International -- Cover Story
THE GLOBAL 1000 (int'l edition)
There's a new breed of blue chips. They're lean, boast global brands, and give shareholders lots of value. And American companies are leading the pack
Nobody likes a braggart. So Bill Clinton didn't exactly get a standing ovation at the mid-June economic summit in Denver when he extolled, again and again, America's magic formula for growth. Indeed, his fellow world leaders barely hid their resentment when the President suggested that U.S. advisers help Japan untangle its regulatory snarls and that Europeans follow the American example and slash their swollen budgets.
Stock buyers, though, couldn't care less about modesty. This year's BUSINESS WEEK Global 1000 shows that investors think Clinton is right. For the fourth year in a row, U.S. companies increased their presence in our tables of the world's most highly valued companies. America added 25 corporate names to the list, bringing its share of the ranking's total market capitalization to nearly 50%.
Using data compiled by Geneva-based Morgan Stanley Capital International, BUSINESS WEEK has since 1988 been ranking about 2,700 companies in 21 countries by market capitalization. Because results are stated in dollars, currency fluctuations over the years have influenced how far countries rose or fell in the standings. For example, thanks to the dollar's strength in the past 12 months, the healthy gains posted by European bourses were even stronger in local-currency terms. And the 17% shrinkage in Japan's overall market capitalization would have been just 11% if stated in yen.
Yet even allowing for the dollar's rise, the shifting balance of power in the Global 1000 reflects long-term economic trends. Japan has been steadily losing heft in the rankings since 1990, when it accounted for 39% of the list's total market capitalization. Now, Japanese companies represent 16% of the total, down from 23% last year, while Japan lost 45 companies from the list.
Nor do this year's results simply reflect the bull run on Wall Street and the bearish mood in Tokyo. The U.S. keeps gaining ground in the global economy not just because its stock market is booming but also because many of its companies dominate the world's fastest-growing industries. Indeed, global competition has created a brand-new class of blue chips. Investors no longer settle for big-cap companies with steady sales and strong domestic market share. They want a worldwide brand name, super efficient production, lean management, and an outspoken commitment to shareholder value. So companies such as Coca-Cola, Sony, Novartis, and Volkswagen came out winners regardless of how their domestic stock markets did.
Two names newly perched at the very top of the list tell the story. Microsoft Corp. and Intel Corp., the West Coast companies that provide the software and chips, respectively, for the lion's share of the world's personal computers, both made it into the top 10 for the first time ever (table). PCs had another banner year, with 18% unit growth, and "Wintel," as the duo are commonly known, reaped the rewards.
Windows 95 really kicked in for Microsoft this year. In the quarter ended in March, the percentage of new PCs with Windows 95 preinstalled grew to more than 75% of reported shipments, and Windows 3.1 and the Windows NT workstation operating system accounted for much of the rest. The blockbuster Microsoft Office software suite supplies more than half of Microsoft's $8.7 billion in annual revenues. In the nine months ended Mar. 31, earnings rose a breathtaking 46%, to $2.39 billion.
Intel is the Microsoft of the global chip business. In 1996, its already powerful lock on the PC microprocessor market became a virtual monopoly. While rivals stumbled with marketing blunders, Intel relentlessly churned out a series of new and faster Pentium chip models, including the first Pentium Pro. Intel's revenues topped $20 billion for the first time in 1996, and profits came in at more than $5 billion.
The PC boom explains why Dell Computer Corp. stock rose more than any other in the rankings this year, soaring 306%. The company has perfected the art of ultrahigh asset turnover. Because it custom-builds its PCs after an order is placed, Dell operates with few raw materials and no finished-goods inventory. And by collecting payment quickly, it converts a sale to cash on its balance sheet in less than a day. The low-fixed-asset system allows Dell to become more profitable as it grows. Rival Compaq Computer Corp. didn't do badly, either. Its shares were up 122%, bringing the company to No.83 in the rankings, from No.223 last year.
"A RADICAL CHANGE." Not every American success story was one of technology, however. Coca-Cola Co. vaulted to second place on the list, from No.4 last year, boosting its volume around the world and gaining share by virtue of its marketing muscle. "What you saw in 1996 was increasing confidence from investors that Coke has won the global cola wars," says Jennifer F. Solomon of Salomon Brothers Inc. in New York.
