Ethan Allen CEO Describes Challenges of Running a Global Organization

Globalization has had varying effects on countries and economies throughout the world. In the first of a series of conversations, NewsHour correspondent Paul Solman talks to Farooq Kathwari, CEO of Ethan Allen Interiors Inc.

PAUL SOLMAN, NewsHour Economics Correspondent: Ethan Allen furniture, how much more American can you get? The green mountain boy himself was a hero of the American Revolution. For decades, the colonial facade and furniture named after him were, for Ethan Allen's customers, early Americana incarnate.

And the company is still the state of Vermont's biggest employer. And, yet, Ethan Allen is about as global a company as you're likely to find, though world headquarters are here in Danbury, Connecticut.

FAROOQ KATHWARI, CEO, Ethan Allen Interiors, Inc.: The product is made in the Philippines, but all the upholstery is done right here in the United States.

PAUL SOLMAN: That's Ethan Allen's CEO, Farooq Kathwari, born and raised in Kashmir, an area both India and Pakistan have claimed for decades. Kathwari emigrated to the U.S. in 1965; he sold Kashmiri handicrafts to, among others, Ethan Allen, while getting an MBA at NYU, has been president and part-owner of the company since 1985.

FAROOQ KATHWARI: As we get into, say, this area, this is somewhat more of the classic 18th-century traditional.

PAUL SOLMAN: Ethan Allen now makes furniture all over the world, global styles, global sourcing.

FAROOQ KATHWARI: And if you look, for instance, at a chair like this, the frame, the metal frame is made in the United States. This leather is cut and sewn in Mexico, and it is upholstered in our plant here in North Carolina. This is Appalachian cherry, solid cherry. And these chairs are made in China.

FAROOQ KATHWARI: ... are made in China, but I would say let's give the benefit of the doubt it was made in America, because it's an American sofa.

PAUL SOLMAN: So what does Farooq Kathwari think of globalization? For starters, he defines the term very broadly.

FAROOQ KATHWARI: Globalization is more than the issue of just buying products cheaper from one country and marketing them in another country.

FAROOQ KATHWARI: Globalization to me means the world has now become smaller. You know, I'd never seen television until I left Kashmir. Today, 40 years later, the information that is in Kashmir, the young kids, they've got more channels than we do right here. They get channels from the east and the west and the north and the south.

So globalization, from that perspective, has created expectations, the expectations to do better. They want to have a better life; they see it all over the place.

FAROOQ KATHWARI: They see it on television; they see it on the Internet. They also see the need for better governance, the rule of law we are talking about.

PAUL SOLMAN: So that the expectation, "Hey, most of the world," someone sees in Kashmir, "they govern themselves. That looks like a good thing. Gee, we ought to try it." "It's very hard to do that. Our expectations are dashed. We get angry." That's what you mean?

FAROOQ KATHWARI: Absolutely. You know, Kashmir also teaches you something else. When I was young, I used to climb mountains and going to school was a hike. When you climb to 15,000, 20,000 feet, if you go too fast, you can get water in your lungs and you die.

So globalization is that kind of a change. You're going up a mountain. And if you go too fast -- and, unfortunately, today, around the world, we see a lot of changes are being made fast -- people are getting water in their lungs. And, you know, a lot of them, unfortunately, are dying because they are also not understanding another factor of a mountain: To save yourself, you've got to come down.

PAUL SOLMAN: Go slow, says Kathwari. Globalization is inexorable, but it can kill. And yet, to its American workers, it must seem Ethan Allen has globalized at a break-neck pace.

FAROOQ KATHWARI: Six years back, we were operating 23 manufacturing plants in the United States. They were all busy, 100 percent capacity. Six years later, due to many factors, we have had to consolidate 13 plants, 13 plants we've had to close.

And we today have 40 percent of our products now coming from offshore, many countries -- China, Philippines, Vietnam, Indonesia, India, and other places. If we had not done those things, we would not be competitive, because we would be dragged down by our plants that were not operating as efficiently as today you need to do.

PAUL SOLMAN: But the question is, it seems to me, that if America follows the Ethan Allen model and moves more and more of its manufacturing overseas, it could be that America loses so many jobs that, for most Americans, the impact is negative?

FAROOQ KATHWARI: Well, let me tell you, the Ethan Allen model, actually, is the opposite of what you've just said. We are in a business where there is a higher labor content, where we could say that we should not be making any products in the United States. So one would say, the hard-nosed person would say, "Why don't you just close everything and go overseas?"

PAUL SOLMAN: Yes, a couple of trips to China, sign somebody up. They'll make the stuff for you. You show them exactly what you want.

FAROOQ KATHWARI: It doesn't work that way. In our industry, we are most probably the only one which has made the amount of change we have made and maintained profitability. Almost everybody in our industry -- I'm talking public companies, larger companies who have gone overseas -- they have lost profitability, yet their reasoning was to increase their margins.

PAUL SOLMAN: What did they not figure in? Where were the costs, people stealing from them?

FAROOQ KATHWARI: Again, I'll use nature, because I'm a farmer, a part- time farmer. I grow -- I have an apple orchard up in upstate New York. And one of the farmers that worked there, who taught me pruning trees, said, "You know, when you prune this tree, don't prune it at one time. You're going to kill the tree."

