America: Power Performerby
The contrast could hardly be more stark: Corporate America vs. Japan Inc. In the U.S., rising productivity, soaring profits, and growing international revenues are sharply boosting the market value of companies, especially in computers, drugs, and consumer products. But the superstrong yen and weak financial system are hammering corporate Japan, sending profits and market capitalization plunging.
These are the dramatic results of BUSINESS WEEK's eighth annual Global 1000. While U.S. companies boosted collective market value by almost 20%, profits by 34%, and return on equity by 13%, Japanese companies lost 24% of their market value, measured in yen. They also saw profits in yen drop 10% and struggled with a mediocre 5% return on equity--far less than the average 20.8% for U.S. companies. The Global 1000 is compiled by Geneva-based Morgan Stanley Capital International, which tracks some 2,700 companies in 21 countries. The publicly traded companies are ranked on a worldwide basis, using market value and other data measured as of May 31, 1995.
The 1995 rankings reflect this year's currency swings, since all valuations are translated into U.S. dollars from local currencies. The yen's strength against the greenback, therefore, masks Japan's terrible performance somewhat. A double-digit drop in market value moderates to only a 6.4% slide in dollar terms, for example, while profits rise by 12%.
Likewise, French and German companies recorded almost no market value gains in their local currencies--but got boosts of 13% and 18%, respectively, in dollars. Other factors such as merger fever in Britain, surging exports from Scandinavia, a commodities boom in Canada, and real estate jitters in Hong Kong also helped determine the companies' results.
For the third year, Morgan Stanley has also compiled a list of market values for the top companies in emerging markets. The list reflects the woeful impact of Mexico's financial and political tumult on its main companies. But the data show an encouraging resilience in emerging markets too, as companies from South Korea to South Africa, turned in world-class performances.
In the developed economies, this year's surprise was the strength of the U.S. A year ago, analysts feared American corporate profits would soon start sagging. Instead, many U.S. companies have gained in the rankings, especially in high tech. Microsoft Corp. advanced from No. 33 on the list to 20, while microprocessor titan Intel Corp. moved from 48 to 21. Digital Equipment Corp., left for dead not long ago, bounded 435 places, after an impressive turnaround, to 436. IBM, another recovery case, added $17 billion in market value. U.S. pharmaceuticals such as Merck & Co. and Johnson & Johnson also surged. The collapse of health-care reform quelled fears of price controls on drugs. New products--such as Pfizer Inc.'s antidepressant Zoloft--fueled profits.
Consumer marketing companies showed their prowess, thanks largely to the growing demand in emerging markets worldwide for everything from Coca-Cola to Colgate toothpaste and Marlboro cigarettes. Coca-Cola Co. jumped from 14th place to 6th as it added $26.4 billion to market value, the most for any company. A big jump in Coke's international profits pushed the company into the top 10, with large gains in consumption in Latin America, Eastern Europe, and Asia. "The momentum we have built brought us our best year in recent history," says Chairman Roberto C. Goizueta. A weak dollar helped exports.
Japan could use some positive momentum. The Super Yen is hobbling profit growth. Some signs of corporate weakness: Overall Japanese profits in the Global 1000 are half those of Britain, and 27 Japanese companies dropped off the list. Analysts figure gains in export profits will remain largely elusive at a rate of 84 yen to the dollar, below the estimated breakeven point of many manufacturers.
CLEANSING. Japanese lenders of all kinds are particularly hard hit with $1 trillion in restructured or nonperforming loans on their books. To cover bad-debt write-offs, banks are selling stocks steadily to raise cash. Until this cleansing process is finished, the Japanese market, which has declined 60% in yen terms since 1989, will probably keep dropping. Not surprisingly, Nomura Securities Co., which depends on the Nikkei's fortunes, is the Global 1000's biggest loser in terms of lost shareholder value. The market whacked $10.1 billion off the value of the company. Says Andrew Shipley, a Lehman Brothers Inc. economist in Tokyo: "We are facing a crisis of confidence in the credit system."
But the story does not belong to the U.S. and Japan alone. Plenty of successes in high-tech products, drugs, and consumer goods occurred outside the U.S. Finland's Nokia Corp. enjoyed an almost fivefold profit gain, thanks to worldwide success in digital cellular phones. Germany's SAP, a leading maker of client-server software with strong U.S. business, saw its net income almost double.
European pharmaceutical companies also enjoyed investors' renewed favor after the demise of U.S. health-care reform. In Britain, takeovers had their effect too. Glaxo Holdings PLC's acquisition of a controlling stake in Wellcome PLC secured Glaxo a No.2 spot in the British rankings. Takeover speculation has also fueled the 45% market value jump for Zeneca, the old pharmaceuticals division of Imperial Chemical Industries PLC that was spun off in 1993.
In Britain, the globalization of demand for such Western products as ice cream, detergents, and beauty aids boosted results for Unilever PLC, the Anglo-Dutch consumer products giant. The company got kudos for its performance in India, China, and Brazil. The Netherlands' Heineken, which is pushing its key beer brand worldwide, also used its marketing savvy to increase profits. And France's LVMH Mot Hennessy Louis Vuitton, purveyors of champagne, perfume, and luggage, recorded big profit gains from a booming export business. The newly affluent of Asia in particular are snapping up luxury goods.
LVMH bucked the trend of an uneven French performance in the Global 1000. French banks and insurers, such as Credit Lyonnais and L'Union des Assurances de Paris are weighted down with bad real estate loans. And Alcatel Alsthom, France's blue-chip telecom equipment provider, was a laggard in its sector, in part because of sagging demand in its German business. A scandal over overbilling also pushed Chairman Pierre Suard out of office and the stock declined.
POLITICS. Smaller economies turned in widely differing performances, depending on such variables as currencies and politics. The devalued krona, for example, powered Swedish exports, boosting profits for drugmaker Astra and telecom supplier L.M. Ericsson. Yet in Italy, despite dramatic export gains for companies such as Fiat, political turmoil and inflation fears offset the beneficial effects of the weaker lira on stocks. In Canada, a general rise in commodities prices advanced the profits of mining companies such as Barrick Gold, Alcan Aluminum, and Noranda. Manufacturer Bombardier Inc. did a land-office business in everything from railcars to business jets.
In contrast to countries with weak currencies, Germany's blue-chip industrials, such as Daimler Benz, Volkswagen, and Siemens, felt the negative impact of the mark's 16% appreciation against the dollar. Here, fear of the future created a big disjuncture between recent profits and stock prices. Major restructuring boosted German results overall. Yet investors feared the imminent impact of the mark on exports, as well as the cost from a generous wage settlement with the unions in March. One company that made progress was the mostly privatized airline Lufthansa, which restructured enough to record its first profits in 1994, after three years of losses.
Overall, this year's mixed results reflect a growing worry about prospects for recovery in Japan and Europe. Fortunately for the global economy, they also show the surprising strength of many individual companies around the world.