Cheap Labor doesn't Mean Cheaper Stuff

The CEOs of most major US corporations are usually paid with a base wage and stock options as "incentive pay". Then after their stock options are exercised and realized, they pay a 23.8% capital gains tax (including the new surtax for ObamaCare) --- as opposed to paying the top marginal rate of 39.6% for federal income tax on their earnings over $450,000 (if they're married, $400,000 if they're single)

Since 2003 through 2012, the capital gains tax rate was only 15%. That's why Warren Buffett has said he pays a lower tax rate than his secretary, and has admitted for yet a second time in 2011--- that there is a class war, and that his side is winning. (The first time he said this was in 2006).

But their side is still winning, and bigger than ever. For example: The New York Times reported that last year Lawrence Ellison, the CEO of Oracle, received $90.7 million in stock options (or 94 percent of his nearly $96.2 million in total pay.) So why are so many American CEOs paying their employees so little? It can't be because they have to be "globally competitive" --- because, on average, American CEOs are the highest paid in the world.

And it can't be because they're giving their customers such a good deal on the price of their products either. The ridiculously low wages being paid by American companies to factory workers in the emerging markets of Asia don't necessarily equate into cheaper products for their consumers in the U.S., but only larger profit margins and excessively high annual salaries for their company executives.

For example, cheap factory labor in the garment industry doesn't mean cheap clothes --- but the availability of low-cost workers in "emerging markets" has given low-wage countries like Bangladesh an annual $20 billion garment industry.

Mass-market clothing labels such as H&M, Gap, GPS, Wal-Mart, Zara and others --- as well as designer brands including Giorgio Armani, Ralph Lauren, Michael Kors and Hugo Boss --- have outsourced manufacturing to Bangladesh. But the array of prices for clothing made in Bangladesh exposes how far-removed a garment's retail price is from its actual production costs --- and how small a sliver goes to the factory that actually makes it.

Fashion's most basic item, the T-shirt, highlights the high-low incongruity. At shops in London, a Bangladesh-made T-shirt from designer-denim brand G-Star Raw has a price tag of $91.25 --- which is 15 times what Wal-Mart's Asda chain charges for one of its basic men's white T-shirts sold under the George label. That's odd, considering that the mass-market and designer labels often use the same factories.

Ralston Fernandez, senior vice-president for operations at ZXY Apparel Buying Solutions, a Bangladesh buying house that places orders for retailers at local factories, says "Brands like Tommy Hilfiger, Calvin Klein or Giorgio Armani have a price point that is higher because the brand has 'a reputation and that makes a difference' ".

Though there are small differences in what goes into a T-shirt, the biggest determinant of its price is its brand name --- not the cost of cotton or labor in its production. Retail prices include other costs too, such as advertising, rent on the boutique and salaries for the salespeople. But with a T-shirt, at least half of the production cost comes from the raw material.

Bakhtiar Uddin Ahmed, the general manager at Fakir Apparels (a T-shirt factory with clients such as H&M, Primark, Puma and G-Star Raw) says Fakir Apparels buys a kilo of Bangladesh cotton for $3.80, enough for four T-shirts. Some high-end brands opt for long-fibered Pima cotton, which is grown in the U.S., because it can survive more washings. A kilo of Pima costs about $5.50 (enough for four shirts). Adding in polyester or viscose can also help lower the cost, yet some of the cheapest T-shirts made in Bangladesh are 100% cotton.

After the cost of cotton comes the cost of labor. The minimum wage in Bangladesh is currently $38 a month (a quarter of China's). Assuming a 40-hour work week, that would be $0.22 an hour. Doubling the minimum wage would add about 10 to 12 cents to the cost of making a basic T-shirt, according to Abby Jamal, managing director of ZXY Apparel.

Quality differences are also seen in the printing processes. A gray Primark T-shirt with a black Iron Man design (described as "a very cheap rubber print") could cost 10 to 12 cents apiece to add. It's estimated that the Primark shirt cost $1.60 to produce and retails for $9.15. The Hilfiger shirt, $5 to produce and retails for $39.99 --- and the G-Star Raw pocket tee: $6 to make, but sells for $93.25. Now THAT is called a profit!

