The North American Free Trade Agreement (NAFTA) has contributed to diminishing the Mexican economy because of its dependence on agriculture. Since the introduction of the treaty in 1994, Mexico has been struggling to find an answer to mounting trade deficits in the agriculture sector. However, if Mexico can successfully implement much-needed changes, Mexican farmers may be able to enjoy a prosperous future.

The Economic Impact of NAFTA on Mexican Agriculture

Introduction

The North American Free Trade Agreement (NAFTA) is a trade agreement that took effect in 1994, between the United States, Mexico, and Canada. Most American citizens take notice of the fact that Mexico has drained industrial and technical jobs from the United States in significant numbers. NAFTA has enabled companies in Mexico to obtain these jobs because companies can pay a Mexican worker less than 20% of the pay for the identical job in the United States. As American automotive manufacturers demand cheaper parts from their suppliers, the suppliers are forced to build plants in countries like Mexico while taking advantage of lower costs labor and free trade between the countries.

However, Mexico is not faring well in all business areas. There is one sector of the industry that even cheap labor cannot compete with the industrial muscle of the United States and Canada. Mexico’s once independent and stable agriculture industry has been trampled by their northern neighbors to the point that Mexico can no longer compete. The United States can sell corn other indigenous Mexican crops to Mexico at much cheaper costs than Mexican farmers can produce it, and in greater quantities. As the Mexican population expands, citizens are depending on corn at an increasing rate. Mexican farmers are giving up the industry or are living well below poverty. The country is attempting to offset the trading loss. However, matters may get much worse before they improve. A discussion of this economic dilemma with Mexico and NAFTA will be discussed as well as suggestions on what Mexico can do to improve its trade deficit without violating the NAFTA agreement.

NAFTA Overview

The North American Free Trade Agreement, or more commonly known as NAFTA, is a wide-ranging trade promise involving the United States, Canada, and Mexico in a free trade area. NAFTA was officially in effect on January 1, 1994. The agreement prescribed the instantaneous abolition of import taxes on half of all U.S. merchandise distributed to Mexico and progressively eliminating out further import taxes over an interval of almost 14 years. Trade limitations were to be done away with from numerous merchandise classes, including automobiles and automotive parts, computers, fabric, and agriculture. The agreement additionally safeguarded intellectual property rights such as patents, copyrights, and trademarks and set the framework of the elimination of boundaries on investment between the three nations. Requirements concerning employee and environmental protection were further added as an outcome of additional arrangements authorized during 1993 (Office of NAFTA and Inter-American Affairs, 2004).

Chapter 7 of NAFTA is known as the agriculture chapter. This text spells out the policies for the agricultural trade involving the three North American nations. It includes three discrete bilateral provisions for U.S., Canadian, and Mexican agricultural trade. This chapter’s objective is the liberalization of agricultural exchange and the decline, eradication, and synchronization of sanitary and phytosanitary (plant sanitation) procedures. Because of arranging a trilateral agricultural operational cluster, the NAFTA regulations strive to circumvent hindrances produced by phytosanitary procedures, to synchronize agricultural categorization and to widen grading and marketing benchmarks. Additionally, it promotes the purging of export subsidies and the exercise of domestic assistance programs that do not warp trade (Office of NAFTA and Inter-American Affairs, 2004).

NAFTA forbids the implementation of phytosanitary procedures as camouflaged obstacles to trade. However, there is no provision in NAFTA that inhibits any of the three countries from creating regulations to shield consumers from hazardous food or defend domestic harvests and farm animals from foreign infections, members are persuaded to implement international and regional regulations where fit. Providence, state, and local authorities are permitted to ratify standards more rigid than those accepted at the nationwide level, provided these standards are scientifically justifiable (Office of NAFTA and Inter-American Affairs, 2004).

