Hearing of the House Small Business Committee-Can U.S. Companies Compete Globally Using American Workers?

Federal News Service January 21, 2004 Wednesday
Copyright 2004 Federal News Service, Inc.
Federal News Service

January 21, 2004 Wednesday

HEADLINE: HEARING OF THE HOUSE SMALL BUSINESS COMMITTEE

SUBJECT: CAN U.S. COMPANIES COMPETE GLOBALLY USING AMERICAN WORKERS?

CHAIRED BY: REPRESENTATIVE DONALD MANZULLO (R-IL)

LOCATION: 2360 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES: PANEL I:

ALLAN KENNEDY, WRITER/RESEARCHER/MANAGEMENT CONSULTANT, BOSTON, MASSACHUSETTS; CONSTANCE BAGLEY, ASSOCIATE PROFESSOR OF BUSINESS ADMINISTRATION, HARVARD UNIVERSITY;
LAURIE BASSI, PH.D., CEO AND MANAGING PARTNER, MCBASSI & CO.;

PANEL II:

ANTHONY R. WILKINSON, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF GOVERNMENT GUARANTEED LENDERS, INC.

BODY:

REP. DONALD MANZULLO (R-IL): The committee meeting will be called to order. While we have good news about an improved economy, we continue to have not so good news about Americans losing jobs to foreign competition. As a capitalist and as an ardent free trader, I can say with conviction that competition is good. It makes us a better nation while improving the economies of those nations against which we are competing.

There is a false argument, however, that anyone who dares question what is happening with off-shoring or the decimation of domestic manufacturing is somehow protectionist, as if there are no shades of gray between the two extremes of true protectionism and no- holds-barred free trade. It's my contention that one of the key issues hidden in this debate is the tremendous pressure Wall Street puts on corporate America. I think if we peel back the onion, we'll find that companies are unduly forced into doing anything, and I mean anything, to drive up stock values in order to make their quarterly estimates.

The decision to manage a company by managing stock price has monstrous effects on everyday America. For example, companies are shutting down entire domestic supply chains for the lure of cheaper labor overseas. I'm not against international trade, but neither do I support a wholesale abandonment of small businesses by big multinationals. By looking long term as opposed to short term I believe companies can put America's jobs first and still win in the global marketplace.

Legislation is surely not the answer. There has to be a change in corporate culture and thus this hearing this morning. I realize we're dealing with highly competitive nations like India and China. The problem is we're giving away the store without them giving up much on their end. India has one of the worst trading records with the United States. China simply refuses to comply with WTO obligations. But we still keep the door open.

What's interesting is that the semiconductor industry is complaining that China is forcing them to give up technology secrets if they want to do business in China. What they're afraid of and what they know to be true is that the Chinese companies will steal their intellectual property and the Chinese government will do nothing about it. We're not talking about manufacturing employment being in decline because of better machinery. That is the classical definition of productivity. In fact, according to sources in the tooling industry, only about one-quarter of the productivity increases can be attributed to new machinery. The rest is off-shoring and the incorporating of cheap, foreign components with American components to come up with higher productivity.

The argument is that companies can't be profitable using Americans. Why are companies like IBM still sending jobs overseas when they have had strong profits? In Monday's issue of the Wall Street Journal, a copy of which is on the table, it's reported IBM plans to ship thousands of high paid programming jobs to China, India and Brazil. They even tell their managers not to be, quote, "transparent regarding the purpose or intent," end of quote, of the off-shoring decision. It cautions that the quote, "terms on-shore and off-shore," should never be used. It is a startling and revealing article.

That's not the worst of it. The poke in the eye is that IBM will have some of the foreign programmers come to the U.S. for on-the-job training by the very people whose jobs they will take over. IBM chief financial officer said, quote, "Competitive price pressures in computer services are holding down profitability," end of quote. Less than a week ago, IBM announced a 41 percent increase in fourth quarter earnings per share over the same period in 2002. They had a 42 percent increase in income compared to the same period a year ago.

What about the CEO's exuberance in stating, quote, "This was a very good quarter for IBM and an encouraging end to a year in which we steadily gained momentum and posted record revenues. Our pre-tax earnings per share were up double digits for 2003. We ended the year with more than $7.6 billion in cash," end of quote. This is what IBM's CEO meant when he said price pressures are holding down profitability? Can't say he's blowing smoke. That sure is an interesting definition of profitability.

What's remarkable is that the National Science Board and the High Tech CEO Policy Group recently warned that the economic vitality of America is threatened by a lack of U.S. graduates in science and engineering. My question is how can you get students excited about science and engineering when they see those same jobs being moved overseas for a fraction of the price. The National Science Board further concluded that U.S. strength in education and innovation is threatened by two major trends.

