eNews September 27, 2012

September 27, 2012

News Briefs

  1. Issues in Outsourcing Destinations Draw Spotlight
  2. SBA Widens Tent, Expands Size Standards in 58 Industries
  3. Shipping, Ports Dodge Another Bullet…For Now
  4. PNTR with Russia Delayed until after Election
  5. Good News, Bad News on California Municipal Bankruptcy


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Issues in Outsourcing Destinations Draw Spotlight

Outsourcing jobs to regions where labor is cheap has long been a strategy used by companies to bolster the bottom line in areas like manufacturing, credit and collections. However, rising unease among workers in emerging economies grabbed headlines this week and highlights some of the dangers of what some believe is short-term thinking when it comes to outsourcing.

Within the last week, riots erupted among workers at the massive Foxconn manufacturing operation in China. This might have slipped under the radar if not for the fact that Foxconn makes two of the world's most recognizable products: Apple's iPad and iPhone. It seems that for workers in China, as well as other hotbed outsourcing destinations like India, the wants of the formerly bargain-priced workforce such as better wages and safer, nicer working environments are increasing. Expecting workers to stay quiet in their discontent may be a pipedream for the corporations that rely upon them.

"Foxconn is far from alone," said NACM Economist Chris Kuehl, PhD. "The riots that broke out this week have many origins, and this puts the whole Chinese approach to mass production at risk. The workforce has changed. The workers know what they want now, and they are far more likely to become bored and angry. The workers see that many middle class people now exist in China, and they want their part of that." He added that workers, at least in China, seem just as concerned with issues like treatment from guards and local authorities. It's an aspect that could be the hardest thing to change, Kuehl noted.

Wage issues, specifically, are covered in the September/October edition of Business Credit in the feature story titled "Bringing It All Back Home," which looks into the outsourcing of credit functions. Therein, several sources including NACM Past National Chairman Val Venable, CCE, director of credit at Ascend Performance Materials, noted that the use of outsourcing for the collections function is not quite the cost-savings panacea some thought it would be. Venable was among several who noted that soon after operations began in places like India, where she formerly trained a team of outsourced credit professionals, the demands for higher wages and frequent turnover began to emerge with vigor.

"Especially in India, kids fresh out of college knew they could shop themselves down the street for $10 more a week; and they did. That's huge for them," Venable said. "It's not uncommon for [workers] to leave within a year [of being trained], or even six or three months. There were periods where I had 100% turnover over the course of a year. And, when you look at the success or failure of a collection [or overall credit] team, you need to look at longevity."

- Brian Shappell, CBA, NACM staff writer

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SBA Widens Tent, Expands Size Standards in 58 Industries

The Small Business Administration (SBA) issued three final rules this week increasing size standards for firms in three North American Industry Classification System (NAICS) sectors. Effective October 24, 2012, more companies in the Real Estate and Rental and Leasing sector, the Educational Services sector, and the Health Care and Social Assistance sector will be allowed to consider themselves small businesses, and thereby gain access to federal small business contracts.

"New size standards will enable more businesses in these sectors to obtain or retain small business status, will give federal agencies a larger pool of small businesses from which to choose for their procurement programs, and will make more small businesses eligible for SBA's loan programs," said the SBA in a statement.

Each NAICS sector includes dozens of individual industries. The SBA increased size standards for businesses in 21 industries in the Real Estate and Rental and Leasing sector, allowing more than 13,000 additional firms to qualify as small under the new size standard. Increased size standards will now also apply to nine industries in the Educational Services sector, allowing more than 1,500 additional businesses to qualify as small, and 28 industries in the Health Care and Social Assistance sector, expanding opportunities to more than 4,100 businesses.

The SBA is currently in the process of reviewing all size standards, and will be for the next several years, as statutorily required by the Small Business Jobs Act of 2010. When revising these standards, the SBA takes into account the structural characteristics of individual industries, including average firm size, the degree of competition and federal government contracting trends, in order to ensure that small business size definitions reflect current economic conditions.

Some of the revisions are drastic, indicating just how outdated some of these standards remain. For instance, the current size standard in the consumer electronics and appliances rental industry defines a small business as one with no more than $7 million in receipts. After this latest revision takes effect, businesses in that industry will qualify as small as long as they have no more than $35.5 million in receipts.

A complete list of the revisions can be found here.

- Jacob Barron, CICP, NACM staff writer

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Shipping, Ports Dodge Another Bullet…For Now

Late summer/fall 2012 seems to be the season for good news, or at least mitigation of expected bad news, for those interested in the health of U.S. ports. One big positive is that the massive Panama Canal expansion, expected to be a boon for U.S. port activity, has avoided major delays or problems to date. Additionally, the late August hurricanes, unlike 2005's Hurricane Katrina, caused little in the way of significant damage to ports like that of New Orleans. This week brought perhaps the biggest news that a threatened East Coast strike of port workers in the coming weeks now appears unlikely.

Negotiations in the last week involving federal mediators and two significant dockworkers unions (the International Longshoremen's Association and the U.S. Maritime Alliance) have resulted in a 90-day extension of contracts that were due to expire on September 30. A strike at most East Coast ports was almost sure to follow during the first days or weeks of October. While the labor dispute is far from settled, there is now more time for them to work things out while not disrupting trade leading up to the crucially important holiday season.

