Tectonic Shifts in the American Class System

As a recent transplant from the Midwest to California, my friends warned me to brace myself for the tectonic shifts I'd experience periodically. I've been witnessing a massive one since I got here, but it's quite different than what I had imagined.

Over the past few decades, the U.S. has seen a gradual erosion in the size and scale of its manufacturing sector as businesses have relocated plants to leverage low-cost Mexican or Chinese labor. Businesses needed both size and scale to offset the significant effort and price tag that such moves entailed, so as a result, we saw mostly Fortune 500 companies and their suppliers embrace the offshore manufacturing phenomenon early.

Stronger Offshore Current

However, in the past five years, the Internet has played a very large role in making it much easier and cheaper to set up shop offshore. As a result, even relatively small businesses are moving beyond simply sourcing from China. They've started experimenting with offshore manufacturing, IT services, call centers and even accounting. Finding credible offshore partners and doing due diligence are getting easier by the day.

The numbers today are tiny. Businesses in the U.S. with less than $10 million in annual revenue still have negligible dollars invested in foreign assets. But the situation is rapidly changing and, I'd argue, accelerating.

There are about 20 million nonfarm businesses in the U.S. Each year about 1.5 million new ones are formed, and about 1.5 million old ones cease to exist. Well over 90% of the businesses that exist today are unlikely to be around 20 years from now. And businesses that are being formed by entrepreneurs today tend to be ones that fully leverage the global economy and the connectivity enhanced by the Internet.

I'd go so far as to speculate that if we had no automobiles and Henry Ford started the Ford Motor Company (F - commentary - Cramer's Take) in 2010 instead of 1910, it would look nothing like your father's Ford. All manufacturing operations would be based in Guangzhou, auto design teams would be based in Milan and Los Angeles, all inbound call centers would be based in Gurgaon, while the basic back-office functions like IT, legal, accounting and financial services would be run out of Bangalore. Indeed, the company would end up with well below 1% of its workforce in Dearborn.

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Mohnish Pabrai is the managing partner of Pabrai Investment Funds, an Illinois-based value-centric group of investment funds. At time of publication, Pabrai held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback at [e-mail]. You can access his Web site at www.pabraifunds.com.