Atlas Is Not Shrugging... He's Just Outsourcing.

Late last year, David Farr shot off his mouth and made a lot of people mad. But the insights that spring from his candid comments could make a lot of other people rich. Including you. With the inspired help of my colleague, David Gonigam, here’s the story…

Mr. Farr is the CEO of Emerson Electric. The firm makes electrical equipment, mostly for industrial customers. That said, its best-known product is likely in your kitchen sink – the InSinkErator garbage disposal.

In 2009, Emerson broke into the top one-fifth of the Fortune 500 – jumping nearly 20 positions, from 111 to 94. Impressive, considering what happened to the stock market and the economy in 2008. Not that Emerson was spared the pain. The company slashed its work force nearly 14% in 2009 – 20,000 jobs gone.

And Farr doesn’t see things getting much better in 2010 – owing largely to the decisions coming out of the nation’s capital. Which brings us to the things he said that made a lot of people mad.

The forum: The Baird Industrial Outlook Conference last November in Chicago. “Washington is doing everything in their manpower capability to destroy US manufacturers,” he said. “Cap and trade, medical reform, labor rules. What do they want to do? Raise taxes. They’re just going to destroy jobs.”


“Jobs are going to be created offshore. They’re going to be created in India and China, places where people want the products and where the government welcomes you. They actually do something.”

Step back for a moment and take that in. India was once larded down by decades of Nehru socialism. China’s economy was crushed by Mao’s madman schemes. But now a major American CEO says that these countries offer a friendlier environment for manufacturers than the United States.

“What do you think I am going to do? I’m not going to hire anybody in the United States. I’m moving. They are doing everything possible to destroy jobs.”

Farr’s remarks in Chicago set off a firestorm that raced 300 miles down Interstate 55 to St. Louis. Since Emerson’s founding in the 1890s, the firm has called the Gateway City home.

Outraged letters to the editor poured into the St. Louis Post-Dispatch. One labeled Farr and his fellow executives “unscrupulous parasites interested in nothing more than short-term profits.” Another addressed Farr directly: “How dare you try to blame Washington for your greed.”

Farr responded on the paper’s Op-Ed page a couple of weeks later. Clearly, the public relations people had gotten to him in the interim. His Chicago remarks were passionate and spontaneous. The column read as if vetted by a conference room full of PR pros…and maybe a couple of lawyers.

“We are a nation of varied beliefs and perspectives,” the committee – er, Farr – wrote, “and there is room for honest disagreement on all of these issues. But none of us wants to see our country weakened to the point where it is no longer the global economic leader.

“Greater government debt and diminished competitiveness mean global investment and good jobs will go elsewhere,” Farr continued, “and America will risk slipping into second-tier economic status. That’s not the legacy any of us want to leave future generations.”

He might have mentioned that the United States has the second-highest corporate tax rate, after Japan. The mushy article concluded with the truly bold declaration, “Action is needed now.” That’s OK, Dave. We know your true feelings. Atlas isn’t shrugging. But he is outsourcing and moving offshore.

Farr isn’t just ranting against the Obama administration. He knows emerging markets firsthand. He ran Emerson’s Asia-Pacific division in the 1990s. And Emerson has been steadily moving jobs overseas for years. That’s where the growth is. First came the new factory jobs. Then came the new white-collar jobs – engineers and product designers. “If half of your sales go outside of the United States, you’re going to have half of your engineering outside of the United States, too,” Farr told Forbes back in 2004. That was at a time when manufacturing output in emerging markets was growing 8% a year…and just 3% in the United States. And that was supposed to be a healthy post-recession figure.

Another factor in Farr’s reasoning is something we highlighted last month. Don’t forget about all those foreign-born engineering students at US universities who are choosing to return home.

This could be one reason that 54% of US executives surveyed by the search firm Korn/Ferry say they’d be willing to accept a post overseas. That compares with just 37% four years ago. Already, 24% of the freshly minted MBAs from MIT have accepted overseas posts. A year earlier? Just 19%.

Already by 2009, emerging markets accounted for one-third of Emerson’s revenue. (That’s up from just 14% when Farr became CEO, in 2000.) Foreign markets as a whole account for more than half of sales.

That puts Emerson in pretty good company. Nearly one out of every five S&P 500 companies now generates a majority of its sales overseas. (Coca-Cola is perhaps the iconic example: 74% of its revenue comes from outside the States.)

Those stand to be among the best performers among the blue chips in the years ahead. They’re exposed to healthier business environments overseas. And they’ll be insulated from the shock of a weakening dollar.

But Emerson (for example) has already had a good run over the last year.
Besides, if it’s overseas exposure you’re after, why not go for the real thing?

David Farr and other American CEOs find emerging markets a friendlier place to do business. And if American blue chips get a good reception, imagine how well the homegrown companies are treated.

That’s the idea behind a fairly new exchange-traded fund (ETF) with a mouthful of a name: The Dow Jones Emerging Markets Composite Titans Index Fund (NYSEARCA:EEG).

We prefer to think of it as the emerging markets “fund of tens.” That is, it aims to buy the 10 top-ranked stocks in each of 10 sector indexes Dow Jones has developed for emerging markets economies. The sectors are the usual suspects – energy, financials, basic materials, telecom and so on.

So the fund is never spread among more than 100 stocks. Not a bad way to hedge your bets if this is your first time getting into emerging markets investing. (And from the e-mail we get, we know you’re skittish about this.)

The practical result of this mix is that right now the fund is about 25% China and 25% Brazil – two emerging markets on a tear. The other BRIC countries, India and Russia, make up another 25%. South Africa, Mexico and other countries make up the remaining quarter. You even get a little exposure to former Soviet bloc countries like Poland, Hungary and the Czech Republic.

The top three holdings account for a little over 15% of the total:

  • Industrial and Commercial Bank of China Ltd.
  • Gazprom, the Russian natural gas giant
  • Petrobras, the Brazilian oil giant.

The fund is fairly new, launching last July. For its first year, it’s keeping expenses limited to a guaranteed 0.75%. Investing by sector, as EEG does, will give you the emerging markets exposure you’re looking for, without too much exposure to any one country.

Addison Wiggin
for The Daily Reckoning

The Daily Reckoning