First, global competition for science and engineering talent is intensifying. Second, the number of U.S. born graduates in these fields is likely to drop. I must add a third: the number of foreign born graduates from U.S. institutions going back home has increased. So what does all this have to do with corporate earnings management? I think they're all connected to decisions made in the boardroom to find that extra penny per share at all and any cost.

It's my hope our distinguished panel of experts can shed some light and our companies can compete in the global market using American workers. For the purpose of the hearing, we've set it forth in two distinct panels. The first panel is dealing with essentially employees as human capital. It will be a very exciting conversation taking place.

The second panel I've split it off. The minority had requested a separate hearing on 7(a) and the second panel speaker is an expert on the 7(a) program. It's totally unrelated to this and in fairness to the two separate topics I've decided as chair to split it into two separate panels. And now I recognize our distinguished ranking minority leader of the Small Business Committee, Congresswoman Velazquez.

REP. NYDIA M. VELAZQUEZ (D-NY): Thank you, Mr. Chairman. Today the drive on Wall Street for short term profits has damaged our nation's consumers, workers and local communities.

Unfortunately, such eagerness for rapidly rising profits has made headlines around the world as company after company has adopted shifty accounting techniques to appear more profitable than they actually are.

From Enron to Worldcom, the desire to satisfy shareholders has pushed these companies over the edge. These types of scandals are not directly related to small businesses since they have occurred in large publicly traded companies, calling into question the relevance of this issue for the Small Business Committee. Unfortunately, these types of governance issues are not solely limited to the private sector.

Many times, decisions that are made at the federal level serve to create the very complications that we try to stop. An example of this is the continuing crisis in the Small Business Administration's 7(a) loan program, which goes without (shift ?) and thorough congressional scrutiny. This issue surfaced late last month when the SBA announced that it will impose another cap on the 7(a) lending program. But this looming crisis was actually foreshadowed much earlier in the year during a committee hearing when both Democratic members and industry leaders indicated that the SBA's budget will clearly fall short in meeting the small business demand for 7(a) loans.

During that testimony and throughout 2003, the Bush administration maintained the program had enough funds. Then at the end of this year and, to no surprise of some members on that committee, the Bush administration announced the program ran out of money. The root of the current crisis is the administration's budget request. The funding request for this important program has steadily declined from President Clinton's budget request of $11.5 billion in 2001 to the Bush administration's most recent request of $9.3 billion in 2004. This decrease is inconsistent with the demand for 7(a) loans which has increased to more than $12 billion in 2004.

As a result of this inadequate budget request, a stage was set for the program's fallout. The first sign of this collapse was the administration's December 23rd announcement of a $750,000 cap on 7(a) loan size. This announcement caused a completely foreseeable run on the bank as lenders rushed their application to the SBA for processing and approval. As obvious as this was, the administration was caught completely off-guard.

Instead of managing its operation to account for this heightened demand the administration made the extreme decision on January 6 to shut down the 7(a) loan program and return all pending applications to our nation's small businesses. The administration's current solution is no solution at all. The SBA has continued its $750,000 cap on loans, banned the use of 7(a) loans in larger financing packages, and has not addressed the inequities suffered by those small businesses that had their obligation outright cancelled.

And to top it all off, it is likely the program will shut down again before the end of January. Does this sound like a solution to you? It doesn't to me or my Democratic colleagues on the committee. Small businesses in the United States drive job creation and contribute to positive economic growth. This is especially important now. As recent reports confirm, the economy is failing to add the number of jobs necessary to put America back to work. In fact, in December just created 1,000 new jobs. A real commitment from this administration to the small business sector is exactly what our nation needs right now. Without this, the economy will be unable to make a full recovery because small businesses will be left out in the cold. Thank you, Mr. Chairman.

REP. MANZULLO: Thank you very much.

BREAK IN TRANSCRIPT

REP. MANZULLO: Congresswoman Napolitano.

REP. GRACE NAPOLITANO (D-CA): Thank you, Mr. Chairman and I apologize for being late. I've had some questions that have been answered with some of the gentlemen, my colleagues, that have asked it. The comment I would make is that we seem to forget that we continually lose jobs to foreign competition and while we feel that they can do a better job, I don't believe. They're learning how but it's such a big world, especially in China that they're going to learn, like we did, that the minute you start training good employees, somebody else is going to take them away from you and it's such a big country that they're going to have a long time before they begin to understand how it feels like we have in this country.