The 14-year phase-out of tariffs under NAFTA is escalated as the period ends. The following is the schedule of tariff changes under the agreement (Office of NAFTA and Inter-American Affairs, 2004):

• January 1994: The removal of Mexican duties on US sorghum, assorted citrus fruit, fresh strawberries, and oranges. In return, the removal of U.S. duties on Mexican corn, sorghum, barley, soy meal, apples, pears, peaches, fresh strawberries, beef, pork, and poultry, and oranges.
• January 1998: Outdated tariffs under the Canada-United States Free Trade Agreement (CUSFTA) were done away with. The eradication of Mexican levies on US pears, plums, and apricots. Additionally, the removal of U.S. taxes on Mexican non-durum wheat, soy oil, and cotton was implemented.
• January 2002: Marked the removal of Canadian agricultural dues on Mexican fish, meat, sugar, flour, dairy, and beer.
• January 2003: Introduced the purging of Mexican tariffs on US wheat, barley, rice, dairy, soybean meal and soy oil, poultry, peaches, apples, frozen strawberries, hogs, pork, cotton, and tobacco. Furthermore, removal of US tariffs on Mexican durum wheat, rice, limes, winter vegetables, dairy products, and frozen strawberries was introduced.
• October 2007: Marks the abolition US-Mexico sugar tariffs
• January 2008: Removes US tariffs on Mexican frozen concentrated orange juice, winter vegetables and peanuts. At this time, Mexican tariffs on corn and dry beans will be eliminated.

NAFTA’s Impact on Mexican Agriculture

NAFTA’s accord on agriculture has delivered considerable sacrifices for food processing companies. Agricultural production has progressively more set focus on large-scale farms, factory-type livestock lots, and capital-intensive food manufacturing. As a result, this will place demands on small-scale farms, for the most part on subsistence domestic farmers in Mexico. Mexico has clearly been dealt the hardest blow to its agriculture market due to NAFTA (RMALC, 2004).

Recent studies have pointed out that Mexico has endured a net loss of profitability since the implementation of NAFTA. The number of agricultural exports improved by 63% between 1993 and 1996, at the same time as imports increased 87.4% in the same time frame. The livestock segment tapered 27%, as imports rose 4%, ensuing in a 108 million dollars trade shortfall in the segment in 1996. The agricultural trade tally recorded a loss of 740 million dollars in 1994 and 1.086 billion dollars during 1996 (RMALC, 2004).

The statistics illustrate that agricultural exports are not keeping up with the rise in imports so that Mexico’s reliance on food importation is in decline resulting in the unenthusiastic outlook on Mexican farmer’s agriculture outlook. This gives the impression that the Mexican agricultural infrastructure is falling apart. Many farmers and producers’ establishments, including added public associations and market analyst, are against the outcomes of the NAFTA discussions in this segment that had calculated that Mexican farmers would benefit from the treaty (RMALC, 2004).

Mexico’s economy heavily relies on agriculture. Agriculture produces 8 percent of Mexico’s gross domestic product (GDP) and retains about 22 percent of the labor force which is estimated to be 8 million personnel. In comparison to the United States, agriculture consists of merely 2 percent of GDP and provides work for about 2.7 percent of the labor force of around 4 million personnel. Despite having half the amount of farm labor, the United States has significantly more arable soil than Mexico. No more than 12 percent (143 thousand square miles) of Mexico is arable whereas 19 percent (1,118 thousand square miles) of U.S. land is arable. This difference points out that the United States is much more efficient than Mexico when labor is compared to the area (United States-Mexico Chamber of Commerce, 2005).

Mexican producers of agriculture find it unattainable to try to win against the industrious capability of the United States and Canada. This compromise was accomplished in exchange for more encouraging remedies for the fruit and vegetable segment; however, these Mexican exports are still held back by non-tariff barriers. These barriers include strict regulations by food regulators in the United States and Canada (RMALC, 2004).

By promising new market admittance and eliminating Mexico’s supply management of corn and its value foundations and additional food security policies, NAFTA unlocked Mexico to imports of corn purchased at subtle prices from U.S. and Canadian farmers who in the past had lower costs, given their vastly automated large-scale fabrication. The import cost at which goods trading corporations offered corn for trade in Mexico was well beneath the bottom price Mexican farmers had gotten before NAFTA. The results were that Mexican farmers who were incapable to contend with U.S. and Canadian producers gave up farming, and Mexico has turned out to be progressively more reliant on corn imports (RMALC, 2004).

Unequivocally conflicting to free trade supposition is that corn prices for Mexican consumers would lift regardless of the reality that corn growers received inferior prices. Additional outcomes were less extensively calculated. The introduction of the genetically equal monoculture corn from the United States and Canada is driving the genetic assortment of Mexico’s native corn mixture to the threshold of extermination (RMALC, 2004).

