More Productivity, without More Profits?
Tech execs and economists at this year's World Economic Forum said this disturbing paradox is a rather likely scenario
businessweek.com
Were the astounding productivity gains by America's high-tech titans just another mirage of the Roaring Nineties? No way, according to the leading U.S. tech CEOs who appeared at the World Economic Forum in New York. In fact, vowed Compaq Computer Chairman Michael D. Capellas: "I don't think we've hit anywhere close to the limits of productivity growth."
So will that mean a return to the dazzling profits of the boom years? Well...not really. One of the striking themes to emerge from this year's forum was a rather disturbing paradox. Advances in technology and operating efficiency continue apace, even since the industry's financial meltdown. That should be good news for consumers and the U.S. economy in general. But "how much of the efficiency gains will you keep?" Capellas wondered. "There is some evidence that [companies such as Compaq] are producing more productivity growth for the economy than we are keeping in profits."
Why? Among the reasons cited at the conference, which ended on Feb. 4: Most corporations have access to the same cost-saving knowhow, the competitive landscape will remain ferocious, and excess production and telecom capacity will take a long time to clear away. Add to this weaker Asian currencies, which make electronics producers in Japan, Korea, and Taiwan more competitive, and you get the prospects of continued soft prices. And that will translate into weak profits.
EXPECTATIONS GAP. So for many companies, that raises the prospect of a profitless recovery. At the very least, said Morgan Stanley Chief Economist Stephen Roach, Wall Street in the years ahead will have to lower its expectations for annual profit growth from around 14% in the '90s to "maybe 8% to 9%."
Management guru Gary Hamel, chairman of consulting firm Strategos, told the panel that real profits would have been much lower had tech companies not pumped them up with needless mergers and massaged their balance sheets. The exuberance of the 1990s produced an "enormous gap between expectations and reality, and that gap was filled by pro-forma accounting and inventory shuffling," Hamel said.
What was surprising is that tech executives met these opinions without objection -- perhaps evidence of how thoroughly the Enron debacle has chastened Corporate America (see BW Online, 2/5/01, "Enron: Where Are America's CEOs?"). Capellas said the industry landed in its current fix by "creating artificial demand in the U.S. with business models that didn't make sense." Sun Microsystems President Edward J. Zander, who shared the stage with Capellas and Hamel on a panel titled "Business Strategy in a Fragile Global Economy," wistfully recalled the mood at the World Economic Forum two years ago in Davos, Switzerland, when America's tech CEOs were the Masters of the Universe. "Nasdaq was at 5000, all was well, and we were heroes then," Zander said. "Now, we're in the penalty box."
DIFFERENT SKILLS. Of course, the execs weren't saying their companies were involved in any financial chicanery. And most remain optimistic about a recovery starting to take shape later this year. Several even said they were relieved by the end of Wall Street's tech mania because they now can return to focusing on their core businesses, operating efficiencies, R&D, and long-term strategy, rather than meeting inflated investor expectations for quarterly profits and acquisitions. Coming out of the current shakeout, Zander said he figures the industry will "return to good growth, but certainly more moderate. And it probably will take a different way to manage."
To Hamel, corporate managers in the next decade will require different skills than they did in the Roaring Nineties. "A lot of factors that buoyed stocks in the 1990s -- mergers and acquisitions, the liquidity in the stock market, share buyouts -- have reached their outer limits," he said. And rather than "dealmakers and efficiency fanatics," the winning industry leaders will focus on achieving organic growth, prudent investing, and building resilient organizations that can adapt to constant change.
Capellas said buyers of technology also have learned their lessons. In the future, they'll be focusing on investments that give them a distinct edge rather than merely mimic industry trends. "If you are a CEO, the question you want to ask your chief information or technology officer is: 'How will the tech spend create unique advantages?'" he said.
LINGERING QUESTION. The new mindset, if it proves true, should point to continued strong gains in business efficiency. But given how quickly new technologies and management techniques are copied throughout industries, the question remains: Will it all translate into superior earnings remains?
Speaking on a different panel, Cisco CEO John Chambers also struck an optimistic, yet qualified, tone. He insisted that the hundreds of millions of dollars in savings his company had achieved through outsourcing and other strategies in the 1990s were real. And as entire industries begin to implement compatible information-technology architectures in the next four or five years, that will make it easier to exchange real-time data throughout the supply chain, from retailers to manufacturers to parts suppliers. "The productivity increase is just beginning," Chambers declared. "I think at Cisco, we can drive 15% growth a year for a decade."
Then somebody in the room noted that the issue is whether these efficiency gains will produce strong profits. Chambers said nothing. Flashing a grin to an economist sitting next to him, all he did was wag his head vigorously up and down, as if to say, "Help me out here." |
