A Year Of Twists And Turns

At first glance, it would appear to be sweet revenge on the Japanese corporate titans that have been beating up on their North American and European competitors. Results of BUSINESS WEEK's fourth annual survey of the Global 1000, which ranks the world's biggest companies by market value as of May 31, show more Japanese companies fell off the list than those of any other country. Moreover, the total capitalization of Tokyo's market fell beneath New York's for the first time since the survey began, the result of a 22% drop in the Nikkei stock average.

But look again. True, Japanese companies have lost market value. And the financial markets have been losing steam, most recently in the wake of the Nomura Securities Inc. and Nikko Securities Inc. brokerage scandals. But investors have turned the corner on the go-go 1980s, when they zeroed in on companies with real estate and other inflated assets. Now they're concentrating on the fundamentals like never before. Notes Charles Elliott, executive director for international equity research at Goldman, Sachs & Co. in London: "The market has forgotten about assets and is going crazy over earnings."

What investors see when they concentrate on the fundamentals is a strong Japanese domestic economy, which is creating a new set of winners. At the same time, Japanese exporters are gearing up for another boom. The renewed attention to high earnings growth and strong balance sheets is a reflection of how the country's underlying competitive muscle could emerge as formidable as ever.

That's just one of the twists and turns of this year's Global 1000. The times were turbulent: The invasion of Kuwait. The gulf war. Reunification of the two Germanys. A currency roller coaster. Stock markets soared, or collapsed. As a sign of the times, the total value of the Global 1000 was down slightly for the first time, to $6.72 trillion, 0.2% less than in 1990.

FIRST IN, FIRST OUT. Compiled by Morgan Stanley Capital International in Geneva, the data base tracks 2,500 companies in 23 countries with developed markets. Country-by-country rankings follow the master list, shedding light on national trends. Standard & Poor's Compustat Services Inc. provides additional data on U.S. companies. And a separate table on page 103 ranks by sales and profits the top companies in South Korea, Taiwan, Brazil, and Mexico, whose equity markets restrict foreign investment or are relatively immature.

Although the Japanese showed underlying strengths, the Americans were far better investments this year. U. S. companies make up the entire list of the top 15 share-price gainers. First to sink into recession among the industrial nations, the U. S. was also the first to see signs of recovery. By May 31, the Dow Jones industrial average, anticipating the rebound, was up 15% from the first of the year.

Among the Americans leaders, tobacco and food behemoth Philip Morris Cos. moved into the top 10, even while faltering IBM dropped a few rankings. Oil giant Exxon Corp. took the No. 3 spot globally. American pharmaceutical companies also clocked big gains for investors, even though there are trouble signs ahead. Wal-Mart Stores Inc., with maverick Sam Walton at the helm, gained 52%, making the retailer worth more on paper than mighty Toyota Motor Corp. And a slew of new companies made the ranking, from biotechnology firm Amgen Inc. to Avon Products Inc.

Although currencies swung wildly throughout the year, currency changes accounted for little of the U. S. gains against the Europeans. Between May 31, 1990 and May 31, 1991, the dollar rose 3% against the German mark, Europe's leading currency. Meanwhile, the yen was up 9% against the dollar in the same period, giving Japanese companies a slight boost.

Stiff global competition and a downturn hit European blue chips hard. France's top companies suffered the most. Chronically undercapitalized, they piled on debt after a buying binge in the U. S. Glassmaker Saint Gobain saw investors pull out to the tune of 27% of its value, Paribas lost 30%, and tiremaker Michelin dropped off the list.

German companies were only middling performers, but with lots of cash and rich banks behind them, they don't depend on market capitalization as much as others. When the growing pains from unification ease, watch out for the Germans. Still, carmaker Volkswagen dropped 36% of its market value, as auto sales slumped across Europe and the U. S. The auto slowdown also clobbered Italy's Fiat.

NEW MOOD. Mired in recession through most of the year, British companies nonetheless benefited from a strong stock market. Big stalwarts such as Grand Metropolitan PLC and Guinness PLC gained as investors fled to safety. Retailer Kingfisher, which owns the Woolworth's chain, added fully 51% to its market value. Following the Anglo-Saxon pattern, Canada's market was reviving by May on hopes that its deep recession was about to turn the corner. Investors were particularly happy with telecommunications giant Northern Telecom Ltd., which gained a snappy 35% and moved into the top quarter of the Global 1000. Even so, Canada's long-term prospects are clouded by a decline in its competitiveness, especially compared with its southern neighbor.

But of all markets, the shifts in Japan were perhaps the most dramatic. The new mood in Tokyo favoring value and quality took the air out of the highfliers and shifted the focus to smaller fry. Daifuku Co., for example, an automation equipment maker, charged out of nowhere with a 35% share-price gain to land on the list for the first time. With unswerving attention to its balance sheet and its booming domestic customers, Daifuku boasted strong earnings growth and sound financials--just what investors wanted. Sales were $847 million for the fiscal year ended in March, and earnings per share leaped by 62%.