To make matters worse for Mexico, during negotiations for the NAFTA talks, supporters of the treaty emphasized that free trade would by design result to better environmental circumstances in all three countries, principally Mexico. By increasing incomes, they argued that NAFTA would produce the funds to underwrite environmental improvement. However, Environmental degradation has excelled. Additionally, information from Mexico’s National Institute for Statistics, Geography, and Information Systems (INEGI) detail how this environmental degradation has damaged the benefits of Mexico’s trade and industry intensification (Gallagher, 2004).

According to INEGI, amid 1985 and 1999 countryside soil erosion escalated by 89%, community solid waste production by 108%, water contamination by 29% and metropolitan air pollution by 97%. The organization’s investigations calculate approximately the economic costs of environmental degradation at 10% of Gross Domestic Product from 1988 to 1999, a median of 36 billion dollars in damage every year. The price of this damage engulfs the rate of financial growth, which has lingered at a median of 2.5% yearly over the identical time frame, or 14 billion dollars annually (Gallagher, 2004).

The Mexican government has been put under tremendous pressure to close the gap in the agriculture trade deficit. In 2003, Mexico’s President Vicente Fox reacted by singing a pact after farmers initiated recurring demonstrations against imports permissible under NAFTA. The pact has increased the concern for some U.S. farm clusters that Mexico’s President will give in to the pressure from its farmers to renegotiate NAFTA obligations on white corn and dry beans. Renegotiating the agriculture chapter has been a vital stipulation of small farmers throughout Mexico, mostly amongst maize farmers who survive mainly at subsistence levels. However, a Mexican study has emerged in opposition to renegotiating the agricultural chapter of NAFTA. It recommends in its place that the nation ought to build up a policy to craft its farming sector to be competitive (MPC, 2003).

North of the United States border, Canada’s overall agriculture trade is much more positively affected by NAFTA. Since the realization of the NAFTA, agricultural trade between Canada and the United States has improved by 82%, accomplishing in access of 25 billion dollars. Additionally, Canadian exports have matured by 92% to attain over 14 billion dollars. Some of the accomplishments for Canada under NAFTA include (Elliot, 2004):

• A 700% increase in exports of soybean oil, a 400% increase in the exports of sunflower oil and a 44% increase in exports of canola oil to the United States
• Canola exports to Mexico have more than tripled, oats exports have increased 700% and wheat exports have increased by 65%
• A 200% increase of beef exports and an 87% increase in pork exports to the United States, and a 2500% increase in beef exports and a 300% increase of pork exports to Mexico
• Pasta exports to the United States increased by 300% and malt exports have increased nearly 500%
• Exports of frozen French fries to the United States increased 400%, and to Mexico, they are 10 times higher
•  Exports to Mexico of dried beans increased 700%, dry pea and lentil exports increased 500%, and exports of frozen vegetables to Mexico increased by 78%

Since the United States and Canada are both able to mass produce agriculture, the two countries frequently clash with each other in regards to trade. Canada and the United States have taken up high profile trade disputes with each other. One of the biggest disputes is over wheat. Each country accuses the other of unfair practices and tariffs to hamper the success of trade. Lumber is another common dispute area (Elliot, 2004).

Improving the Outlook of Mexican Agriculture

Mexico’s failure to compete with the United States and Canada in the agriculture segment is embedded by many factors. While these elements are crucial to the survival of Mexican agriculture, they can be achievable under current NAFTA guidelines with the cooperation of Mexican farmers and the government. The following details an economic plan to assist in an improvement in the industry (Robinson, 2003).

Mexico’s dependence on a single free trade treaty with its partner’s highly productive agriculture segments has put them at a disadvantage competitively. Mexico endeavored to advance its economy lacking the assistance of its robust northern partners it and has fundamentally disastrous because of it. Mexico should broaden their market to diminish the reliance on the United States and Canada by moving ahead with bilateral trade pacts with other nations. Analysts furthermore state that added trade with the remainder of the world will aid Mexico to bolster its competitiveness to respond to the mounting competition from China. Agriculture companies in Mexico should support such pacts and focus on the products that are unique to Mexico (Robinson, 2003).

Worldwide manufacture of cereals, meats, cheese, sugar, and vegetable oils is expected to outpace utilization over the subsequent ten years. These should temperate intensification in trade and amplify across the board in world prices. Worldwide grain production is estimated to increase by up to 17% by 2013.Growth in world oilseed production is projected to be sluggish due mostly to some relief in the rate of Brazil’s productivity. Mexican companies should be able to take advantage of these forecasts by concentrating crops that will be high in demand in the ensuing years (Robinson, 2003).

