Trade roundtable
GEOFF COLVIN: Outsourcing American jobs -- Senator John Kerry has just proposed a tax plan to fight that growing trend and create, he claims, 10 million jobs in four years. That's only the latest punch in a fight that could decide who the next president will be. Polls show jobs and the economy are the No. 1 worry of Americans now, and as more American jobs flow to India, China, Mexico, and other low-cost countries, the debate gets louder and more intense. As part of PBS's Election 2004 By the People coverage, we're asking what's reality, what's hype, and what happens next?
Marc Andreessen was an Internet pioneer, co-founder of Netscape. Now he runs Opsware, a software firm that helps companies outsource jobs; he joins us from Mountain View, California. Dianne Byrum is a Democratic state representative in Michigan, where John Kerry made his proposal, and she's a strong proponent of laws to fight outsourcing; she joins us from Lansing. David Kotok is chairman of Cumberland Advisers, an investment firm. He looks at outsourcing through the eyes of an investor.
Marc Andreessen, millions of Americans are afraid of outsourcing. They believe as Senator Kerry seems to that it's a trend we need to be protected from. Are they wrong?
MARC ANDREESSEN: I think they're completely wrong, and I realize that there's real concern over jobs. People have jobs they like today. It's very worrying to be going into a future where those jobs might change. But the American economy is extremely flexible and very dynamic. And if you look at the numbers, in the last 10 years alone, the American economy has destroyed 325 million jobs and created 342 million jobs, for a net gain of almost 18 million jobs, and those jobs are at higher wages and higher benefits than the jobs that came before them. And that was in the face of the Japanese, competition from the Japanese, competition from NAFTA. We've done just fine. We benefit from more international trade, and that's going to be the picture in the next 10 years as well.
COLVIN: It has always worked out that way. What seems to have people worried now is that we are well into an economic recovery, but we haven't created nearly as many jobs as we normally do at just the time we see these jobs going overseas. Do you believe that the trend is still going to work out as it has in the past?
ANDREESSEN: Oh, absolutely. We're seeing a momentary lag in hiring. And again, I realize, like this is a big issue for the people who are affected, and I do think we need to talk about how we take care of people who are affected by a recession, who are affected by technological change, who are affected by offshoring, there's no question. But there's every reason in the world to think, based on 200 years of history, and this is a momentary hiring lag. The Federal Reserve is pumping a huge amount of money into the system, and over the next 12, 18 months we're going to see I think really substantial employment growth. I think there's a lot of evidence of that.
COLVIN: Representative Byrum, John Kerry chose to make his proposal in your state of Michigan. He said:
"We have a tax code that does more to reward companies for moving overseas than it does to reward them for creating jobs here in America."
Now presumably he chose Michigan because it has suffered a lot of job losses and it's a very important state in the Presidential election. There in Lansing, how do you feel when you hear Marc Andreessen make the case for outsourcing?
DIANNE BYRUM: Well, I would disagree. I don't believe outsourcing is good for our economy. Here in Michigan, we're losing 1,000 jobs a month, and yet we don't see any policies coming from Washington that is going to assist us here in Michigan. We have the largest number of employees that have extended out, extended their unemployment benefits. They have no more extensions left. It is affecting our quality of life, our standard of living. It's bankrupting communities. We think that we ...
COLVIN: But there are a couple of things ... Go ahead.
BYRUM: Well, we just think that we need some focus from Washington on the problem, and we don't see that happening.
COLVIN: Well, there are a couple of things Washington could do. One, it could help those people who are losing their jobs, or it could do something to prevent jobs from going overseas. Now, do you think they should do the first or the second?
BYRUM: Well, I think it's a combination of many things. I think that we should address outsourcing. We've proposed here in Michigan to give preference to Michigan companies that are employing Michigan workers when it comes to state contracting and state investments. But we also believe that there should be some attention paid to retraining and giving people the necessary skills to compete.
