Advertisement
YOU ARE HERE: LAT HomeCollections

1996-97: REVIEW AND OUTLOOK | JAMES FLANIGAN

The Companies to Watch Are Taking a Global View

December 29, 1996|JAMES FLANIGAN

The outlook in most forecasts for 1997 is for slow to moderately growing economies in the United States and around the world, with low inflation and declining interest rates.

Rates on 30-year U.S. Treasury bonds should fall about 1 percentage point to about 5.5%, 10-year bond rates to nearly 5%, experts predict.

Forecasts vary, to be sure. Some economists see stronger economies with rising inflation and interest rates in '97.

But in either forecast, the consequences are negative for business and stock markets worldwide. Slow growth would mean lower earnings, but so would rising inflation.

And yet there's a mystery as we end 1996. Many business people are optimistic and stock markets around the world are mostly bullish.

As the old year ends, Coca-Cola said its global outlook is positive; so did pharmaceutical leader Merck & Co.

And General Electric Co. announced a dividend increase, a 2-for-1 stock split and an increased share repurchase out to 1998. "These actions demonstrate our confidence in both the short- and long-term outlook for the company," GE said in a statement.

GE explained that its diverse mix of 12 global businesses, from aircraft engines to finance, was generating high levels of cash flow (income plus depreciation) that allowed the company record levels of internal investment and the ability to make acquisitions in its many fields.

Indeed, rumors flew last week that GE was on the verge of acquiring American Express, the financial services giant. And GE, the owner of the NBC television network, is constantly rumored to be a candidate to acquire a Hollywood studio and get deeper into global entertainment.

The aim of GE--and Coke, Merck, Toyota, Daimler-Benz and similar global companies--is to grow faster than the slowly expanding economies of the U.S., Japan and Western Europe.

The fact that companies can grow faster by improving operations through technology and winning new markets in developing countries is driving stock prices higher here and abroad, and thus they're earning the returns that pay pensions for the aging populations of the developed countries.

These companies will be the ones to watch in '97. And GE is a leading example, reflecting in its moves and strategies the possibilities and the difficulties of world business today.

The Fairfield, Conn.-based giant's net income for 1996 is expected to have grown 9.6% to $7.2 billion on a 13% increase in sales to $79 billion, while the U.S. economy's total output (gross domestic product) grew roughly 2.5%.

One way the company achieved that growth was by doing more for the same customers. GE's medical systems division, which sells CT scanning and MRI equipment, now gets a big chunk of its $3.5 billion in revenue from servicing such equipment--GE and other brands--for hospitals and clinics. The medical systems unit also trains hospital personnel on medical and financial operations, all for a fee.

GE has supplied electric power plants for more than a century; now it manages power operations for utility customers. Such service work, which is more profitable than manufacturing, is growing rapidly.

Globalization also proceeds apace. GE's non-U.S. business, now 29% of sales, is growing three times faster than domestic operations.

But new fields and new markets don't come easy. Many other companies share GE's aim of beefing up services and earning more dollars from the same customers.

GE's trump cards have been its innovations in finance--which have made GE Capital one of the largest U.S. lenders--and its ability to wring costs out of operations.

GE's cost-cutting programs, which have become models for other companies, are a response to the changing world. Chairman John F. "Jack" Welch Jr., the archetypal U.S. CEO of the last decade, understood that the Information Age was changing the rules.

Why did GE have sales offices in so many towns and cities? he once asked. It needed representatives with laptop computers, but not offices with expensive furniture.

What Welch understood before many others is a central fact of the global economy: the overcapacity of nearly everything. The U.S., Japan and Western Europe are fully built up in power plants, office buildings and factories, which are capable of turning out great surpluses of goods and services. Those countries are in the phase of closing or "downsizing" many such facilities.

Meanwhile, the developing countries of Asia, Latin America and Eastern Europe are trying to earn the money to build or rebuild power plants, office buildings and factories. So they are turning out surplus goods and selling them to the developed countries--although that can aggravate traditional trade patterns.

And to top it all, computers and digital networks are making it more economical to produce and distribute all those goods and services. The result, says Charles Clough, chief investment strategist for Merrill Lynch, is "a deflationary bias in the global economy."

Advertisement
Los Angeles Times Articles
|
|
|