by Gary North
"Outsourcing" is all the rage these days, in both senses: popular (CEOs) and fury (union members).
Outsourcing is a constant process. It is as basic to life as death is. As the clock ticks, you can hear the outsourcing process. You are its target.
Well, you were leaving anyway, right?
In the early stages of any booming market, insourcing is all the rage. Some industry gets hot. In come lots of would-be replacements, all offering to do things cheaper, faster, better.
It doesn't matter what the field is: big money attracts people who want to get in on "the gold rush." Then the gold peters out. There are a lot of miners out there, sifting pans in hand, with not much dust per dirt load.
The market for real estate brokers is now in the down side of its gold rush. Because of the monetary policies Federal Reserve System after 1995, a real estate boom took hold. Millions of buyers took advantage of low long-term interest rates to bid up the price of home ownership. Real estate brokers started doing better than people in other professions. So, at the margin, newcomers arrived, trying to get a piece of the action.
Today, the bubble has reversed in some areas, such as Boston. It is slowing down in the other boom areas.
Meanwhile, those businesses that are located in the middle of these boom regions find it increasingly expensive to recruit new employees. The local cost of living is high because of appreciated real estate.
There are places to go where you can buy the lifestyle you want at a lower price. There are even websites that let you identify such places. Just type in a zip code.
Any company CEO who isn't paying attention to such geographical options is costing investors and employees a lot of money.
Silicon Valley is the premier example. In San Jose, the median priced home is now $700,000. Asking prices are higher than sale prices, but the price is still very high. You can verify this on the following site, which reports the median price of housing in most major American cities.
With 5% down and a mortgage rate of 6.3%, a 30-year fixed-rate mortgage would require $4,000 a month. To this add home insurance, taxes, maintenance, and the PMI (under 20% down) extra payment. Face it: the buyer will be paying $60,000 a year for his nondescript 3-bedroom, 2-bath stucco house. Then taxes will rise. Then maintenance costs.
What kind of salary scale is required to hire people who need $60,000 a year just to buy a mediocre home?
The San Jose Mercury News ran a story on the job market in Silicon Valley. It's an employer's market, even for highly skilled technicians. Companies are outsourcing — hiring people outside of Silicon Valley.
Outsourcing to India is visible. Outsourcing to North Dakota isn't.
If you possess highly unique skills, you can get a job in Silicon Valley. This is always true. But your average grunt, with a Harvard MBA and a degree in engineering, is out of the running.
Jeri Ann Smith got laid off in August 2003 after 21 years at Hewlett-Packard. Even with her experience, her MBA from Harvard and an engineering degree from the University of California-Los Angeles, Smith struggled to find a job in tech. So Smith got a license to be an investment adviser and joined a firm her parents started.
"It's wonderful not to have the threat of losing your job looming over you," Smith said. "I feel I have much more energy to tackle a new career here than I would at another tech company where the management could change and I'd be left out again."
Yes, siree, Bob: just get a job from mom and dad, and job insecurity disappears . . . until mom and dad decide to retire.
Then there is the sad tale of Karl Troutman.
The former fiber-optic technician was laid off from Agilent in August 2003. Since then, Trautman, 62, has done some contracting work, filled in as a maintenance worker and tried unsuccessfully to land a job. "I keep reading about how things are looking up," Trautman said. "But it's really deceptive. It's not true."
While some valley employers are on a hiring spree, most of it is outside the region. In 2005, Intel hired 14,900 people. Apple Computer added 3,105. Google snagged 2,659. EBay tagged 3,500.
But these gains are offset by continuing cost-cutting and restructuring, as well as by valley companies hiring in other regions where the cost of living is cheaper. According to payroll statistics from the state, Silicon Valley has only added a minimal number of jobs in the past year.
The other development is that the percentage of local jobs in high technology is declining. Where is the job growth? At the lower end of the skill set.
Over the past five years, tech's share of jobs in San Mateo County has shrunk to only 26.3 percent after peaking at 31.6 percent in 2001. Other non-tech industries have been more robust, such as construction, which had a net gain of 2,200 jobs in the past year; or restaurants, which expanded by 1,500 positions; or education, which added 900 jobs.
So, here we have the general population sitting in high-priced housing. New buyers must come from within the region: sellers of homes who are moving up. But at the margin, few new buyers qualify for mortgage loans. Outsiders are locked out.
The problem is, we all grow old. Then, one by one, we move into very, very small quarters. Utility costs drop. Maintenance costs fall. Everyone will eventually move out of the homes in Silicon Valley.
Who will be moving in?
Those who got there early and bought their homes are paying enormous rents. If they sold their homes, took and money, and invested — if nothing else, by issuing a mortgage to the buyers — they would be pulling in $4,000 a month. They are not pulling in a dime. They are paying high property taxes and maintenance costs. They are maintaining their lifestyles in their ticky-tacky houses — the phrase coined by Malvina Reynolds in 1961 ("Little Boxes"), a song that came to her as she was driving from Berkeley to Palo Alto. Supposedly, it came to her in Daly City. For those of you who don't remember it, it goes like this:
Little boxes on the hillside, Little boxes made of tickytacky Little boxes on the hillside, little boxes all the same.
There's a green one and a pink one and a blue one and a yellow one.
And they're all made out of ticky tacky and they all look just the same.
And the people in the houses all went to the university, Where they were put in boxes and they came out all the same.
And there's doctors and there's lawyers, and business executives.