COLVIN: Now, of course, the argument is that when you give preference to companies that employ Michigan workers rather than overseas workers, you are punishing Michigan consumers because the costs will be higher.
BYRUM: Well, I think we're investing in Michigan. These are Michigan-paid tax dollars we're talking about, and if it's going to be used for Michigan people to be doing those services, providing those goods, I consider that an investment in our state. And it's one of many things that we can do. We're also investing in our K-12 system, making sure that we have top-quality students graduating from our high schools and putting incentives in place for people to get degrees in technology and engineering. We know those are the jobs of the future, and making capital available for the entrepreneurs that want to invest in the emerging industries, the technology industries that are going to be the growth of the future. It's part of a multifaceted proposal.
COLVIN: Okay. David Kotok, the Financial Times just a couple of days ago had an article, "Missing the point on outsourcing, John Kerry is a danger to U.S. business." Is he a danger to U.S. business?
DAVID KOTOK: I don't know that he's a danger to U.S. business. He has a proposal out today on changes in tax policy. Some of that may be good. The issue of barriers and protectionism is the danger to U.S. business.
Not to disagree -- respectfully, I would disagree with the representative from Michigan. If Michigan puts in place policies which they believe will try to keep jobs in Michigan, then investors and business people in other parts of the country who are deciding whether to site a location in Michigan or someplace else will say, "Wait a minute. I don't want to put a location in Michigan and have these barriers. I'll put it in another state where I won't have the barriers." And so Michigan never gets to measure the jobs it never gets to see.
COLVIN: Representative Byrum, a legitimate criticism?
BYRUM: Well, I would disagree. What we're talking about is with state contracts, and that's a preference for Michigan workers, but it's part of an overall plan that has a very aggressive economic development arm. We have an investment in in our K-12 education system. We want to be graduating more citizens in Michigan from college, particularly in degrees in technology and engineering.
COLVIN: Marc Andreessen, go ahead.
ANDREESSEN: I agree with a lot of what the representative says obviously on investment in education and investment in training. I think that's exactly right. The problem with restrictions like, for example, on contracts in Michigan or in any other state, or in fact there's a bunch of new legislation at the federal level to restrict government contracts going to companies with offshore labor, is that number one, it directly, it represents a tax on the American consumers, Michigan consumers in the case of Michigan laws and American consumers in the case of the federal laws. It raises the costs of government services. It's a tax to benefit a very small minority of workers.
BYRUM: It may or may not, though.
ANDREESSEN: Oh, it absolutely will.
BYRUM: It may or may not, because if that money is being turned over in Michigan's economy, I would suggest that we are actually enhancing Michigan's economy because those dollars are being spent locally.
ANDREESSEN: But then call it a tax. I mean then raise taxes and then spend that money the same way. It's a tax.
Second, these are exactly the kind of restrictions to trade that tend to lead to retaliation. And especially if we start to enact these at the federal level, it's very logical that other countries are going to do the exact same thing. And because the United States runs a huge services surplus internationally to the order of about $80 billion a year, we have much more to lose as an economy if other companies, if other countries start engaging in services protectionism than we do.
BYRUM: Well, I think they already are in monetary policy. I think we need some tax policy changes, quite frankly, that doesn't reward companies for taking their business offshore.
COLVIN: Okay, David Kotok.
KOTOK: We have an interesting debate. It's an interesting question. The investing world is going to go and put its money in the place where it's going to derive a profit. And so the investment community is looking for businesses, and those businesses operate in whatever method gives the best net cash flow and profit to them. They're going to make those decisions.
How do we balance? Because what we have here are two positions, and we all agree we don't want people to be hurt. Therein lies the question of this transition or adjustment. The transition and adjustment is going to occur, whether Michigan puts a barrier in place and the jobs that never get to Michigan go somewhere else, Michigan won't count them. That will be true in many states, because state protectionism is an issue.
