Capitalism, Unions, and Offshoring (Part V): Offshoring

In the last four installments of this series, the Widget Worker’s Union (WWU) brought Egalitarius to its knees with a strike that ultimately forced the company to declare bankruptcy. Before the WWU strike, Egalitarius’ management instituted several aggressive cost-cutting measures to offset the cost of more expensive unionized labor. This scenario starts at this point, long before the strike begins.

This time the focus is on Meritocratus.

While Egalitarius’ management balanced shareholder interests with society’s well-being, Meritocratus ruthlessly pursued maximizing its bottom line.

Meritocratus’ management was looking for ways to improve the company’s profitability. As such, the company discovered it could produce the same quality product overseas at one-third the labor cost. Furthermore, one particular country, Freedonia, offered American companies a tax holiday if they built production facilities there. Meritocraticus’ management calculated that by relocating production jobs to Freedonia, it could lower the company’s effective tax rate from 40% to 15%.

When Meritocratus’ management ran the numbers, it learned that these two drivers — labor cost improvement and tax rate reduction — could quintuple the company’s profit projections for 2012.

The decision was a no-brainer.

Management announced the move the next day.

And the stock market loved it, rewarding the company with a premium P/E multiple of 12.0x versus the 10.0x earnings multiple at which the company traded the day before.

The layoffs and facility closures began shortly thereafter as the company left the men and women behind who built the company from nothing.

Below is a spreadsheet showing a comparison of both companies after unionization of Egalitarius’ workforce, Egalitarius’ aggressive cost-cutting measures, and the offshoring of Meritocratus’ workforce.

Source: ©2011 Reflections of a Rational Republican

In the next installment of this series, we examine how both companies weather a major recession.

Advertisements

About Sean Patrick Hazlett

Conservative clean energy crusader, national security hawk, financial analyst, engineer, and former military officer.
This entry was posted in Business, Finance and Economics, Investing, Mathematics, Policy, Politics, Predictions, Taxes, Unions and tagged , , , , , . Bookmark the permalink.

6 Responses to Capitalism, Unions, and Offshoring (Part V): Offshoring

  1. Pingback: Capitalism, Unions, and Offshoring (Part IV): Strike! | Reflections of a Rational Republican

  2. Pingback: Losing Jobs Overseas? Don’t Blame Capitalism, Blame Evolution | The Rantings of Vern Rigg Kaine

  3. Pingback: Capitalism, Unions, and Offshoring (Part VII): Lessons Learned | Reflections of a Rational Republican

  4. Randy R Cox says:

    Your article is compelling. You can see that the unions were doing their part, but their company still failed. This is more than a union/non-union issue. Moving a business to another country would not be viable without the huge American military keeping the landing countries for our business stable enough to protect the American capital that moves there. The huge military expenditures, the inefficient health care system, the workers comp that pits employee against employer, the destructive intellectual property rights that allows the huge companies to violate patents that small companies can not violate….all play a part in our weakness. It is time to put the free back into the market. Unions should be free to compete with non-unions, but our business base must make more sense.

  5. Pingback: Private Equity: A Force for Good, or Evil? | Reflections of a Rational Republican

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s