Commentary: Can U.S. Companies Afford To Take The Long View?By
It has been a virtuoso performance by Japanese manufacturers. Faced with economic turmoil at home and a soaring yen abroad, Japan's exporters have followed the same long-haul strategy that worked in the past: Hold down prices to build demand, then drive down costs enough to make a profit. As a result, even as the yen has jumped some 50% in the past five years, the price of Japanese imports to the U.S. has risen only 15%, keeping Japanese cars, consumer electronics, and high-tech goods competitive.
The superiority of this market-share strategy has been proven by the global success of Japanese and East Asian manufacturers--in industries from steel to memory chips. By comparison, experience has shown that a company that earns big profits today by boosting prices runs the risk of becoming less hungry to cut costs--a potentially deadly failing over the long run.
KEIRETSU CAPITAL. But Chrysler Corp.'s experience shows how difficult it is for even well-run U.S. companies to take the long view. Having rescued itself from the scrap heap, Chrysler was attempting to behave like its Japanese competitors, socking away billions of dollars that it earmarked for developing new products. Now, Kirk Kerkorian's bid for the auto maker--even if he does not win--probably means that Chrysler will have to pay out much of its cash to shareholders.
It's not just Chrysler, either. U.S. investors do not trust most domestic manufacturers to invest their money wisely. They recall the ill-fated diversification attempts of the steel and oil companies and the billions that General Motors Corp. wasted in the 1980s. That's why a big pot of cash turns a company into a takeover target.
Shareholders of a U.S. company are unlikely to accept lower short-run profits while a company patiently builds market share. Cross-border comparisons can be misleading, but reported operating profits for Japanese manufacturers, as a percentage of sales, seem to average about 1 to 11/2 points less than for comparable U.S. companies.
In part, Japanese executives can live with lower profits because they have access to cheaper capital. Japanese companies still have as big a capital-cost advantage as they did in the late 1980s. Real 10-year interest rates in Japan are about one percentage point lower than they are in the U.S., just as before. Moreover, the price-earnings ratio for the Japanese stock market remains about four times that for the U.S. market.
Another reason Japanese companies feel less need to focus on short-term profits: A big chunk of their shares often is held by related corporations. These ties help companies expand market share by making borrowing easier and spreading risks. For example, Sumitomo Bank Ltd. helped fellow keiretsu member NEC Corp. build a strong position in integrated circuits by making loans available when a U.S. bank might have balked.
FRAGILE REVIVAL. Even without such a system of mutual support, some U.S. industries manage to be market-share-driven. Semiconductor makers learned their lesson from the 1980s and now develop new chips even as they aggressively price the old ones. U.S. airlines, too, are more focused on maintaining market share than they are on keeping up profits. As a result, they run up big losses in bad times--but they have also been forced to become the most productive carriers in the world, according to a 1992 McKinsey & Co. study.
As long as U.S. companies have to pay primary attention to short-run concerns, the U.S. manufacturing revival will be fragile. The Chrysler bid shows that prudent planning for the longer haul just may be too dangerous.
Mandel writes about economics from New York.
By Michael J. Mandel