I spent much of November meeting with executives of 18 companies in seven countries: France, Germany, Italy, China, India, Japan, and Brazil.
I don't take notes at such meetings and I don't carry a tape recorder. The conversations are confidential. But I can tell you that, without exception, the CEOs I met are all feeling our pain, because our pain, they made clear, is their pain. Little happens in a vacuum any more. In today's interconnected world of globality, where the destiny of companies and the economic fortunes of nations are more tightly bound than ever, what happens in one country affects many, many others.
As I write this, the European Union, Japan, and the United States are all clearly in recession. Even Hong Kong and Singapore, two of the so-called Four Tigers of Asia, are in recession. But the downturn is in fact universal. Every country and almost every company has been touched. Customers are slowing payments to conserve cash; companies are delaying payments to suppliers; and so on down the line. As demand falls, prices fall. The hurt is widespread.
When major economies such as the U.S. and EU slide into recession, unemployment and uncertainty rise and business and consumer spending decline. The United States is the largest export market for many countries. Reduce sales here by any significant amount and a chain reaction occurs. Chinese and Mexican factories slow down, business declines at Indian outsourcing service centers, orders for European luxury goods fall, and basic commodity prices tumble as demand trails off—affecting additional companies and economies.
Oil-exporting nations, for example, have seen the price of crude fall by nearly two-thirds in a matter of months. The prices of other commodities also are down significantly, affecting the economies of countries that rely on these revenues, such as Brazil, a major exporter of iron ore, and Jamaica, a major supplier of alumina and bauxite.
And conditions are likely to worsen before they get better.
Those who talk of "decoupling"—that is, how China, for example, might dodge the downturn by redirecting production to the domestic market—are on the wrong track. There is no more decoupling. The economies of the world are more deeply entwined than ever, and the U.S., Japanese, and European slowdowns are not only having an impact in China and elsewhere, the impact hit extremely fast.
While most Americans are concerned primarily with the effects of recession on their jobs, incomes, investments, and retirement prospects, there is a greater worry: a deep or protracted recession in the United States, Japan, and the EU will affect the entire globe. The United States alone spent more than $1.97 trillion on imports in 2007. The recession means we will buy less this year and next—and who knows beyond that? The cutbacks will not only be felt in Canada, China, Mexico, Japan, and Germany, the five countries that sell the most goods to the United States, but in many other countries as well.
CEOs are concerned mostly about their companies. A major Brazilian exporter of raw materials told me that he's concerned the U.S. slowdown will reduce Chinese demand for his company's products. An Indian CEO is worried that the slowdown would cause American companies to "in-source," or bring back home, IT and call center jobs, creating greater problems in India.
China stands to take the biggest hit from the global recession—since its three largest customers are the United States, Hong Kong, and Japan, which imported a combined $519 billion of Chinese goods in 2007. Many Chinese factories already have been stung by falling orders, as customers wait for massive levels of inventory to clear from long supply chains. In some cases, we were told, orders have been cut by more than half. This, in turn, has forced dramatic production cutbacks, idling workers and factories.
But times like these also create opportunities. Companies that think ahead and act prudently can win big in the long run.
Crisis times give rise to the greatest opportunities for those who are hardy and wise enough to take advantage of the situation. The challenge for executives during this once-in-a-lifetime deep downturn is to survive in the short term so their companies can thrive in the long term. Here is how smart, prepared companies can benefit.
For starters, U.S. companies may be better situated than their European counterparts and should leverage those advantages. In the United States, companies can lay off workers when production slowdowns occur—and recall them when orders pick up. In the interim workers receive unemployment benefits. In many European countries, employers face onerous costs when they lay off workers. This gives U.S. companies more maneuvering room and encourages them to hire, since they know they can furlough workers if need be.
If conditions go from bad to worse, U.S. companies also can seek Chapter 11 bankruptcy protection. Many ailing companies have successfully restructured and reorganized under Chapter 11. In Europe, there is no equivalent. A struggling company can become easy prey to low-ball acquisition offers from aggressive suitors.
If the goal is not only to survive but to thrive, managers need to take several immediate actions:
Focus on cash. During good times, many of us let things slide. Now's the time to refocus on generating and conserving cash. Reduce discretionary spending that doesn't help you lower other costs or prepare for the upturn. Shelve or delay capital expenditures. Review operations and look for ways to cut costs.
To paraphrase what one Indian CEO told me: "We're cutting the fat, we're being careful not to cut muscle, and we're staying far away from the bone." That's good practice. Fat is something nobody can afford in lean times; bone, however, keeps the structure together; and muscle will be needed to ramp things up—and capture new business (perhaps that of less-prepared competitors)—when the economy turns.
Operations is an area that needs an especially careful look. One American CEO told me that he was surprised to learn that one of his Chinese plants was still making products at the same rate, though demand was down by more than 50% and the supply chain was "filled" with product. He called the plant manager and asked, "What's the matter with you? Don't you read the newspaper?" Or you might find out, as another CEO confessed, that you're still paying boom prices for commodities and raw materials that, due to falling demand, are now selling for 20% to 50% less than they were last year. That's giving money away.
Remember, in midsummer the average price of a gallon of unleaded gasoline in the United States was more than $4. Today it's around $1.70. Your suppliers probably won't come to you and suggest a price reduction. So go to them. Ask for a rebate—or ask to renegotiate existing contracts, especially since raw material costs, in many cases, are down by as much as 50% or more. And stop paying fuel and other surcharges. Prices are down; they're no longer justified.
Plan to hunker down. This is the time to have Plan B ready: the "what if" scenario you hoped would never have to be implemented when demand falls by 25% or even 50% or more. None of us can predict with any certainty how much business will be down, or for how long, but you need to get ready to ride out the worst storm you can imagine. This means making plans now that will be ready to go later. This means establishing metrics that will give you a quick and clear reading of the economic and business data that affect your company and identifying "trigger points" that will prompt an immediate response when the downturn hits a certain level (for example, when sales are down 40%).
It means getting your product mix and cost position right to accommodate the inevitable "trading down" to lower-cost goods and services. It might mean reductions in force. It could mean rebates and discounts for valued customers. It does mean responding quickly to the market. Having a plan may give you the edge over your competition—and could mean the difference between survival and liquidation.
Prepare to win. This is also the time, if you have the cash or access to favorable financing, to capitalize on opportunities. The business landscape in the near future could be littered with ailing companies—some, perhaps, on life support. If it's the right fit, this is the best time to acquire a weak company that may have gotten into financial difficulty because it didn't focus on cash. You may get a bargain.
This is also when you should start making your rebound plans. You will want to act quickly when the market starts sending encouraging signals. You will need to increase payroll, increase purchases of raw materials, and ramp up your production and distribution pipelines as quickly as possible.
There probably will be less competition when the recession ends. If you don't fill the vacuum, someone else will.
Every recession—whether long and deep or short and mild—creates both havoc and opportunity. Some companies will suffer through no fault of their own. The military term for this is "collateral damage." You don't want to be collateral damage. You want to be the one who emerges on top worrying less about short-term valuations and more about survival, building value for the future, and the opportunities that lie ahead.