The adjustment process is global, jobs are changing, comparative advantage is at work. And there's no way to stop it.
COLVIN: Right. And there's another angle on this that tends to get overlooked, which is if we discourage U.S. companies from hiring foreign workers outside the U.S., we can expect other countries to discourage their companies from hiring American workers in America, and 6.5 million Americans currently work for foreign companies here. Would we be willing to see some of those jobs disappear?
KOTOK: We would be upset. We wouldn't want retaliation. We like it one way, but not the other.
COLVIN: Marc?
ANDREESSEN: Yeah, and in fact just today IBM announced...
BYRUM: Well, I think those countries are practicing protectionism already. It's not a fair trading situation, and their monetary policies are manipulated so that they close some of our markets overseas.
ANDREESSEN: Well, let's talk about that for a second. So IBM today just announced a $750 million outsourcing deal with a major telecom company in India -- $750 million from an Indian firm buying services and products from IBM. Two weeks ago the Bank of India outsourced their information technology for the next 10 years to Hewlett-Packard in a similar deal. All these call centers that are being set up in India that we're worried about all the jobs going over there, all these call centers are being run on Dell PCs or HP PCs, running Microsoft software with Lucent phone systems with Carrier air conditioners with bottled water from America, drinking Coca-Cola.
We have huge new markets internationally to exploit, and if we're allowed as American businesses to go after those markets and not spark a trade war by trying to put up these kinds of barriers here at home, we are going to grow American businesses very fast in the next 10 years and we're going to be able to hire and create a lot more jobs in America.
COLVIN: David, I don't want this to end without asking you what you are doing as an investor in response to this trend.
KOTOK: As an investor we want to seek, we seek firms that are taking advantage of the globalization process and investing, as Marc described, and we are finding that those are faster growing companies and they are producing better results for investors, and that's a worldwide phenomenon, not just a U.S. phenomenon.
COLVIN: Got any names?
KOTOK: Well, I don't want to name names. I would name areas, sectors. But the fact is most large companies now are aware that they have to business in a world environment. And the entrepreneurial start-up companies are excited about it, and there are thousands, and some of them are going to be the next Microsofts.
COLVIN: Sectors.
KOTOK: The sectors are the obvious communication/telecom technologies which are evolving. And in the next 10 years, there are probably a thousand firms and techniques which we can't even identify today which we will be using. In addition, the health care, medical care, biotech area is huge and exploding.
Now the question is are we going to have a policy that's restrictive, that is going to encourage some biotechnology firms never to locate in the United States because of fear of the penalty and others to try to position outside the United States because of fear of protectionism? Or are we going to encourage it so that we participate as Americans?
COLVIN: We are all going to be hearing a lot more about this, but we've got to stop now. So Marc Andreessen, Dianne Byrum, and David Kotok, thank you very much.
FORTUNE 500
KAREN GIBBS: Our colleagues at FORTUNE magazine have been putting out the annual list of top 500 companies for an incredible 50 years. A look at the new top 20 includes a lot of household names, and even a few rookie breakthroughs. But we all know that big doesn't always mean better.
After all the turbulence in corporate America the last few years, do the people running the leading companies finally get it? Do they have topflight management teams sensitive to the sticky corporate governance issues? Are they big as in growing market leader or big like about to become extinct dinosaurs? But the real question is how many of them are worthy of your investing dollars?
Jim Huguet runs the aptly named IDEX Great Companies America fund, and we've asked him to apply his rigorous stock-picking screen to these corporate giants. He joins us from Clearwater, Florida. Jim, in your opinion, what makes a company a great investment?
JIM HUGUET: Well, as we look at companies, Karen, we've identified 12 different screens, ranging from size of $15 billion in market cap to having overseas sales to companies who have outstanding businesses and wonderful management. And so we've identified basically 12 screens that we look at a company, and we believe a company that passes those 12 screens is a great company.