Mexican marketers should push their products to make them more appealing to consumers around the world. Competition is intense, with today’s customers more meticulous and pushing higher quality and sensible prices of the products they buy. Hard-hitting and concentrated promotion will be the answer to success in this market. Five-star hotels, restaurant, and institutional trade, as well as targeted niche markets, will be majority positive for food at the upper end of the processed food segment. For example, Florida constantly markets the quality of their oranges. This promotion has caused a demand for Florida oranges (Robinson, 2003).

Mexico is presently facing various environmental troubles. One such problem related to their agriculture capacity is the country’s shortfall of available water resources for the population’s daily requirements. Its requirement for water sources has been on an unremitting growing demand in current decades because of populace growth and escalating per capita requirements due to modern technology. The central water hurdle facing the country in the will be how to supply a sufficient amount and quality of water in a sustainable and gainful manner for a diverse range of water applications for this rising population. The government, as well as regional agriculture producers, must invest in innovative means of supplying water to people and crops (Robinson, 2003).

The United States has an additional advantage due to the farm subsidies available that are lacking in Mexico. U.S. farmers can generate seven times as much as the Mexican market, with merely 2 million U.S. farmers. In contrast, Mexico has approximately 8.6 million farmers to produce agriculture. For the most part, the disparity within Mexico’s lack of production is pointed to the deficiency of improvement in technology as its hurdle to contending with the U.S. Others indicate that Mexico’s land restructuring of the 1930s is a large ingredient of the crisis. This restructuring restricted the quantity of land a farmer can own to 100 hectares and in the majority circumstances, much less. This has not added to the effectiveness in the agriculture market concerning tons of food created per hectare and per man-hour. Decades of disregard by Mexico’s government has additionally kept back Mexico’s farming systems and rendered them obsolete. The country must remove the land cap and allow farmers to own more land. Furthermore, the government must find ways to subsidize farming to get a jump start in the market (Robinson, 2003).

Conclusion

Mexico must invest in their farming technology, introduce new farmer land privilege laws, give support to agriculture subsidies, direct water sources, and to reshape their farming structure to improve the agriculture trade deficit. As their agriculture improves, their general economy will be greatly improved because of the dependency of the market. Those exporters who have kept a presence in the Mexican market and preserved contiguous relations with distributors, importers, retailers, and consumers will be in the best situation to benefit of the economic resurgence.

References

Elliot, I. (2004). Canada-U.S. wheat spat goes to NAFTA. Feedstuffs, 76, 46. Retrieved June 3, 2005, from Proquest database.
Gallagher, K. (2004). Paying for NAFTA. NACLA Report on the Americas, 38, 1. Retrieved June 3, 2005, from Proquest database.
MPC. (2003). Mexico’s president signs new farm policy pact. Feedstuffs, 75, 18. Retrieved June 4, 2005, from Proquest database.
Office of NAFTA and Inter-American Affairs. (2004). NAFTA text. Retrieved June 1, 2005 from http://www.mac.doc.gov/nafta/
RMALC. (2004). The impact of nafta on mexican agriculture. Retrieved June 2, 2005 from http://www.developmentgap.org/rmalcag.html
Robinson, L. (2003). NAFTA moves closer to free trade promise. Retrieved June 4, 2005 from http://www.txfb.org/TexasAgriculture/2003/011703/011703NAFTA.htm
United States-Mexico Chamber of Commerce. (2005). NAFTA: Agriculture. Retrieved June 7, 2005 from http://www.usmcoc.org/n8.html

The post The Economic Impact of NAFTA on Mexican Agriculture appeared first on Michael A. Hartmann.

The harsh reality of an economic downturn is that companies must make decisions to perform budget cuts to compensate for diminishing revenues. Budget cuts can be comprised of a combination of sources. These include outsourcing, employee reductions, service reductions, employee benefit changes, organizational realignments, liquidation, or any resourceful techniques to decrease expenditures. Each decision carries its own incentives as well as consequences. Several of these decisions for reducing budget costs will be discussed.

Facing Budget Cuts

Overview

Economic cycles can significantly affect companies in how they handle their financial planning concerns. During prosperous times, managers appear to have an unconstrained budget that permits conglomerates to expand their products into additional markets or to offer more diverse services to customers. On the other hand, during slow economic times administrators are pressured into decreasing budgets in order to compensate for dwindling income levels. This is in response to ensure the survival of the company through these economic downturns without degrading the company’s core competencies. How managers act in response to financial stresses within the organization will result in significant outcomes that are dependent on their skillfulness (McGarahan, 2001).