The development was enough to cause Fitch Ratings to declare the movement one that "serves to minimize the credit impact expected from any future work stoppage." A report unveiled by Fitch on September 25, titled "East Coast Port Strike: Credit Implications," noted the following:

"While the potential remains for a work stoppage at the end of the 90-day extension period, Fitch expects port credit to remain resilient...Contingency plans at potentially affected ports have envisaged 10-15% cargo diversion over a month or so of stoppage, which is well-below throughput losses modeled in Fitch's rating case scenarios for ports." Fitch added that ports have maintained solid levels of liquidity.

- Brian Shappell, CBA, NACM staff writer

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PNTR with Russia Delayed until after Election

The House of Representatives adjourned last Friday, with 46 days to go until Election Day, after having put in a total of eight legislative days of work this month. The House has not adjourned this early before an election in more than 50 years.

Among the lengthy list of items left unfinished by the House upon their departure from Washington were a farm bill, a solution to the upcoming automatic spending cuts and tax hikes that will take effect in January, and the establishment of permanent normal trade relations (PNTR) with Russia.

Competing bills have been on Congress' docket since this summer, but agreement on the bill and wide bipartisan sentiment in favor of establishing PNTR with Russia have continually fallen victim to the sharply divided chamber. Russia officially joined the World Trade Organization (WTO) on August 22, opening up its markets to the global trade community. However, under WTO rules, until the U.S. establishes PNTR, Russia can increase tariffs on U.S. goods entering the country, putting U.S. exports at a competitive disadvantage in the Russian market, which is the world's ninth-largest.

American companies will continue to operate at a competitive disadvantage at least until after the election on November 6.

In a recent speech to the Coalition of Service Industries (CSI) Global Services Summit, U.S. Trade Representative Ron Kirk tried to keep the pressure on Congress to enact PNTR upon their return. "Because the WTO Agreement does not apply between the United States and Russia at this time, Russia does not have to apply the WTO rules, or its market-opening commitments, to U.S. service suppliers. That's why the Obama Administration is strongly encouraging Congress to pass legislation as soon as possible that will terminate Jackson-Vanik and authorize permanent normal trade relations with Russia," he said. "Giving U.S. service suppliers a level playing field in large and growing international markets is critical to creating jobs here in America."

Establishing PNTR with Russia requires the U.S. to repeal the Jackson-Vanik amendment, a Cold War regulation that made U.S. preferential tariff rates for Russian products conditional on the country allowing Jews and other minorities to emigrate freely. The amendment is regularly suspended as a matter of course, but its presence on U.S. books allows Russia to discriminate against U.S. products under WTO rules until the amendment is repealed.

Each version of a PNTR bill has been coupled with a version of the Magnitsky Act, named for anti-corruption lawyer Sergei Magnitsky who died in 2009 under mysterious circumstances after serving a year in Russian prison. The House's version would deny visas and freeze the assets of parties suspected of involvement in Magnitsky's death, while the Senate's version would take a much broader approach, allowing the law to be applied to human rights violators outside of Russia and beyond the scope of the Magnitsky case.

Some iteration of the Magnitsky legislation was considered a prerequisite for any bill approving PNTR, as lawmakers were wary of being perceived as having given Russia a free pass on trade without any penalties related to the country's human rights record.

- Jacob Barron, CICP, NACM staff writer

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Good News, Bad News on California Municipal Bankruptcy

As it looks more and more certain that one California community will not go through the entire Chapter 9 bankruptcy process, another in a seemingly long line of potential filers seems to be spiraling toward it as quickly as any of its predecessors. And a 2011 state law designed to slow municipal bankruptcies may not be effective in this case because of a strategy looking more like a trend in a state where so many debt-hobbled communities exist.

Atwater, CA law and policy makers met this week to consider taking steps to declare a fiscal emergency, a move that would circumvent the California mandate that forces municipalities to the table with creditors for a period of no less than 90 days before a Chapter 9 can legally be filed. It's similar to the play made by San Bernardino, one of three California communities to file for municipal bankruptcy in the last year. It appears the culprit in this case, like in many cities teetering on the brink of insolvency, is worker and retiree compensation and entitlements such as pensions and health care.

On the flip side, the unwinding of Mammoth Lakes' attempt to go through Chapter 9 appears to be continuing without a hitch. The possibility of the municipality getting to avoid the entire, painful process increased in recent weeks after it reached a tentative agreement on a $43 million court judgment settlement won by a land developer that almost single-handedly forced the community into insolvency. Said agreement occurred after Mammoth Lakes, essentially a resort and tourism town, officially filed for Chapter 9 protection.

It's the second time in as many years that parties negotiated a settlement after a filing was made. Concessions with creditors in an out-of-court settlement between Central Falls, RI and its retired workers following that municipality's 2011 filing was one of the first and most publicized of the 2011-2012 wave of cases. The filing essentially forced the negotiations.

- Brian Shappell, CBA, NACM staff writer

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