workers who train for jobs that then disappear. What's the long-term impact on the environment in the region, and on the stability of the government? Surely the corporate social responsibility argument includes some kind of analysis of the impact of suddenly pulling the plug on a geography.

Free-market capitalism was once thought to be the foundation of a new era of global prosperity. Now, as these forces falter, governments step in to install and enforce regulatory mechanisms to repair the damage. The question is whether they should or even can wrest control of the global economy from the multi-national corporations. Will this rightful and necessary refocus on national interests result in protectionism or a new type of capitalism?

The Founding Fathers warned against getting too involved in international expansion; the Roman Republic, they argued, was done in not by Visigoths, but by the military generals who gained too much power building the Roman Empire. After the Spanish-American war, American empire-building has been built on 'dollar diplomacy.' CEOs of multi-national corporations could be compared to Roman generals. Their excessive power may bring down the Republic as surely as did the Roman Emperors.

Will historians of the latter part of the 21st century look back at the last 40 years in electronics as the most dramatic transfer of wealth and intellectual property in the history of mankind? Will electronics industry executives of global multi-nationals be praised as heroes, or were they just dead wrong?

By Jennifer Read
Charlie Barnhart & Associates, LLC

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