And they're all made out of ticky tacky and they all look just the same.
And they all play on the golf course and drink their martinis dry, And they all have pretty children and the children go to school.
And the children go to summer camp and then to the university, Where they are put in boxes and they come out all the same.
And the boys go into business and marry and raise a family.
In boxes made of ticky tacky and they all look just the same.
Now they're 40 years older. The people, I mean. And so, one by one, they move to dramatically smaller quarters.
Outsourcing isn't just going to India. It's going to heartland America, where it's humid and the breezes blow through in tall spirals at 160 miles per hour.
The most overpriced housing in the country, according to a recent study by a Ph.D. economist who lives in outrageously expensive Claremont, California, is San Mateo County, California — in between Silicon Valley and San Francisco. He says there is no sign of a housing bubble anywhere else in the 10 major urban areas he studied. (Yes, he says that.)
So, if you were planning to locate a high-tech company, where would you pick? You would look for a university that cranks out engineers and technicians, but one that is located in a low-cost area, where you can buy homes at depressed prices.
There is such an area. Let me give you a hint. It's located almost midway between North Zulch and Snook. Got it placed mentally?
It's College Station. That's in Texas. It's the home of Texas A&M.
Texas A&M cranks out lots and lots of engineers. It's a conservative university politically, probably the most conservative university faculty in the United States. There is a good old boy network in the state for A&M graduates, matched only by the old boy network of UT Austin grads. There is money in Texas.
The town is not very lively, unlike Austin, so it attracts students who are content to study, go to football games, and drink, not necessarily in that order. But the engineers are a studious bunch.
College Station is one of many similarly blessed college towns. Students attend, learn to like the region, and would be willing to stay if they could get jobs. They would be willing to work for less pay to buy lifestyle.
College Station is the obvious location for a high tech boom. I saw what would happen in Austin in 1987, when Texas real estate had crashed. I told people that if I ran a company in Silicon Valley, I would re-locate to Austin. Nearby, Round Rock became the home of Dell Computer.
There is no good reason why College Station could not become the next Austin as a high-tech center.
This would be stealth outsourcing.
OPPORTUNITIES FOR GROWTH
The technological best and brightest can live anywhere. There are jobs for them. They can buy those tick-tacky houses, though just barely. But what kind of lifestyle can a person enjoy who is forced to pay $60,000 a year for 30 years, just to live in a nondescript house?
This cannot go on, and it won't go on. The process of attrition will overwhelm any company that decides to locate in a former gold rush area whose real estate got bid up during the rush.
Teams are important in high-tech settings. A team can live anywhere. Core teams are kept close to the CEO. Other teams are not crucial geographically.
Typical is Netflix. It has 1500 employees, but only 300 of them are in Los Gatos, a Silicon Valley area. The rest are scattered across the country. The core technology team is in gold rush country. The rest of the teams aren't.
Start-up companies could open branch offices for recruiting purposes, located close to Stanford and Berkeley and the tech centers. They could advertise like this:
Algorithm specialist wanted:
Sell your home for $700,000
Buy a $350,000 mansion in College Station, Texas
Pay cash for it.
No more mortgage debt. Ever.
We'll pay you $100,000 a year.
When Google starts opening branches in places like College Station, investors will know that the company is serious about staying ahead of the pack. Local teams can be assembled far from Silicon Valley.
Programmers will opt for lifestyle, just like everyone else. If you can buy a better lifestyle for less money, pay lower taxes, and bear lower debt, why not make the move?
India is one such outsourcing center. It is not the only one.
There is no reason for any but the best and the brightest to stay on the core central team in Silicon Valley, New York City, Chicago, or Boston.
When investing, look for companies that have relocated or that are planning to. These companies are not being run for the convenience of the CEO and his wife, who paid off their mortgage fifteen years ago.
Thirty-five years ago, I was hired by an outfit in Westchester County, New York. Real estate was high. I was a low-level employee competing against New York City stock brokers for housing. The boss lived in a free home, had a free car and a free chauffeur, and never offered a raise. He passed on most of his expenses to the organization, tax free. I quit after a year and a half. I could see that he was living his life for his convenience, not with any vision of how to replace an aging staff. I knew he would run the organization into the ground. He said he would: "I will ride my bicycle until I fall off." He did.
The man who replaced me — a "kid" in his forties — later confessed to me: "If I had been sensible, I would have burned down that house." The organization drifted into obscurity. That free home seduced every subsequent CEO. They could never hire bright, energetic types who might have kept the organization growing. They would not offer wages that allowed young men a way to own their homes without massive debt. They never felt the employees' pain.
Pretty soon, there were no high-level employees.
How is your company run? For the convenience of the CEO or the employees? If it's run for the convenience of the CEO and his immediate cronies, then your future is in danger. They will suck the capital out of the company. The most important capital is brainpower.
A wise CEO looks at the company's ability to hire better talent cheaper. Today, the country's eyes are focused on India. This is an optical illusion. The significant outsourcing is domestic.
The Japanese auto producers did not build factories in Detroit. They built them in Tennessee. Detroit is going bust. Tennessee, despite tornadoes, isn't.
If you have a vision for your career that is hampered by your CEO and his wife, then you should consider outsourcing your employer.
Go to where the future is. Go to where old people are retiring and young people are moving. There is a phrase that describes such places: "Newlyweds and almost deads." Demographer Jack Lissinger has called them "penturbia."
That's where the future is.
April 17, 2006
Copyright © 2006 LewRockwell.com