Hollow Economies?

In the 1980s, driven by the then-new concepts of “reengineering”, American firms began to rearrange all their business processes. All activities that could be done cheaply by outside contractors were outsourced.

Many observers of the business scene were horrified. Companies were shuttering everything from manufacturing plants to payroll accounting to logistics, and getting cheaper contract firms to do the work.

The resultant shells of firms were given the shameful epithet of “hollow corporations.” These were corporations that had nice looking corporate skins, something that gave them the appearance of solid business entities. But inside, these entities were hollow -- owning only some key brand assets and possessing financial clout, but having very little in terms of technology, operations, and embedded skills.

American corporations shrugged off these ignoble labels. They had something that made people pay attention: money, or at least the appearance of wealth that kept their stock valuations high. Business commentators came to accept the inevitability of this next phase of capitalism and the “hollow corporation” label not only disappeared but was grudgingly replaced by obliquely admiring labels such as “lean and mean” and “rightsized.”

By 2000, almost the entire American economy, including government agencies and non-business entities, had embraced the gospel of reengineering, contracting out, and outsourcing. Moreover, the locale for outsourced work shifted – to China for manufacturing and of late to India for some of the software and service operations. Outsourcing acquired a foreign accent – in many cases it became “offshoring.”

China, as we know well, has become the global manufactory. This is not going to change anytime soon – there are vast reserves of expansive geography and catch-up wages in China’s Wild West that will continue to provide competitive manufacturing to not just the United States but indeed to the world.

China, therefore, is by no means hollow. It is a solid manufactory, from coast to tundra to desert to mountain.

Meanwhile the hollowing out continues in America. This economy of hollow corporations is becoming a hollow economy – owning and artfully enhancing its symbolic assets while ruthlessly outsourcing to Asia any work that can be done at a rate that is a few dollars cheaper.

Unlike China, in India a curious phenomenon is afoot. A hollow economy is springing up in cities like Bangalore, Delhi, Hyderabad and Pune – a low-cost mirror image of the hollow economy of the United States. For now, despite political rhetoric and media outcry, there is no end in sight to this mutual hollowing out process. The front-office customer-facing hollow economy of USA is developing in tandem with the back-office tele-connected economy of India. If hard goods are needed somewhere in this process, China provides these. It is interesting that there is almost as much lament in India as in USA – often a hollow lament in both countries – about the lack of solid, muscular manufacturing facilities and jobs.

Just as in the older instance of “hollow corporations”, the “hollow economy” label is not likely to stick – in fact it may not even get any play except in this note here! As long as money keeps the wheels of global capitalism spinning, new and flattering labels are being tried: “knowledge-based economy”, “offshore knowledge base”, “global technology development center”, and so on.

In some instances, the two hollows don’t make a whole – and here China or Vietnam or Indonesia step in to provide the solid filler.

Indeed, in the unfolding annals of global capitalism, “hollow” and “solid” are not enduring notions. As every stock market investor knows, the claim of year-on-year solid returns on investment rings hollow.

Nik Dholakia