IBM and Dow Offer a Glimpse of the Future

Not more than a month ago, IBM sold its low-end server business to the Chinese firm, Lenovo, a move reminiscent of when it sold its personal computer business to the same firm back in 2004.  Dow Chemical’s December decision to put its commodity  division up for sale is of a piece with both IBM moves. Though each company would appear to be obeying its own particular profit calculations, both firms, and others like them, are responding to much larger forces, a global division of production that is well described in the new book, Thirty Tomorrows. All these moves are due in no small part to the aging demographics in the United States, Japan, and Europe.

The increasing average age of populations in these developed countries is forcing them to relinquish elements of their production to the emerging economies and refocus their domestic efforts. Plummeting  birth rates in these countries over the past thirty-plus years have slowed the flow of youthful entrants into its workforce even as increasing life expectancies have enlarged the population of dependent retirees, putting them in a position where they lack the relative labor power to pursue some lines of business. The situation will become more acute over time, so that by 2030 the available people of working age will fall from 5.2 for each dependent retiree today to barely over 3.0. Even if the country fails to solve its present unemployment problem, this demographic reality implies a scarcity of skilled labor relative to the economy’s needs.  Europe and Japan face even more intense situations.

To relieve the implicit economic and financials strains, the United States and these other developed economies will need to supplement and substitute for this shortage of workers. One key way they can do that is with increased in trade and globalization. By importing simpler, labor-intensive products from the emerging economies, this country, and others in the same predicament, can tap large, youthful, and eager workforces abroad, even as those workers stay at home. To have something with which to trade for these imports, the developed economies will have to focus increasingly on products that do not require a great deal of labor input, high-value items that rely more in their production on equipment and technology than on labor.

Such a division of production will create a kind of global symbiosis in which the emerging markets, with plentiful, cheap, but otherwise less-well-trained workers, produce simpler, labor-intensive products, such as PC assemblies and textiles, in which they have a comparative advantage, while the developed economies, with limited amounts of otherwise comparatively well-trained workers and a relative abundance of equipment and technology, produce those sophisticated, high-value products in which they have a comparative advantage.

IBM, Dow, and other firms across the globe are making the necessary adjustments and are doing so without necessarily knowing the broad cause of the need. The 2004 sale to Lenovo even spoke to the division explicitly. In the press release announcing that transaction, IBM mentioned how PC manufacturing had become commoditized and no longer required the high skill level of its workforce. Similar allusions have accompanied other sales and placements by Japanese machine-tool makers, German producers of heavy equipment, and American firms such as General Electric. The pace will only pick up, as the demographic pressure intensifies. To support it, the United States, Japan, and Europe will have to focus more than ever on innovation, education, and worker training.

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