The article which follows was written by Gary Sutton, who is a friend of my wife and me. He has been president of six different companies, most in a turnaround situation. He presently serves on several corporate boards and has written five business books.

I am sharing it because I feel the considerations of the board on which Gary serves are typical of those of thousands of manufacturing companies, past and present, resulting in millions of Americans losing their jobs to employees in other countries, especially China. It also warns that both our federal government and state governments need to be aware of the law of unintended consequences as they raise corporate taxes and pass laws that place further restrictions on manufacturing businesses, such as the proposed carbon cap and trade legislation, as is presently happening as Democrats return favors to the individuals and groups, such as unions, who helped elect President Obama and the Democrat majorities in the US House and Senate.

Let me give you an analogous domestic situation. Georgia is the only state among those contiguous to us that has a state income tax. You would be surprised at the number of high income people with houses in the LaGrange area whose official residency is Florida. In addition to not paying state income tax they save money on their annual car taxes, get a higher homestead exemption and get a yearly cap on how much their real estate taxes can go up.

The Sutton article:

“Let’s move headquarters out of the United States,” I told the other directors. “It’s the patriotic thing to do.”

Those strange comments made more sense after I explained.

The business is an optical instrument company in the Los Angeles area. Five years ago we stopped making the stuff here and switched to Chinese manufacturing. Three things happened:

1. Costs dropped 14 percent. No surprise there. Usually it’s more, but many of the components were already Asian.

2. Quality improved dramatically. Ooh. That was interesting.

3. Turnaround time from order to delivery dropped by half. Wow!

Reducing warranty problems, getting more competitive in pricing and never being out of stock helped us double sales the following year. Before that, we’d struggled to grow 10 percent to 20 percent annually. We doubled again the year after and again the year after that, with cash flows growing embarrassingly strong. Bigger margins let us hire more engineers and the product just got better and better.

We kept engineering and final inspection in southern California.

But when oil hit $150 a barrel, you start thinking sharper. In our case, air freight started to get painfully expensive and cargo ships looked smarter. (This fuel cost shifted back recently, but, the long term trend is pretty obvious.) There’s just one problem with those boats. They’re slow. And this puts too much inventory on the water, waiting a couple weeks before inspection approves the batches. That can be costly. Too much bad product can be built before a problem is caught.

Obviously, final inspection needed to move to Hong Kong. Build instruments in mainland China and check them the same day in Hong Kong. Catch problems fast.

As an added benefit, nearly half our orders come from Europe and the Mideast. So, loading product on a ship headed up the Suez Canal makes deliveries happen faster for those key customers than they do now by air. And freight costs drop.

This is straightforward.

But we’re a young company. We incurred losses in our early years. Gov. Schwarzenegger just rescinded the net operating loss carry-forward, so we’re getting taxed higher for the sin of being innovative in California.

You start to ponder. You look at the shareholder names. Some fat cats. But a teacher’s retirement fund here and a widow over there. A couple of insurance companies with middle class shareholders. And you start to ask, why should we slash those Americans’ returns by staying in the United States, paying 35 percent to the Feds plus escalating state rates?

Moving headquarters to Hong Kong, which is now communist, cuts that tax bill in half. Plus we gain the logistical advantages.

I discussed this with a couple guys whose wisdom I respect.

“But what can you do if China just decides to nationalize your business?” the first one asked.

Great question.

“We’ll keep the research in California,” I replied, “and why should we fear a Chinese takeover when that’s already happening in the U.S.? Those communists tax less than our governments.” Not a bad answer, I immodestly suggest.

“You can’t let them dominate us,” said another. Being a less rational comment, and a bit broader than my narrow mind, I explained that they already do economically. Our business would die if we tried building in America again.

If he saw the work ethic and thin bodies on the assembly lines over there, he’d understand. I’m sorry, but they gain weight when we employ them but still look skinny. Our major health crisis here, proven statistically, is obesity.

Will we do it? I don’t know. But it’s sure a startling thought. And why not?