G-Star Raw - £60 ($93.25)

Phillips-Van Heusen Corp (PVH) is an American apparel company, and the world's largest shirt company. It owns brands such as Tommy Hilfiger, Calvin Klein, Van Heusen, Izod, Arrow, G. H. Bass --- and licenses brands such as Geoffrey Beene, BCBG Max Azria, Chaps, Sean John, Kenneth Cole New York, JOE Joseph Abboud and MICHAEL Michael Kors. Fred Gehring, as the CEO who oversees the Tommy Hilfiger brand, earns $15.3 million a year. It's estimated that the Hilfiger t-shirt only costs $5 to produce, paying at the most, a sewing machine operator in Bangladesh 57¢ an hour (assuming a 5 day work-week at 8 hours a day) --- but sells the t-shirt for $39.99.

And it isn't just T-shirts that are made in Bangladesh. Designer brands such as Ralph Lauren manufactures a variety of clothes in this very low-wage country, including polo shirts, lamb's wool sweaters, a $35 pair of neon skinny jeans for girls and a $110 quilted child's jacket.

Factory owners in Bangladesh say their profit margins tend to be the same, regardless of the customer. Mr. Ahmed says, "Customers are always pushing down costs" --- keeping investment to a minimal in the factories themselves, rendering them unsafe for the workers.

A top sewing machine operator in Bangladesh may get $100 a month (57¢ an hour, assuming a 5 day work-week at 8 hours a day), not counting overtime, while a worker one grade below may earn around $80 (46¢ an hour). Their monthly wages are about enough to buy one of the high-end designer T-shirts.

Two years ago Michele Chandler at the Stanford Graduate School of Business wrote an article about T-shirt manufacturing in the West African nation of Liberia: "What could possibly be so hard, Chid Liberty wondered, about going back to the birthplace he barely knew - the West African nation of Liberia - and opening a garment factory? All it would take was purchasing sewing machines, hiring local women as tailors, and putting them all in a room so the workers could start turning out T-shirts to be sold in the United States."

Liberty' factory opened in Liberia in 2010 and now employs 60 workers, but was in the process of ramping up to 500 workers. Starting early in 2012, the company's T-shirts, handbags, and pants were to be sold online and at U.S. retailers. The firm had recently acquired a second factory in Ghana, which aims to employ several thousand workers in just a few years.

That's just for T-shirt shirts. Now think about Apple's iPhones or Nike's running shoes. Americans are paying for a brand name, not just for the actual cost of research, production and shipping --- with a "modest profit" margin being added to fairly compensate the "job creators" (CEOs) millions of dollars every year for all their "innovative" efforts.

In other words, the argument about using cheap foreign labor to give consumers in the U.S. lower prices in big box stores like Wal-Mart (or top shelf items such as iPhones) isn't necessarily true. If Walmart has "cheap prices", and Chrisy Walton can earn $1 million a day with Walmart dividends, then their stuff could be a whole lot cheaper than it is. Their idea isn't to be "globally completive" at all, but only to further inflate executive salaries --- and to increase stock prices for large institutional shareholders for private equity firms such as Vangaurd and Bain Capital.

Competition from low-wage countries, coupled with fallout from the 2007-'09 financial crisis, has put American wages under such unprecedented strain that they have shifted into reverse --- not merely stagnating, but falling. And this isn't happening just in the U.S. --- In its latest Global Wage Report, the ILO warned that wage competition between nations could trigger a "race to the bottom," with nations desperate to undercut each other with cheap labor only to end up shrinking their own economies.

Eight years after the Powell Memo may very well have been when the middle-class in America had first began it's long decent into oblivion. Manufacturing in the U.S. peaked in 1979 when we had over 19.6 million good-paying manufacturing jobs --- when the total number of union members had also peaked at over 22 million.

Commentary: And speaking of Africa...President Obama unveiled a $7 billion plan to upgrade African power networks in a bid to end blackouts that deter business investment on the continent. The plan is called Power Africa. But why is the U.S. investing in foreign infrastructure when ours is in such disrepair --- and when our unemployment rate is so high? The Republicans complain about government spending and the Democrats complain about a lack of domestic (and well-paying ) jobs. So why is the U.S. investing in another "emerging market"? Could it be because American corporations can enable the people in Africa with low-paying jobs, to ultimately make them consumers, to sell them their Chinese-manufactured electrically powered products to them? Do the people of Africa currently have an over-abundance of refrigerators, computers and TVs that need electric power? How will these people pay their monthly (and expensive) electric bills with low-wage jobs? Hey, I'm just askin".

* Aside from the hyperlinks, editing and the additional commentary, the original (and complete) version of the article that's just related to the aspects of Bangladesh factories first appeared at The Wall Street Journal, and this post was partially excerpted from the online version here