And as far as my colleague's comment in regard to cutting some of the expenses, the overhead, if you will, well and good except, in this country, that is what has made the United States the world's largest economy and California specifically. It's because we do have the training levy that has paid well and spends the money. It's all relevant. You build up economy. You spend it locally and it builds it up. Thank you.

REP. MANZULLO: Question. But first of all, this testimony, it's refreshing to see people speaking about the way things should be, sometimes giving very innovative, if not radical, answers as to what should be done. But what I appreciate about what you're doing is you're raising the issues such as what Andy Grove did. You're asking the questions and making the comments about what's wrong and, Dr. Bassi, you said ultimately you have to change the corporate culture. You have to change the way people think about the definition of profit, the value of stock. Ultimately, that's, you know-perhaps may be some legal issues. For example, I've never looked upon the holding period in long term's capital gains as being part of long-term planning as opposed to three month planning now that we have-on the next quarter.

Ultimately there has to be a change in the way business does business. I mean, none of us wants to get involved, and Mr. Akin expressed it quite well, in passing more laws and more regulations that can end up doing the adverse effect. But where do you start in changing the corporate culture? This regard represents-the biggest city's at about 11 percent employment. Eleven percent. That doesn't count the four factories that have announced they're going to close because those layoffs have yet to begin. December, we lost 28,000 manufacturing jobs. And the guys back home have a name for where the machinery is going. It's called black-holing. They've looked on it and they figured out what the codes are. This machine is going to Mexico. That one is going to China. That one perhaps is going to Eastern Europe.

And the march continues and the shoe has yet to fall on the devastation and ultimate destruction of manufacturing in this country. This is the 54th hearing that we've held involving manufacturing and the way companies do business. No other committee has got involved in manufacturing in the way this committee has and manufacturing jobs are gone. They're not coming back. What do you do? How do you start? Go ahead, Dr. Bagley.

MS. BAGLEY: One question that comes to mind is a government- private enterprise organization that was set up in Silicon Valley when the valley was going through a slump in the 90s and there was something set up called Joint Venture Silicon Valley. I don't know if any of you are familiar with it but it was a voluntary association of representatives of primarily the state, government from the cities together with heads of a number of the major companies. One of the things they looked at was the question of regulatory burden on small business, on high-tech companies and tried-they were able, for example, something as straightforward as by adopting more of a uniform building code, were able to substantially reduce the expense of expanding some of the factory spaces and the like. So things that you might not read kind of first on your agenda in fact can make a very real difference when you are able to look at it from that point of view.

But really what they did is they also looked at things like infrastructure, you know, what sort of transportation system makes sense, ease of getting workers to San Jose to Silicon Valley. There's always a common goods problem whenever companies are considering whether or not to spend money on, you know, education, road and the like because it's like I pay for the road but then my competitors' workers drive on it. When you are able to get some of these cooperative organizations, I think it can help with some of those issues.

So I would suggest perhaps looking at that organization and some of the work that they did because I know, from having done some research on it, three or four years ago-I'm not sure where they are now. Maybe with tech backup, they've put themselves out of business. But I do think that a collaborative effort where you've got the best of the business and the best of the government saying how can we do this hand in hand because I don't think it's going to be fixed by the government mandating all sort of things and I don't think it's going to be any one company is going to fix either because of the fact that you've really have this common goods problem of, you know-there's going to be free riders out there.

And so disclosure helps in terms of kind of outing the free riders, the cheaters. But I think that trying to get some of the best minds around, okay, what is it that keeps us from creating the amount of value for a worker that we would like to be creating. And if it's changing the building code, let's change the building code. It doesn't mean we give up in terms of structural safety or anything else, but sometimes there are bureaucratic bumps like that in the road that no-one has really focused on and once focused on can make a difference.

MS. BASSI: I think that's a brilliant framework to think about the question that you ask. Where are the common good? Where are their issues-and that's particularly acute for small business-where are the issues that they are struggling with, that they can't solve individually but could solve collectively? And how can collective help be made to exist? Just calling these folks together is a struggle. So an appropriate role for government is to facilitate that convening.

I look at this from the perspective of investing in people. Many small businesses have a tremendously difficult time investing in their people because the people are constrained by time and space. They have to be at a certain spot. They can't go off to class. Electronic learning could help tremendously because then you can have them learning any time, any place. It's much more flexible but small business can't invest in electronic time because it's high fixed cost, low marginal cost but high fixed cost. Collectively though, they can solve those problems.

So I think looking for where collective action would really make a big difference in helping organizations get over the high fixed costs in exchange for low marginal costs, that's a structure-conceptual structure from which to view the problem. But I think you'll find some creative answers.

BREAK IN TRANSCRIPT