Thursday, January 13, 2011

The trade-off: drop 1 American from the middle class, add 4 elsewhere

Keeping an eye on the post-Great-Recession economy is always interesting. The Atlantic Magazine has a long article this month offering a great deal of information about how those in power (not government folks - they don't have any real power over the economy) view how things are going to change for us:
The good news—and the bad news—for America is that the nation’s own super-elite is rapidly adjusting to this more global perspective. The U.S.-based CEO of one of the world’s largest hedge funds told me that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing-out of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade,” the CEO recalled.
I recommend this article, but it is quite imposing in its length as will be this post.

Anyway, how this change is slowly but incrementally progressing can be illustrated by an example I read about today.

I was perusing my news email and noticed this article:
It makes sense that an expert in electrical technology is getting into what could be a huge burgeoning market: the power infrastructure for cloud and mobile computing applications. General Electric plans to pay approximately $520 million for Lineage Power, of Plano, Texas, which provides DC power conversion technology.

As rationale for the deal, GE cites the potential $20 billion market for power conversion infrastructure, which is being accelerated by cloud computing services, mobile Internet access, and the spike in video and data applications.
Being a GE shareholder, I had to followup on this story. It is, of course, a "cleaned up for American general consumption" version of the news release. What we have here is the typical American-based mega-international-corporation spending a tiny portion of its huge cash reserves, cash partly protected by a recent government bailout, to make more cash with limited potential benefits the American middle-class workforce (if any at all), as the news release explains (emphasis added):
Lineage Power had revenues of approximately $450 million in 2010. The transaction is valued at approximately $520 million or eight times enterprise value on 2011 EBITDA basis. The deal is expected to close in the first quarter of 2011, subject to customary closing conditions, including receipt of regulatory approval. Lineage Power is headquartered in Plano, Texas, and has nearly 2,300 employees, with manufacturing operations in China, Mexico and India.
So we know that company has no employees building anything in the United States. Not that the company doesn't have employees in the U.S. They do have R&D, customer support, and administrative employees in Texas. In fact, at the beginning of The Great Recession the Dallas Business Journal reported:
Lineage Power has laid off 166 employees, according to a filing with the state's Texas Workforce Commission.

...The Mesquite facility is the headquarters for the company, which has 2,400 employees worldwide. It's also Lineage's primary research and development center. The layoff leaves it with 325 employees in Mesquite.

...The employees -- which included electrical and mechanical engineers, program and project management and materials handling people -- were laid off Jan. 15. The Workforce Commission's rapid-response team is assisting workers in finding other jobs, Stalnaker said.
When you go to the Lineage Power web site you learn that GE actually just acquired additional federal grant monies:
Lineage Power is excited to have been named the recipient of a U.S. Department of Energy (DOE) $2.4 million research and development grant to develop technologies that minimize the power loss and heat generation that occurs as electricity moves through the ever-growing wired, wireless, and broadband service provider infrastructures.
In an overall "FAQ Sheet" on the acquisition, GE offered the following corporate-speak assurances to Lineage employees:
12. Q: What changes should be expected by employees?

A: Prior to closing, the approximately 2,300 employees of Lineage Power should expect no changes as we will continue to operate in a business as usual manner between announcement and close of the transaction. Lineage Power employees are expected to remain focused on delivering the industry’s best customer experience, built on a foundation of great products, reliable service, and world-class operations. There is nothing more important than our customers.

GE and Lineage Power share a culture of energy technology innovation. GE values the employees that will be joining our team as part of this acquisition. Employee expertise and industry experience are important factors in GE’s decision to acquire Lineage Power. There are no plans at this time to alter the current direction of business operations and it is much too early to speculate on any functional changes.

GE does not anticipate closing any Lineage Power facilities. The global GE brand, supply chain scale and distribution network combined with growing market demand for power conversion products is anticipated to increase opportunities in the coming years. At closing, employees will learn more about GE benefits offerings.

Lineage Power employees have built an innovative and customer-centric company with a foundation of technology leadership and strong, long-term relationships with customers. GE will be working closely with Lineage Power’s management team to design an integration strategy that will build upon both companies’ existing expertise. We will communicate as openly and as frequently as possible as new information becomes available after the close of the transaction.
GE, of course, has it's own approach to R&D as indicated on its web site:

It's easy to project how the Lineage folks will be affected in the long term by this acquisition.

GE Energy already has a large field services operation in Houston where right now they're recruiting for a Engineering Services Manager - North America who will probably help "integrate" Lineage Power field support folks who don't mind moving from the Dallas-Ft. Worth area to Houston. Of course, selling their homes might be a bit of a problem, as explained in the Dallas Morning News last Friday:
Home sales in the Dallas-Fort Worth area have continued to slide. And prices are still drifting lower, albeit only slightly.

...Through the first 11 months of 2010, sales of single-family homes through the Realtors' Multiple Listing Service were down 7 percent from the same period of 2009.
Adding to this bad news, Tuesday's paper offered in this article "the percentage of Dallas-area homeowners facing foreclosure has inched higher after months of decline" and in this article we learn:
CoreLogic Inc. said Tuesday that Dallas-area prices fell by 3.9 percent in November compared with November 2009.

Even if you take out distressed property sales including foreclosures, CoreLogic estimates Dallas-area home prices were 1.4 percent lower in November than a year earlier.

Prices were down 3.3 percent in the Fort Worth area.
If they desire to remain with GE and keep their homes in the immediate Plano area, Lineage Power R&D personnel might be able to find positions as openings occur in the GE Health technical operation there.

This is an example of how the American post-Great-Recession economy has transitioned into a highly profitable corporate economy offering no real "growth sharing" to the American middle class. It involves one of those legendary American small businesses that created jobs.

How does one respond to the statement "if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade."

One might respond by saying why not lift four people in China and India out of poverty and into the middle class and, instead of buying a new yacht this year, in some imaginative, productive way, prevent the one American from dropping out of the middle class.

Of course, to truly understand that statement we need to understand what "middle class" as a "lifestyle" means in India, China, and Mexico compared to what it means in the United States.

The World Bank's definition of middle class households are those with annual incomes ranging from $4500 to $22,000.

Here at the beginning of our post-Great-Recession experience, those are the new numbers that will define achieving middle class in the new 21st-Century international economy as understood by those holding economic power around the world.

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