Worldwide, unit case volume grew 8%. The surprise was that Coke racked up 6% volume growth in the U.S., whose soft-drink market analysts had written off as mature. Meanwhile, Coke's international numbers remain impressive. Its Middle & Far East group, which has a 42% market share in soft drinks, saw volume growth of 11%. And in Greater Europe, volume rose 8% despite the region's slow economic growth.
Compared with such achievement, the Japanese made a poor showing overall. The Nikkei stock average, down 6% in the past 12 months, didn't help. Nor did the dollar-yen exchange rate, as the yen slipped from around 108 to the dollar in midyear 1996 to about 115 now. And although the weaker yen was good for Japanese exporters, making their products cheaper on world markets, domestic demand is still sluggish.
Yet companies that have moved out of their regulation-bound home market--by producing outside Japan, selling abroad, or both--broke away from the pack, and investors rewarded their initiative. Sony Corp., for example, rose through the Global 1000 ranks to No.74, from No.93 last year, its stock gaining 32%. The global entertainment giant continues to make waves in the video-game market with its 32-bit PlayStation and the programs that go with it, which account for $1 billion in annual sales. And Sony's Hollywood business is enjoying a strong year at the box office.
Another bright star in the Nikkei's dim firmament has been Takeda Chemical Industries Ltd., whose stock shot up by 53% in the past 12 months thanks to aggressive moves at home and overseas. The company has reduced domestic head count by 360 people and is paring less profitable product lines. The result: Although consolidated sales rose only 4.7% last year, Takeda's net profit grew by 19.3%. Meanwhile, Takeda is charging into foreign markets, notably Europe. Industry observers are impressed. Kazuhisa Sugita, pharmaceutical analyst at Lehman Brothers Inc. in Tokyo, calls Takeda's strategy "quite unique for a Japanese company."
Europe's markets presented something of a paradox this year. Except for Britain, its economies are stuck with sluggish growth and high unemployment. Deregulation on the Continent is proceeding at a snail's pace, and in some cases, new Socialist politicians are pushing job creation over competitiveness. Yet investors believe in Europe's recovery, even one that takes years. Germany's DAX stock index soared 46% from June, 1996, to June, 1997, and France's CAC 40 index rose 33%.
That's because despite the macroeconomic problems in their home markets, top-tier companies under pressure from foreign competition have been forced into mergers, asset sales, and downsizing that are beginning to bear fruit in better earnings. Germany, for instance, added seven companies to the Global 1000. Exporters, of course, got a boost from the stronger dollar. But dynamic new executives committed to shareholder value are having a deeper impact on the corporate landscape than mere currency moves. "There has been a radical change in German management," declares Thomas R. Holmes, manging director of Schruder Munchmeyer Hengst Research in Frankfurt.
Top German companies, including Siemens, Daimler Benz, and Allianz, moved sharply up in the rankings. And Volkswagen leaped from No.259 last year to No.136, thanks to rigorous cost-cutting, including a Chrysler-like move to use four basic platforms worldwide for all its models. "Companies have gone to extreme efforts in restructuring. Now they are meaningfully improving their profitability," says Holmes.
Privatization, too, is raising Europe's profile in the global market picture. This year, Deutsche Telekom, Germany's newly privatized telecommunications behemoth, made its debut on the Global 1000 list at No.25 as the government floated $13 billion worth of new shares. The future performance of such newcomers to the rankings will be a good benchmark of their competitiveness.
HANDOVER HIGHS. Closely tied to the U.S. market, Hong Kong emerged from a cyclical lull in its all-important property sector. Low interest rates, plus confidence that the handover to China will go smoothly, have pushed real estate prices to record highs. That boosted not only regional players, such as New World Development, but also made tiny Tsim Sha Tsui Properties, a holding company, the second-biggest share-price gainer on the Global 1000. Long Asia's most transparent market, Hong Kong's future in the rankings will depend heavily on whether Chinese rule alters its standards of disclosure and liquidity.
How much change in the lineup should investors expect in the coming year? A correction in U.S. stocks, serious deregulation moves in Japan, or new life in Europe's recovery could shift countries' overall status again. But the race to conquer the global market will only get fiercer, and the companies that stay responsive to its demands are likely to remain out front, no matter where they are headquartered.By Joan Warner in New York, with bureau reportsReturn to top