The Future of Small Online Companies… Globalization and Cowboys

I have a high school daughter and I am always tearing out articles I read in Business 2.0, Wired, the Wall Street Journal, Inc Magazine and the like hoping she will read what I read and have an “aha” moment. Usually it is just a “aarrgghh” moment, as I see the torn wisdom sitting in the trash adjacent to toilet. But there was one article I made her read (umm, I mean “required”), and that was “Why the World Is Flat” by globalization guru Thomas Friedman. I normally don’t like to receive advice on parenting, and you may not like it either, but have your kid read this article. It may help them pick a college career that won’t be outsourced.

When we were growing up, our mothers and fathers taught us many lessons that were true – one of which is that the earth is round. It was easy to believe and understand. We could see pictures from outer space and every class room had a globe. We in turn, taught our children that…

The World Is Round… Or Is It?

At first, humans believed the world was flat, because everything they saw was flat. If the world was round, one would most certainly fall off. Then, after Columbus and Magellan, man learned the world is round, and this information was handed down through the generations. While we believe the world is round, should we really be teaching our children this?

And Now, We Find The World Is Flat Again.

Thomas Friedman, a globalization expert, writes in his new book “The World Is Flat: A Brief History of the Twenty-First Century” that world is no longer round. Here is why.

We Be Smart, Ain’t We?

It used to be that America was smart and other countries (especially third world countries) quite frankly we not so smart. A high school drop-out on welfare would earn more money than almost anyone else in the world. Overseas labor was cheap, but it was too far away.

Now countries like China and India produce more engineers per year than America. Our “advantage” over these countries is rapidly decreasing.

Cheap Labor Is Now One Day Away

There are two ends to the income spectrum. First, there are over 2.5 billion people living in China, India and Indonesia. This is about 41% of the world’s population. The vast majority of these people have an average per capita income in the $1,000 – $4,000 range. At the other end are the countries like the U.S., Japan, Germany, France, Canada and the UK. This group totals over 500 million people and, depending on the country, has an average income in excess of $11,500.

Geography is becoming less of an issue as we can either put a document in an overnight delivery pouch and have it seamlessly delivered anywhere in the world for less than $30, or we can wire funds to an overseas bank in minutes. Ships carrying container trucks flow from Asia as easily as we drive from the suburbs to downtown. This is further demonstrated by looking at Wal-mart. It has over 6,000 suppliers. Of those 6,000 suppliers, 5,000 are in China.

How a Flat World Impacts Your Online Business

A flat world means that your online business is open game to competition. The same way in which call centers, engineering projects, IRS tax preparation and living trust documents have been out-sourced to offshore companies indicates it is only a matter of time before foreign corporations come into the online market by establishing a domestic presence, while doing all the processing out of, say, India. It is hard for a online owner who pays a receptionist $14,000 – $20,000 a year to compete when the ENTIRE staffing costs of an overseas online entity can be subsidized for the same amount.

Of course the U.S. branch office of an overseas company will employ a facade of Americans as the “in-office” salespeople. But all of the processing work (and probably customer service) will be handled by more cost effective labor alternatives.

Small Online Companies Will Be Hurt Most

Due to economies of scale, smaller online companies will likely be the first to feel the impact of globalization. Historically, highly fragmented mom-and-pop businesses like donut stores (Dunkin Donuts) and corner markets (7-11) were consolidated or franchised into more efficient business identities. And we have witnessed the constant consumption of small local banks firms merging with and being consumed by larger regional banks.

The economies of scale coupled with the inexpensive cost of overseas labor will cause small online companies to fall by the wayside. Yes… this could mean you.

Not Me!!!

I know, I know… I can hear you now. You are saying, “I have customers who have been with me for years, they will never leave me.” These were the dying last words uttered by small hardware store owners as Home Depot swooped into their town. Are there small hardware stores left? Sure, but not very many, and their owners are not earning as much.

Do you really believe customers will buy from you if there is a significant price differential? When was the last time most people paid attention (when they bought their cell phone) as to where it was made? They didn’t. Price was the primary consideration when purchasing this commodity.

Like it or not, the online industry has moved from a customer based service to a commodity of interest rates.

How A Flat World Impacts Your Children.

Your children will be impacted as well. First, if you have ever envisioned handing your company over to your grown children when you retire, there just might not be much left to give them. Second, assuming your child wants to become an engineer, they will no longer be competing with only U.S. students to get a good education. Your child is also now competing with international children who are attending college and becoming engineers in overseas countries. American companies looking to hire engineers have the option of hiring a $30,000+ freshly graduated U.S. college student or a $10,000 experienced engineer from China or India.

“Mama, ‘Do’ Let Your Babies Grow Up To Be Cowboys”

So what jobs are safe for your children? According to Friedman, jobs that require a physical presence, such as: physicians, car mechanics, grocery workers, coaches, negotiators and the like. Teachers as well, until distant learning and tele-classes cause them to fall to the globalization wave.

There is a country song that says, “Mama, don’t let your babies grow up to be cowboys.” But because being a cowboy requires an actual physical presence with the cows, it could be a safe job… until even more countries grow their own cattle and export meat to the U.S.

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