American manufacturers, American industries, have closed their plants too fast. It is like pruning that tree. And what they've done is, in many cases, they have killed the tree. So we don't want to kill our tree.

PAUL SOLMAN: There are, Kathwari insists, long-term economic advantages to keeping production domestic. For example...

FAROOQ KATHWARI: Our factories, our wood factories have been located in the Appalachian Mountain range, where there's an abundant, renewable supply of wood, in cherry, oak, birch, maple. So we said, "This is great resource." China, Vietnam, and many of those countries have hardly any resource left. In fact, they're importing a lot of their products.

Secondly, we have no idea what is going to take place due to increase of costs in China. Energy costs are increasing; transportation costs are increasing. So there are a lot of these things that one is concerned about.

PAUL SOLMAN: Among them: terrorism abroad; protectionist import restrictions; major investments Ethan Allen has made for decades in American plants; American workers in revolt or terminally unmotivated, if they think no jobs will be left here at all. On the other hand, globalization has palpable plusses for America, says Kathwari.

FAROOQ KATHWARI: We have 17 Ethan Allen design centers in China. The 18th is opening in two weeks. And the interesting thing is that over 50 percent of the product that we are selling there is shipped from our plants in the United States to China, because we are one of the few companies in our industry shipping products, American-made products to China.

PAUL SOLMAN: But globalization is still costing America middle-class jobs, isn't it?

PAUL SOLMAN: Right, and you're contributing to it, I mean, the loss of the middle class, at least in part.

FAROOQ KATHWARI: But on the other hand, what we have done is also -- let me just tell you the other side. At Ethan Allen, we have actually added jobs at the middle and upper levels almost as much as we have lost at the factory level. We have added almost 1,200 new people in the last 15 months.

PAUL SOLMAN: Ethan Allen employs 3,000 interior designers alone, boasts Kathwari, employs its own architects, makes its own ads. But every one of those people you're hiring, I'm betting, has a college degree. Is that right?

PAUL SOLMAN: Twenty-seven percent of the people in the United States get a college degree, and that number is going down, for the first time I think in recorded history.

FAROOQ KATHWARI: Well, you know, that's a problem. This is where our leadership should pay attention to. I'm talking of our national leadership. Our education in this country is a disaster.

PAUL SOLMAN: As you can see, Kathwari is no Pollyanna. Indeed, he thinks of himself as a realist determined to make the best of life, perhaps because he's seen the worst, and not only in Kashmir. In 1992, his 19-year-old son died, fighting in Afghanistan.

FAROOQ KATHWARI: The loss of my son helped me understand that conflicts are not good. Conflicts need to be resolved. That's a responsibility of leadership.

FAROOQ KATHWARI: Globalization is the biggest conflict that we can think of. Environmental conflicts, trade conflicts, rule of law conflicts, expectations conflicts, all of those, to me, are part of globalization.

PAUL SOLMAN: So, finally, how does Kathwari think they should be resolved? With caution.

FAROOQ KATHWARI: I think that we should establish standards, that are international standards, that are enforceable standards about minimum wage overseas, environmental issues, health issues.

PAUL SOLMAN: If you impose wage standards on the rest of the world by American standards, the hard-nosed economist would say, then you're denying those people the right to pull themselves up by their bootstraps, by working inexpensively, the same way Americans did when we started out?

FAROOQ KATHWARI: Yes, I'm not talking of American standards. I'm talking about decent working conditions.

PAUL SOLMAN: Do you think it's possible that, when people look back historically at this period, of the last few hundred years, they might say globalization was not a good thing? That is, is it clear that the post-globalization Kashmiri is better off than the pre-globalization Kashmiri?

FAROOQ KATHWARI: They certainly are better. They're certainly better, even though there may be more suffering. They're better because they understand their rights better. They want to improve themselves. They also are less -- they are less tolerant of oppression or injustice.

PAUL SOLMAN: And so, for you, globalization is that potential to realize yourself that wasn't there in most of the world before this?

FAROOQ KATHWARI: Absolutely. My only concern has been, and is, that this is such a major change, it's a monumental change. But I think, whether we like it or not, we are living in a small world, and we've got to help everybody get up. If we don't do that, we're going to have more and more conflicts. So we have to help people get up and not to feel that somehow globalization means that we're going to do better and everybody else is going to stay down.

Now that the housing bubble is collapsing and people will no longer be able to take out home equity loans to buy $10,000 sofas to impress the neighbors, and with your stock at 5 year lows, just how do you plan to make future earnings...?

Globalization, which is irreversable, will eventually ravage our domestic economy. Businesses are outsourcing everything to cheaper foreign labor - even formerly classified high technology national defense components. When Sam Walton started Wal*Mart in Bentonville he insisted on marketing products made in America. Today going to Wal*Mart is like visiting Beijing. Volvo, Jaguar, Kia are owned by Ford and many “dometic” names are owned by foreign conglomerates. The 60,000 parts needed for an auto are manufactured all over the world. It’s pretty much the same with every major industry today. “Made in America” may look good but it means little or nothing. Unfortunately, it’s causing American wages to stagnate and eliminating our manufacturing base. And it’s going to get much worse.

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