Developing a Strategy

It is essential for management to develop a realistic strategy in advance to implementing any actions to reducing a budget. There are many directions for a manager to consider that would achieve their objective to trim down expenditures. Cutting costs is a business decision that should be based on well thought out plans that will minimize the impact on the organization. When a financial short fall is recognized, management without delay must amalgamate and answer certain fundamental questions (TechRepublic, 2003).

These questions can be comparable to the following:

• What are the company’s long-term plans? Management can reiterate the current mission, goals, and appraise the existing capacity of the company. This incorporates a realistic assessment of what the company will be able to offer to customers in the future (TechRepublic, 2003).
• How will the company position itself to be successful and profitable? In the changing climate of the industry, the company will have to find a balance between profitability and maintaining their position in the industry. Managers must calculate approximately how the financial recession will affect their entire industry. Furthermore, companies must determine if the monetary degeneration will influence them to take on a changed role in the industry (TechRepublic, 2003).
• What are the preliminary plans for cost-cutting? This includes estimations on how much funding will be necessary to cut and what functions of the company can be afforded to be reduced or viable candidates for elimination (TechRepublic, 2003).

Subsequent to these preliminary inquiries are fulfilled, management must investigate into much greater detail what functions can be eliminated or receive reduced funding. This can be accomplished by generating a discrete priority list of the business functions that are genuinely business essential. In the same respect, a list of business functions that would be negatively impacted if reductions were made to its financial support can be constructed as well. This list includes all the opportunity costs that a cost cutting decision would incur and all of its successive consequences. These lists can assist in directing executives to make a decision on what functions of the company can be financially decreased or eliminated with a minimal impact to productivity (TechRepublic, 2003).

Organizations will find it necessary to recognize and return to their core competencies. This entails that the company begins to return to the basics of the company’s core mission. During flourishing economic times, companies have a tendency to investigate and expand into new services that may not provide added value to the company. A company may have lost its focus and have ventured out of the boundaries of its deep-seated core strengths. Functions that were previously attractive now may have developed into a hindrance to the potency of the company. All activities must be lined up with the strengths of the company. If these functions fail to meet requirements, they should be considered barriers to financial recovery (TechRepublic, 2003).

Outsourcing

An opportunity that companies can consider in order to reduce costs is to outsource certain activities. Outsourcing offers ways for companies to preserve functionality while saving on costs including labor expenditures. If a company already makes use of outsourcers, management may find it beneficial to evaluate their current contracts that are about to expire. Companies can take advantage of outsourcing companies that are also facing budget cutbacks that will aggressively compete for their business (TechRepublic, 2003).

Management must be aware of the advantages and disadvantages of outsourcing and decide if changing to outsourcing is best for the wellbeing of the company. Executives must effusively investigate the prospective service providers before making any commitments. Some contractors may not be able to deliver the cost savings that was anticipated. Some of the advantages of outsourcing include (ROK Connect Limited, 2003):

• Permits a business to focus on core activities
• Streamlines a business’ operations
• Gives access to professional resources that might be their specialty
• Shares the risk
• Confidence that the process is in excellent hands
• Removes the pressure in regards to continually developing new technologies
• Improves service quality
• Releases manpower to focus on other company functions
• Liberates cash flow
• Increases the control of the business
• Enables the business to be more flexible to changes in the demand of the market

The disadvantages to outsourcing are as follows (ROK Connect Limited, 2003):

• The fear of the service provider going out of business
• A company may lose control of the process
• Creates potential redundancies
• Competitors may also be using the service provider. As a result in some cases, the best interests of the service provider may be weakened with other clients
• A company may lose focus of the customer and give attention to the product, the outsourced process
• The loss of talent generated within the company because of dependence on the outsourced company
• Employees may react negatively to outsourcing and as a result their quality of work may suffer

Once management decides that outsourcing is the proper pathway to proceed, intense investigations of qualifying providers must be accomplished. They must discover the histories of the past and current clients of each prospect to gain references on their service quality. They must ensure that there are no hidden terms or costs associated with choosing them as a partner. Last but not least, they must make certain that the company has long term financial stability (ROK Connect Limited, 2003).

