China's Big Deals: Should We Worry?
There's a worldwide yard sale going on. Multinational corporations are starting to sell off big-name brands to Chinese companies. IBM (IBM ) is selling its PC business to China's computer-making giant, Lenovo Group. Thomson has unloaded most of its RCA television-manufacturing business through a joint venture with China's TV-making giant, TCL International Holdings Ltd. There's talk in Wall Street mergers-and-acquisitions circles of other big deals, with U.S. corporations shedding major brands. What's going on? Is this a sign of America's economic decline? Should we be worried? Not at all.
A major global reshuffling of assets is under way. Companies cashing out of their lower-value operations to move upstream to more profitable ones should be applauded. It's the multitude of other large corporations that are sitting on mountains of cash and doing nothing that bothers us. In the U.S., profits are strong and balance sheets are healthy, yet capital spending is subpar at this point in the business cycle compared with previous ones. Most chief executives appear fearful of placing big bets or making bold moves. Nonfinancial corporate liquid assets are at a record $1.3 trillion, and CEOs are spending much of it buying back stock and raising dividends. Where's the vision here?
Fortunately, a handful of businesses are showing the way. IBM, for example, is moving out of commodity PC production to focus on high-end services and software. It's part of the general migration in the U.S. away from manufacturing commodity products into higher-value markets with greater pricing power. IBM, as part of the deal, will get a stake in Lenovo that should improve its opportunities to sell high-margin servers, services, and software to Chinese banks, government agencies, and companies.
IBM is not alone in its product migration. General Electric Co. (GE ) just sold 60% of its Indian outsourcing operation to a pair of private equity funds. Call centers are fast becoming a low-margin, commodity-service business, and GE is focusing on its higher-margin medical, energy, and media operations. GE, we should remember, sold RCA to France's Thomson back in 1987, as low-cost Japanese TVs were swamping the U.S. market. Sound familiar?
Chief executives can be pardoned for their defensiveness. We are living through an unusual economic interregnum. A huge cost disequilibrium has opened up inside the global economy and the Internet is making information instantly available everywhere. As a consequence, manufacturing and services are pouring out of America to China and India. It is hard to envision the future. Many CEOs are stuck -- waiting for the past to reappear or for evidence of what is to come. But a handful are casting off the past to place bets on the future. A new class of 21st century winners may be in the making.