In The End Value Is All That Matters

by BILL WADDELL

The big money people around the world are in a full blown panic over the financial implosion in Dubai.  The state owned bank there says it is about $35 billion short on its ability to pay its debt's – at least – and the best and brightest from around the world apparently have as much as $130 billion at risk with the money changers from the UAE.

The fact that Dubai can't pay its bills should come as no great shock to anyone.  Look at the map (doctored up with a few crude pointers I added):

You might wonder why Dubai became such a big trading Mecca since it is basically on the road to nowhere.  Anything going from China or India to or from Europe has to go way out of the way to get in and out of Dubai.

The answer is simple.  As I wrote in Manufacturing Crunch way back in August, "The UAE – Dubai – is not very widely understood. The Discovery and Travel channels paint a picture of a Disneyesque place, and it is true that there is a staggering amount of money in Dubai. The real economy of Dubai, however, is built on what amounts to non-violent piracy. Want to get around prohibitions against selling your US-made products into Iran or Syria? Sell to a broker in Dubai. Think the 35% import tariff into India is too high? Your Indian customer has a cousin in Dubai who will buy your product for $20 each, then sell them into India for an invoice price of $10 each, thereby cutting the tariff paid to the Indian government by half. Got a couple of containers of counterfeit name brand goods from China you want to unload – the brokers in Dubai are open for business. Need to buy a couple of containers of legitimate goods from a US or European manufacturer in order to keep your franchise even though you have no market for them? No problem – the diverters in Dubai will take them off your hands and sell them into someone else’s territory at a bargain price. Have some product with Israeli content you want to sell into Saudi Arabia in violation of their laws? The country of origin will disappear when the paperwork comes out of Dubai."

In other words, Dubai is a lousy location logistically, but it works just fine for people whose primary interest is breaking trade laws and generally cheating governments and others out of their money.  Dubai adds no legitimate value to anything, but there have been plenty of scammers, cheats, money launderers and assorted low-lifes mucking up the world's trade to make Dubai into quite the boom town – but none of it was based on real value.

The silver lining behind the tough economy is that, when the going gets tough, the houses of cards are the first to collapse – and so it is with Dubai.  The palm tree shaped man-made islands, indoor ski resorts and other absurd toys for the wealthy who made their money doing business in hollow places like Dubai are the first to go.

Contrast that with Germany – expensive, way-too-rigid, low-on-humor-and -long-on-hard-work Germany.  In spite of a lousy exchange rate, and in spite of high labor costs, the Germans are pulling themselves and much of the rest of the Eurozone up by their bootstraps with solid German value exports.

Whether it is countries or companies, solid fundamentals and a tunnel vision focus on value adding is what pulls people through and out of the tough times.  Whether it is in Dubai, Wall Street, or among the manufacturing community rife with companies who have lived on clever marketing and even more clever financial nonsense and profits that are not based on real value, cannot sustain.