E-Learning and Employee Training

A frequent oversight performed by companies during budget constraints is to eliminate staff training. Training is crucial to growth of opportunities within the company. In lean times, training can help increase productivity and improve the overall morale of the company. While layoffs may be inevitable, the costs of replacing valuable staff is always much higher than retaining and training current staff. These core employees will help guide the company throughout hard economic times (Rueda, 2002).

Conventional employee training can be expensive and rather unattractive to management during budget restrictions. A trend in employee training that offers a low cost solution is E-Learning. E-Learning provides a cost effective opportunity for employees to become more efficient. Career education will enable employees to concentrate on their career paths and not on the financial predicament of the company. E-Learning can also assist in helping employees to become skilled at additional tasks that will be added to their duties during any restructuring that the company may have to endure. E-Learning is easily accessed by the employee and can turn them into a better performer to enhance the company’s overall effectiveness (Rueda, 2002).

Employee Downsizing

A manager my find themselves in the position where the downsizing of employees can not be avoided and becomes a causality of a reduced budget. Out of all the changes made to slash budgets, the downsizing of employees will have the most impact on the culture of the organization. Not only are the employees that are selected for layoffs affected by this change, survivors of the reductions may also have difficulty coping with this transformation. A company must carefully perform downsizing in a strategic fashion to limit any ramifications to the culture of the establishment (About, 2003a).

The objectives of downsizing employees are to increase productivity, quality, profitability, customer service and to reduce costs and wastes. The decision to layoff employees is not made lightly. However, once this assessment is made, managers must be conscious that their actions during this time can improve or erode the climate of the organization. If layoffs are instituted correctly, it can be possible to increase the chances that positive results can be achieved. There are simple but complex strategies that can be used to achieve these optimistic benchmarks (About, 2003a).

Some managers will withdraw from visibility throughout the layoff period. These managers may be planning for the future of the company or intentionally avoiding contact with employees’ altogether. The change that layoffs produce is a major event for a company to undergo. Management that does not make themselves visible to the survivors during these times will result in negative implications to the morale of the company (About, 2003a).

Layoff survivors need interaction with their supervisors on a daily basis. Leaders must be able to pay attention to employees that may express pain and sorrow. Leaders ought to appear strong and able to set the tone of the changes being undertaken to be positive to the company and to all the remaining employees. Employees should have confidence in their leaders or they may be suspicious of the intentions of management (About, 2003a).

In order to combat the negative impacts to company morale, climate and culture, management needs to reconstruct the work environment. Survivors must be able to have their self-esteem developed to find their work gratifying. Managers will discover that this is easier to accomplish if they keep the lines of communication open. For example, an executive can meet with employees and let them ask questions that they might have concerns with. Management can help the employees to visualize the new role and direction of the company. Company mission, vision and values can be reemphasized to keep employees focused on their responsibilities (About, 2003a).

Further attention can be given to each individual worker to enhance the success of changes due to employee reduction. Employees are keen on feeling secure and appreciated in the bounds of a company. A good supervisor will be capable to communicate the reasons why workers are valued to the company on a group basis as well as on an individual basis. Survivors ought to know their new individual responsibilities in the organization. Workers also will want to be aware of any new changes in the company that will affect their career path (About, 2003b).

Survivors also carefully watch how the company conducts the layoff process when employees are terminated. In order to maintain morale, survivors must see that the downsized employees are treated with dignity and respect. The practice of escorting people and their personal items out of the door using security officials or supervisors is not an effective way to make survivors feel affectionate about the organization. A more practical technique would be to conduct a meeting towards the end of the day when most of the workforce has left and divulge the dire news to the downsized workers. This would be followed up with a gesture by the supervisor to assist the individuals to gather their belongings. This may possibly present a less damaging impact to the culture of the company (About, 2003b).

Some companies also have found it successful to get in touch with the former employees several days after they depart the company in order to check up on them. This can soften any negative attitude that the laid off employees may carry against their former company. This would be especially beneficial if the ex-employee still maintains contact with current survivors of the company who may perhaps desire to discuss the experience on how the company deals with individuals during layoffs (About, 2003a).

A manager should be attentive of the fact that each employee may respond differently during change. Some employees may be able to accept and adjust to change easily. Others may have some difficulty when transformations occur. Generally people become better at accepting change with experience. However, it is wise not to downplay the potential reaction to change that an individual may bring to bear (About, 2003b).

