It's like the annoying drip, drip, drip of a leaky faucet. Every week or two, even as the economy struggles to gain strength, yet another of America's big-name companies announces a major cost-cutting program. As a result, companies as diverse as Colgate-Palmolive, Du Pont, and Hewlett-Packard are taking big write-offs. Wall Street bulls argue that all the trimming has positioned many companies for dramatic profit gains at the first uptick in the economy. But with a slow recovery, a big question arises: How many companies are really lean -- lean enough to post smart profit gains even in a stagnant economy?
The sad answer: in all too many industries, not many. Oh, sure, the layoffs have been real and painful. And costs at many companies have come down dramatically. But profits are still sagging. Many of the gains from cutting cost are being wiped out by fierce price competition. Moreover, U. S. companies too often have higher costs than foreign rivals, especially in white-collar staffing and pay. And high debt left over from the 1980s is still eating away at profits, despite heavy cutting in other areas. The upshot: While a few leaders may do well before the economy begins to expand in earnest, for too many sluggish growth will mean more layoffs and scrawny earnings.
ERODING ADVANTAGE. The struggles of Chrysler Corp. show how hard it is for companies to get a lasting boost from cost-cutting. The No. 3 U. S. auto maker lost just $82 million in the third quarter -- a stellar performance, next to red ink totaling $1.1 billion at General Motors and $574 million at Ford. Analysts also expect Chrysler to break even in the fourth quarter, while GM and Ford lose money again. That's because Chrysler has cut its annual costs by $3 billion in two years, or about 11% of total costs.Layoffs aside, much of Chrysler's progress came from an innovative program to work with suppliers to cut parts costs. But the company stopped at almost nothing to get further gains. It no longer chrome-plates parts that aren't visible, for instance. And it claims to have cut its long-distance phone bill 40% by switching from AT&T to MCI.
So why aren't Chrysler execs grinning? With U. S. car and light-truck sales off 12% through October, dealer incentives and other discounts "just swamp all your cost controls and everything else," says Vice-Chairman Robert S. (Steve) Miller Jr. With lower prices, it now needs to sell 1.9 million cars to make a profit, up from 1.8 million last year. It only expects to sell 1.5 million this year, so it plans to cut another $500 million in 1992. Profits, says Chrysler Chief Financial Officer Jerome B. York, "should recover very quickly" in an upturn- but only one strong enough to allow the company to limit discounting. Chrysler's no anomaly, either. Even companies that are doing well are getting a working-over. For instance, Electronic Data Systems Corp., GM's computer services unit, is cutting $500 million from expenses by 1994--even though its sales and earnings were up a healthy 13% in the third quarter. And companies in cyclical slumps are augmenting prior cost-cutting. On Oct. 31, for instance, atop a previously announced cost-cutting plan, chemical maker Union Carbide Corp. said it would pare costs by $20 million annually at its slumping industrial gas operation.
Many companies are cutting far more white-collar employees than in past downturns. According to a Boston University survey of manufacturers, higher staff and white-collar pay scales are the major reason overhead was a punishing 26.6% of manufacturing costs at U. S. companies last year. That number is 21.6% in Germany and just 17.9% in Japan. Du Pont Co., for one, decided to slash $1 billion from its costs after benchmarking its performance against other international chemical companies. Its biggest cuts will whack white-collar ranks: About 1,900 jobs are being cut from its fibers business, plus 550, or 20% of the total, from in-house engineering.
Slumping overseas sales are also hurting many industries--especially in high technology, where many companies collect more than half their sales abroad. Computer makers Digital Equipment Corp. and Hewlett-Packard Co. have dramatically lowered their costs, for instance (table). But now a slowdown in Europe, which has fueled computer-company growth since the mid-1980s, threatens to put a damper on improvement.
Other companies, meanwhile, are grappling with consumer confidence and price-cutting back home. For instance, Frito-Lay Inc., PepsiCo Inc.'s most profitable unit, has lowered costs a lot. But with aggressive competition from Borden and Anheuser-Busch, Frito-Lay Chief Financial Officer Michael White isn't expecting an earnings spurt. Even after the recession, "we'll still have a very competitive environment," he says. Sears, Roebuck & Co. is wringing $1.3 billion in costs out of its bloated retailing operation this year and next, largely by eliminating about 33,000 jobs. That has helped to boost operating profits a bit so far this year, and Sears could get a big boost in a recovery. With shoppers searching for value, though, it's still losing market share to such lower-cost competitors as Wal-Mart Stores Inc. and Kmart Corp. As William J. Shaw, chief financial officer for Marriott Corp., notes: "The key, until the economy improves, is that you've got to find ways to provide better price value."
Then again, Marriott, Macy's, and other debt-heavy companies have bigger worries. Both got caught up in the financial frenzy of the 1980s. They're paying the price now. Marriott has slashed 2,500 jobs at headquarters and by closing down its hotel construction and development unit. But such savings pale against the cost of servicing more than $1 billion in debt taken on in an overly aggressive hotel construction program. Cost-cutting helped Macy's narrow its losses for the fiscal year ended Aug. 3. But now it's being hurt by higher ad spending and weak demand.
CHEAP SEATS. Big airlines may profit from extended adversity. The strongest U. S. lines--American, United, and Delta--are hunkering down for a continuing slump. American Airlines Inc., for instance, has cut in half its $16 billion capital spending program for the next four years. It's under pressure to hold down costs because of fare slashing by "thinly capitalized" competitors, says Michael J. Durham, senior vice-president for finance at AMR Corp., American's parent. But Durham concedes that continued economic sluggishness could help stronger carriers if it drives troubled rivals out of business.
In many other industries, the pressure shows no sign of letting up. Take steel. The best minimill operators can break even running at just 60% of capacity. After years of slashing costs, big rivals such as USX Corp.'s U. S. Steel and Bethlehem Steel are also close to that goal. But now the biggest minimill operator, Nucor Corp., is using a new German steel-processing technology to lower dramatically the costs of rolling sheet steel. A Nucor plant using the process at Crawfordsville, Ind., can make money at a 60% production rate--but is running at 90%. And Nucor plans to build two more of the mills in the next few years.
Competition may not be that heated in every industry. But in most, companies that wait for a recovery to bail them out will be a long time hurtin'.
A PEEK AT WHERE EFFICIENCY IS IMPROVING Sales per employee 3rd quarter 3rd quarter CHRYSLER $53,242 $60,112 DIGITAL EQUIPMENT 24,949 28,561 DU PONT 59,234 66,380 HEWLETT-PACKARD 31,600 42,700* MERRILL LYNCH 71,400 78,000 SEARS (merchandising only) 18,566 20,677 USX (steel only) 64,306 83,117 *Estimate DATA: COMPANY REPORTS; GOLDMAN, SACHS & CO. ESTIMATE CHRIS USHER