Continental Drift At IbmJonathan B. Levine
For IBM, it was the quarter from hell. First, cut-rate personal computer clones trounced Big Blue's own uncompetitive line of PCs, which in October were replaced with new models. Then, sales of high-profit mainframes faltered--less than a year after new models had their debut. But the zinger came from Europe and the wild gyrations its currency markets suffered in September. Amid the turmoil, IBM said, buyers froze computer orders. Profits plunged 51%, to $86 million--before a $4.4 billion special charge.
Now for the really bad news. Europe's currency crisis was in fact only an acute symptom of a chronic malaise: The Continent's economies are stagnating or contracting--and political turmoil over economic union has shaken business confidence. The upshot? Europe, once IBM's earnings engine, may sap profits throughout 1993. "The banker IBM always counted on isn't there anymore," says Derek Lewis, managing director of British computer dealer Technology PLC.
IN SAD COMPANY. IBM isn't the only American company laying the blame for a lousy third quarter on Europe's shores. Ford Motor Co. has already warned that its results will be hurt by flat sales on the Continent. But technology companies, which have seen much of their sales and profit growth shift to Europe during the past decade, are hit especially hard by the region's woes. Digital Equipment, Computervision, Stratus Computer, and Lotus Development all have complained of weak European sales in the latest quarter.
There is plenty to complain about. IBM Europe Chairman Renato Riverso says the $124 billion European technology market may not grow at all in 1992--compared with average annual growth of 8% during the past three years. And, he adds, "we have no reason for optimism that 1993 will be any better."
Not without some help from heaven, anyway. In Britain, for instance, dealers say widespread layoffs at companies such as British Aerospace PLC and Rolls-Royce PLC have been accompanied by massive cuts in data-processing budgets. Even companies based in France, where the economy is relatively buoyant, are cutting back. Take Peugeot. Last April, the auto maker went on an austerity kick, pushing back 10% of all scheduled investment. Because of the September devaluation of currencies in Italy, Britain, and Spain--three big export markets for Peugeot--the auto maker's profits will weaken, causing further tightening of capital spending.
LOCAL CONTROL. That's rotten news for IBM, since Peugeot will delay 75% of its planned fourth-quarter buying of PCs until next year, including $3 million in IBM business, says Jean-Serge Bertoncini, the car maker's chief technical officer. Only projects critical to cutting costs are moving ahead, such as an $8.4 million upgrade to Peugeot's mainframes. Says Bertoncini: "We're postponing everything we can."
Most worrisome is the technology market in Germany, Europe's economic engine. Computer sales to emerging east German businesses peaked early this year. Now, major computer customers such as chemical makers BASF, Hoechst, and Bayer are cutting costs as exports are slammed by the strong German mark. Auto makers are starting to cut back, too. "If Germany goes down," worries IBM's Riverso, "it will pull all of Europe with it."
Like many U.S. companies with sagging European sales, IBM has been trying to boost profits by reorganizing abroad. To cut overhead and speed decision-making, Riverso last year began shifting responsibility for product-line management and marketing from IBM's Paris headquarters to regional managers. By year's end, IBM's European staff will shrink 17%, to 90,000 workers.
Still, such moves only go so far. "We're running very fast to get more competitive," Riverso says. "But I can't say everything we save is going to the bottom line." Translation: IBM Europe isn't planning to send its parent quarters from heaven any time soon.