GIBBS: Well, let's take a look at some of the companies on the Fortune 500 list. In fact, looking at the top 20, number one is Wal-Mart. Not only is it the biggest retailer, it's the biggest company on the planet. Can it get any bigger?
HUGUET: Well, they are getting bigger by growing overseas. Wal-Mart is probably the best run and best managed retailer in the world, and they have continued to really grow. And right now they're going into an overseas expansion. Retailing is a very difficult business. It's hard to develop protective barriers around your business, but Wal-Mart has done that through the efficiency and the systems that they've put in place.
GIBBS: So that makes it one of the ones that would pass your screens and you would say buy it.
HUGUET: If I were investing in a retailer, Wal-Mart would be one of the companies that I would invest in. They don't pass our screens yet because they don't have 30 percent of their business outside of the U.S., but they are moving in that direction.
GIBBS: General Electric is on the list and one of your fund's holdings. It's also been a leader in trying to clean up some of the corporate governance issues. What do you think about GE?
HUGUET: GE is one of our favorite companies. It's an interesting situation right now. Jeff Immelt who came in as chairman and CEO is a terrific manager. He is doing a lot of really I think major improvement in GE. He's trading off some businesses that are not particularly good, that are not growing, and he's replacing them with new businesses like Amersham and Vivendi that do have significant growth potential. We look at GE as the kind of company that people would want to invest in over a long period of time. 
GIBBS: So you definitely rule that as a buy and not an avoid.
HUGUET: Exactly.
GIBBS: Jim, the energy sector is heavily represented in the top 10, and we're looking at Exxon, Chevron and Conoco. What's going on with the energy sector, and which one of those companies would you buy and which ones would you avoid?
HUGUET: Well, it's certainly the largest sector of the five sectors in the top 20. The problem with the energy sector, you've seen a tremendous increase in oil prices lately, so there is some reason to believe that you're at the top end of the cyclicality cycle in oil. Of the three companies that are in there, the one that we like the most and think is probably the best run is Exxon Mobil. And so if you felt that you needed to invest in the energy sector, that's where we'd recommend people putting their money now.
GIBBS: Well, the next sector that has quite a bit of representation is the financial services sector. You've got Citigroup there, you've got AIG, you've also got State Farm and Fannie Mae. Let's talk about the financial sector.
HUGUET: Well, there are three companies in there that we really like, Citigroup, number one, which is the largest global financial services industry in the world. Then you've got American International Group, AIG, run by Hank Greenberg and probably the best managed insurance company in the world. And Berkshire Hathaway, run by Warren Buffett, a terrific company. Buffett continues to deliver returns around 20 percent per year. So we really like those three companies. We are concerned about Fannie Mae, frankly, from a corporate governance standpoint. Studies have shown that companies that have a governance problem, it doesn't go away real fast. And so we would warn investors to be very careful about investing in Fannie Mae at this time.
GIBBS: So Fannie Mae is an avoid. How about State Farm, the big property and casualty insurer?
HUGUET: Well, State Farm has lost some share lately to some more aggressive companies like Geico and Progressive, and while they're certainly a large company out there, we don't see them really growing their business and expanding at the kind of rates that we'd like to see them expand.
GIBBS: Jim, a lot of people have said technology is yesterday's news, but we do have Hewlett-Packard and IBM on the list, respectively 9 and 11. Would you buy or avoid?
HUGUET: IBM we would certainly buy. IBM is a very well run company. They're selling at almost a 30 percent discount to their intrinsic value and have got one of the strongest brand franchises in the world. 
On the other hand, if you were to compare Hewlett-Packard to And Dell , Hewlett-Packard has considerably more sales, almost double, not quite, but about 75 percent more sales than Dell, and yet Dell's profits are higher this year, as reported by FORTUNE, than what you have at Hewlett-Packard. So we think Dell is a much better option for investors than Hewlett-Packard is.