Management must recognize that workers may need an avenue to communicate their grief and anxieties. Some people may be able to talk about the situation with supervisors and co-workers to vent. Others may suffer silently. There are some individuals that may express their concerns even if they support the changes. There are possibilities that some employees may try to undermine change efforts. The key for managers is to allow survivors a period of grief before any expectations of increased productivity are achieved (About, 2003b).

Managers, supervisors, leaders, human resource managers and change agents must be aware of these issues surrounding change and the potential resistance to change during employee downsizing. Managers must support employees in the company all the way through the heartaches of downsizing. An understanding of the normal progression of change during layoffs is essential. Most importantly, leaders should not expect an immediate return to total productivity (About, 2003b).

Employee Benefits

Employee benefits have been a growing financial burden for a company to continue to offer its workers. Some companies may mull over the proposal to trim down or do away with job benefits during nerve-racking economic times. Benefits are necessary to attract and retain highly qualified staff. This dilemma has resulted in some companies to find alternatives to reducing the costs of benefits but without pillaging the benefits package (Elswick, 2003).

One method of achieving these results is to establish higher co-payments for prescription drugs and office visits but counterbalance the additional cost by launching employee Flexible Spending Accounts (FSA) (Elswick, 2003). An additional way to save on health costs is to take advantage of a Health Reimbursement Arrangement (HRA) plan. HRAs offer unique advantages over Flexible Spending Accounts. With this, the employer can obtain a high-deductible PPO plan such as one with a $1,000, $2,000 or $3,000 individual deductible. Switching to a high-deductible plan has the capability to considerably reduce the group’s monthly health insurance premiums. With an HRA, the employer funds a percentage of the deductible even as the employee funds what’s left. The employer contribution is tax-deductible. Apart from the preliminary deductible funding, the health plan operates the same as normal (Spalt, 2003).

A concluding way for fully insured employers to save in redesigning their health plans, for all intents and purposes entails presenting employees with the choice of maintaining their existing level of benefits but shell out a higher contribution rate, or halt their contribution rate but accept a lower level of benefits. In-between options also may be introduced (Spalt, 2003). Introducing modest cost sharing such as these can have the same effect as cutting out complete features of your benefits plan, according to research published in the June issue of Health Affairs (Business Review, 2002).

Proactive Planning

The solution to restraining the effects to budget concerns is to be proactive to economic changes and not reactive to these fiscal fluctuations (Themba-Nixon & Vizeuta, 2003). Businesses can be affected by long term economic recessions and are also vulnerable to the business cycle of an industry. Business cycles are short term fluctuations of the collective economy around its long-run growth path. In order to prepare for the future that affects a companies financing, pricing, and employment strategies, it is necessary to recognize simultaneously how the business cycles and overall economic cycles impact the company (Spurge, 1997).

In order for an organization to be strong during hard economic times, a company is better off being geared up for change during prosperous financial times. A company that has built up cash reserves and has trained employees efficiently will help their positions in a slow economic environment. Those competitors who have not been prepared may be vulnerable to companies that have executed a well designed financial strategy (Themba-Nixon & Vizeuta, 2003).

Companies that prepare themselves for modest economic times may be able to use the situation to their advantage and open up opportunities to capture additional revenue. As the functions of competitors are deeply affected because of bad financial planning, well planned companies may be able to use their competitive strength to their advantage. Customers and clients will also be attracted to the stability and efficiency of the organization (Themba-Nixon & Vizeuta, 2003).

Jabil Circuit Case Analysis

Attempts to interview management at Jabil Circuit were unsuccessful. Therefore, a discussion on the effects of changes in a budget crisis in the company will be derived from personal experience of the author. Opinions of the author will be also included in the analysis.

Jabil Circuit is a company that specializes in the Global Manufacturing Industry. The company was established in 1966 in Detroit, Michigan and now is incorporated based out of St. Petersburg, Florida. Jabil has over 40 locations worldwide in 18 different countries.

During early 2000, the company did not have such a diverse global presence. One location in Auburn Hills, Michigan was responsible for generating 500 millions dollars of the three billion dollars generated annually worldwide. The Auburn Hills plants were viewed as the company’s top location, which was able to produce an outstanding 12% profit sharing bonus for all Auburn Hills employees. The Auburn Hills plants had contacts with Johnson Controls Incorporated, Lucent Technologies, Avaya Communication, Magellan, Motorola, LTX, Cereva, Phillips and Xedia Corporation. The company was flourishing with the success that the economy provided, especially in the internet telecommunications and automotive industries.