What's even more attractive about Daifuku is that it's a growing presence in automation, which is destined for high growth in labor-starved Japan. It could also reap big benefits as Japan's notoriously overmanned distribution system is streamlined. Daifuku is the inventor of the vertical automated warehouse, which uses computer-guided machines and huge, cage-like structures to store and retrieve parts within a factory's walls. Key to Daifuku's success, with 60% market share, is that it reduces engineering costs and delivery times by standardizing parts and design across a broad range of systems. Most competitors still engineer their products one at a time.

Daifuku's domestic orientation is typical of the other outstanding Japanese performers. Japan's economy grew faster than the country's traditional export markets for most of the year. Top gainer Nihon Unisys Ltd., a joint venture of trader Mitsui & Co. and computer maker Unisys Corp., does all of its business in Japan. But while sales grew by a respectable 13.5%, profits plunged by 38.7%, hit by higher interest and R&D costs plus intensified competition. Analysts ascribe the company's share-price jump to takeover speculation.

More representative is Toyo Seikan Kaisha Ltd., whose 29% share-price gain was fourth-highest among Japanese companies in the Global 1000. As Japan's largest supplier of beverage and food cans, all of Toyo Seikan's business is domestic. Booming beer sales, especially of Super Dry from Asahi Breweries Ltd., to which it is the main supplier, kept the coffers full. It also benefited from a shortage of canning capacity, which enabled it to extract high margins from customers.

TELECOM TORTOISE. Not to be overlooked was the phenomenal performance of game maker Sega Enterprises' stock, which soared by an adjusted 161%. It failed to make this year's Global 1000 because it was listed on the Tokyo Stock Exchange late in the year. Like last year's top Japanese share-price gainer, Nintendo Co., Sega is cashing in on the worldwide craze for electronic games and this year beat Nintendo to the market with a new generation of products.

Conspicuous by its lackluster share price is NTT Corp. Down by 13% in dollar terms, the telecommunications giant's stock fell by 21% in yen. Though it beat the overall market's performance, investors remain concerned about short-term earnings and NTT's sluggishness in converting itself from a lumbering monopoly into an agile marketer. But analysts expect gains when it spins off two key subsidiaries in a few years.

To be sure, slumping stock prices are bound to blunt Japanese corporate competitiveness some. Lower price-earnings ratios and higher interest rates push up the low cost of capital, once Japan's ace in the hole. Now Japanese companies may not invest as aggressively in capital expansion, which grew by about 15% last year and is still rising by 7% to 8%. And more debt will be coming due as bondholders cash in more often.

Even so, the rest of the world shouldn't celebrate Japan's market woes. Predicts Peter Tasker, general manager for research at Kleinwort Benson International Inc. in Tokyo: "Companies competing against the Japanese won't notice the difference." And if companies and their investors keep stressing the bottom line, Japan's strength can only improve.

                  Billions of U.S. dollars
       1. C. ITOH             $152.0
       2. MITSUI               150.8
       3. SUMITOMO             144.9
       4. MITSUBISHI           142.8
       5. MARUBENI             141.6
       6. EXXON*               116.0
       7. NISSHO IWAI          111.8
       8. GENERAL MOTORS       107.0
       9. ROYAL DUTCH/SHELL**  106.5
      10. FORD MOTOR            97.7
      11. IBM                   69.0
      12. TOYOTA MOTOR          66.6
      13. MOBIL*                64.5
      14. GENERAL ELECTRIC      58.4
      15. BRITISH PETROLEUM     56.5
      *Includes excise taxes
      **Excludes excise taxes
                   Billions of U.S. dollars
       1. ROYAL DUTCH/SHELL  $6.53
       2. IBM                 6.02
       3. EXXON               5.01
       4. GENERAL ELECTRIC    4.30
       5. BRITISH TELECOM     3.56
       6. PHILIP MORRIS       3.54
       7. TOYOTA MOTOR        3.19
       8. BRITISH PETROLEUM   2.87
       9. AT&T                2.74
      10. DU PONT             2.31
      11. CHEVRON             2.16
      12. NOMURA SECURITIES   2.00
      13. UNILEVER            1.98
      14. MOBIL               1.93
      15. AMOCO               1.91
                  Percent from 1990, U.S. dollars
       1. AMGEN                     249%
       2. U. S. HEALTHCARE          228
       3. U. S. SURGICAL            197
       4. NOVELL                    131
       5. COSTCO WHOLESALE          118
       7. THE GAP                   104
       8. FUND AMERICAN             102
       9. CHIQUITA BRANDS INT'L      96
      10. FREEPORT McMORAN C&G       81
      11. PFIZER                     79
      12. MERRILL LYNCH              74
      13. HOME DEPOT                 63
      14. NATIONAL HEALTH LABS.      63
      15. IMCERA GROUP               63
       1. GILLETTE                 472.2%
       4. DORDTSCHE PETROLEUM      207.9
       5. SMITHKLINE BEECHAM       150.5
       6. RALSTON PURINA            66.2
       7. ELSEVIER                  66.0
       9. SYNTEX                    53.8
      10. FREEPORT McMORAN          52.4
      11. CANAL PLUS                51.0
      12. POLYGRAM                  50.6
      13. GENERAL MILLS             50.0
      14. FREEPORT McMORAN C&G      48.4
      15. MERCK                     48.2