GIBBS: The automobile sector is known to be very cyclical, meaning that it is very sensitive to the ups and downs of the economy. With the economy coming back and looking on to the road of recovery, would you say General Motors and Ford, the number 3 and 4 on the list, are a buy or an avoid?
HUGUET: I would avoid them. I think it's a very difficult business. You've got high labor costs, you have high fixed cost. It's a cyclical business. Those two companies have not done particularly well over the long term. It's an industry that's consolidating through acquisitions. I think it's a very difficult place to put your money right now.
GIBBS: Let's talk telecommunications, and specifically Verizon. Buy or avoid?
HUGUET: The telecommunications business has almost gotten to be a commodity business where pricing is key. Most of those companies have had a hard time making money. There's a lot of shakeout, a lot of consolidation in that business over the last several years. Frankly we would stay away from that business until we kind of see where it settles out.
GIBBS: And Home Depot, pretty much a household name. Lots of people like the do-it-yourself type business. Is it a good company to buy, or would you avoid it?
HUGUET: We think they're much better run than they used to be. The issue that you've got there, you've got significant inventories. Return on capital is challenged. They've got a really strong competitor in Lowe's. I don't see us putting significant amounts of our money to work in Home Depot.
GIBBS: Let's talk about the health care sector. It's a hot button issue for a lot of people, and particularly let's talk about Cardinal Health. Buy or avoid?
HUGUET: It's not the kind of company that we believe over a long period of time is going to be well, and that's what we invest in. And we try and invest in companies for the long term, and that's not the kind of company that we put our money in for the long term.
GIBBS: Jim, it's had a name change, but it's still on the Fortune 500 list. Let's talk about Altria.
HUGUET: Altria is, as you know, is the old Philip Morris company. Kraft is a part of this organization. But most of the profits, by far the lion's share of the profits come out of tobacco. Tobacco is an incredible business on one hand, and the consumption, especially overseas, is growing, not so much in the U.S., but overseas. People are incredibly brand loyal. The problem that you have is all the litigation that goes along with it and the risks that are involved from a litigation standpoint.
GIBBS: It sounds like an avoid to me.
HUGUET: Yes.
GIBBS: We talked about consumption, can't miss Kroger. Where do you stand on that? Buy or avoid?
HUGUET: Kroger is well run. But again, that's one of those low growth sectors that we look at that's hard to develop competitive barriers around. And so we would avoid Kroger.
GIBBS: McKesson. Let's talk about that. Buy or avoid?
HUGUET: I would avoid again. It's a distribution company that I think it's very difficult to add value to that particular business. It's not the kind of business we would want to invest in.
GIBBS: You've given us a great analysis of some of the top 20 companies on this FORTUNE 500 list. Looking at the whole list, the entire list, is there one company that jumps out at you as a sleeper, something that you just have to have for the long term in your portfolio?
HUGUET: Well, we really like Medtronic. The ticker symbol is MDT. Medtronic started over 50 years ago with heart pacemakers. It's still a key part of their business. But as we look at an aging population, of which I'm one...
GIBBS: I am, too.
HUGUET: What we're seeing is that implantable devices are having a huge impact on health care. In fact, there was a study that came out last week that the largest killer of Americans in the United States is sudden cardiac death, but the study showed that 23 percent of the Americans who died from that disease last year could have survived had they had one of the ICDs from Medtronic, which stands for an implantable cardioverter-defibrillator. It's a case of Medtronic being in wonderful businesses in health care. They've got diabetes businesses. They're working on spine, they're working on the heart, cardio, a number of different areas. The business is growing at 15 to 20 percent a year. Return on invested capital is around 20 percent. Just a very well run business, outstanding company. And so that's one of the companies we would strongly urge people to invest in.
GIBBS: Jim Huguet. Thanks very much for joining us.
HUGUET: Karen, my pleasure
Next week
GIBBS: Next week, a closer look at CEO pay and how it matches performance.
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