The plant could not hire fast enough to keep up with the employment demand. The company frequently brought in engineers by sponsoring workers from other countries such as Mexico and the Middle East to fill these positions. Raises for employees were generous and promotions were readily available for the taking. The company frequently threw parties for the employees to increase morale and to reward those who worked hard as a team effort for their high productivity.

Three years prior, in 1997, the company released half of its employees in the Auburn Hills plant. Survivors of that reduction would repeatedly enlighten workers how malicious and inconsiderate the company was with handling those layoffs. At this time, the plant was mostly comprised of recruits after the 1997 layoffs. For the reason that these new workers never experienced how the company handles employee reductions, and the thriving status of the company, these employees did not take these warnings seriously. The morale of the company was at its height, boasting 4000 employees in the Auburn Hills plants alone.

By the end of 2000, the telecommunications boom started to taper down and entered a period of decline. Avaya and Lucent began to reduce its orders for work. Jabil Circuit had amassed about two billions dollars in cash reserves in preparation for any short term economic crisis that may have surfaced. The company responded by reducing the budget, which place an end to most company sponsored events. Initially these changes had no impact on the culture of the company, the company simply stressed that we needed to be on a continuing pace for efficiency.

In March of 2001, the economy was fluctuating. Despite this, the employees on the Avaya work cell were treated to a fun time at Gameworks with all expenses paid for. This was a result of the work cell producing a record breaking quarter at 47 million dollars. The company then boasted about the 8% profitability of the plant despite the unsteady economy. This meeting later became to be known as the last supper.

The following week, Avaya announced that they were severely over stocked, and unable to move inventory. They did not anticipate any orders for Jabil for the next three months or longer. Jabil immediately responded by firing about 400 employees at the plant. There were no indications that the company was going to cut back on employees and the scene was ghastly. Towards the end of the shift, they separated the employees in two groups and asked one group to enter a room for a meeting. The others would remain on the floor for a separate meeting. They asked the employees to gather their personal belongings because they were going to get to go home early. They took the one group in a room that was full of security officials and informed them that they were immediately terminated. This was unexpected to everyone, knowing that they were just rewarded the week prior. When the door opened, access to the floor was blocked by an army of management and supervisors, only allowing a path to exit the building.

Survivors were deviated by the surprising news. An immediate distrust brewing across the plant toward the company was felt. Productivity started to dwindle and people were constantly in the dark, wonder what the company might do next. Workers were fearful of being unemployed without warning. Jabil had handled the termination of the 400 employees in the wrong manner. This set a negative impact and tone to the culture of the company. These bombshell layoffs were arbitrarily conducted until the middle of 2003, all using deceitful tactics. Each time, employees were increasingly worried about their jobs and not on productivity. Parallels were drawn to compare the company’s layoff tactics to being a solider in Vietnam. The scenario would be as if soldiers were being killed all around an individual, wondering when it would be their turn to get hit. Some workers wished that in the next round of layoffs, they would be terminated just to get it over with.

During the course of these layoffs, the company did not layoff a single foreign sponsored employee. This caused some resentment among the domestic workers. To make matters worse, Jabil used some of its two billion dollars in reserve to acquire plants all around the world. Jobs from the plant were quickly sent out to these newly formed locations. This further put the employees at odds with the company as people were laid off and their jobs were sent overseas.

Jabil Circuit is estimating revenue of 4.73 billions dollars for fiscal 2003. Financially, the company executed its change to the economic crisis with great success. Globalization of the company has brought on enormous change to the company. The impact to the culture of the company, particularly in Auburn Hills has been devastating.

Today, survivors still hold great distrust in the company. Many of them may leave the company as the economy continues to increase and opportunities at other companies are available. The remaining 600 survivors from the original 4000 employees in 2000 will have plenty of warnings for any future new hires within the company. If cutting a budget involves management to be deceitful to employees, they have failed to effectively manage change. However these intangible assets that include company culture and company morale do not appear evident on annual reports.

Conclusion

A company must approach budget cutting with careful strategic planning. This embraces the need for management to be knowledgeable on the assortment of options to be considered and the effects of each decision. The company should take into consideration the ramifications of the cultural characteristics of the company as well as financial impacts. Employees and customers will judge the company by the decisions made during these hard economic times.

References

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