Many U.S. Firms Reluctant to Expand Despite Demand
After years of humiliating losses to foreign rivals, a broad variety of U.S. companies now face the novel question of how fast to grow to meet the robust demand for their products here and overseas. But contrary to an earlier bold spirit within American industry, many are reluctant to expand.
They remember the painful cutbacks that some of these same firms were forced to endure just a few years ago and are uncertain that today’s favorable climate for manufacturing will last.
“We simply don’t have the capacity to sell all we can sell abroad,” said Myron T. Foveaux, a spokesman for the chemical industry, which underwent a slashing retrenchment earlier in the 1980s.
Makers of paper products, textiles, rubber, plastics and other goods find themselves in similar situations because of their own recent efforts to modernize and get rid of wasteful operations. They have also been aided by the lower-valued dollar, which reduces prices of U.S. goods in key foreign markets while pressuring prices upward for the products that foreign companies export to the United States.
Just how these newly competitive American companies choose to deal with the unsettling question of expansion will be highly significant, according to analysts, because manufacturing has become an increasingly important part of U.S. economic growth. Moreover, decisions on expanding could affect the size of the trade deficit and the level of inflation.
“Whether industry makes that investment is very critical to the future of the economy,” said John O. Wilson, chief economist at Bank of America in San Francisco.
Executives cite several concerns that dampen their enthusiasm for having their companies get bigger: the possibility of a recession in 1988 or 1989, fear that the dollar might reverse course and rise in value and worries about the costs of financing. Some note that turbulence in the financial markets could force interest rates up, making it far costlier to expand.
Many American executives have learned the dangers of underestimating their foreign rivals. “They don’t want to repeat the mistakes of the past,” observed David Hale, an economist at Kemper Financial Services in Chicago. “They’ve been burned.”
At the same time, Hale worries that “corporate anorexia” will prevent these streamlined U.S. companies from fully exploiting the benefits of their increased ability to compete.
‘Lean and Mean’
What Hale refers to as an eating disorder, however, other analysts have described admiringly as the “lean and mean” approach that has made many U.S. companies much tougher than they used to be. This is shown most clearly by the fact that key U.S. industries are running virtually at full bore, according to figures compiled by the Federal Reserve Board.
Factories that make paper products are humming at 97% of capacity, for example. Textile mills are running at 94% of their ability to produce. Aerospace firms are at 89% and plants making plastics are at 88%.
America’s factories overall are now running at 82.1% of their capacity, the highest level in more than seven years. That is unusually high: Analysts say that an overall rate of 85% or more could signal that the whole economy is overheating.
Turning Down Business
Indeed, if industry does not expand to meet the demand, these high rates could help ignite inflation, because they threaten product shortages and price increases. The high rates also mean that factories are turning down some business, here and abroad, simply because they cannot handle the extra orders.
The question of growth is perceived differently in different industries.
These days, Dow Chemical Co. occasionally has to turn down new customers who seek plastics and certain other products. But the chemical giant remains wary of big new projects. Earlier in the decade, the Midland, Mich.-based corporation got out of certain businesses and cut its global work force from a high of 62,000 to 51,300. And today neither Dow nor others in the chemical industry are in a rush to repeat such disruptive retrenchments.
‘Floodgates of Spending’
“Our crystal ball is not clear enough that we’re going to turn loose the floodgates of spending,” said W. K. Schweitzer, Dow’s director of economic and strategic planning. “We are being cautious. We don’t know what the global economy is really going to do.”
Similarly, conditions in the steel industry have changed markedly from earlier in the 1980s, when American firms were battered by competition from Japan, Brazil, Mexico, Taiwan, South Korea and other countries. During that frustrating time, Chicago-based Inland Steel cut back its steel-making capacity from 9.3 million tons a year to 6.5 million tons and pared its work force from 35,000 employees to 23,000.
Inland pursued efficiency in other ways: It recruited a team of 30 Japanese engineers to suggest improvements in more than 300 processes and spent $800 million to modernize.
Opportunities Passed Up
Because of increased efficiency and the cheaper dollar, Inland now operates at more than 90% of its capacity. It was forced to pass up sales opportunities last year because of needed maintenance, which temporarily reduced its steel-making ability, and also because of shortages of materials. “We could have sold a couple hundred thousand tons of additional steel if we’d have been able to make it last year,” said Sam H. Saran, a company spokesman.
A situation ripe for expansion? Not at all. The world remains flush with steel mills that are capable of producing far more than is currently needed. “There probably will not be any major expansion of the American steel industry,” Saran maintained.
Contrasted with many companies in steel and other old-line industries, the high-tech Western Digital Corp. has enjoyed growth rates of more than 50% a year for each of the last five years. Nonetheless, the Irvine-based maker of computer products is also cautious about expanding.
Roger W. Johnson, the company’s chairman, said it sometimes is wiser to use another firm’s production facilities than to rush ahead and build new plants that may be destined for mothballs if business slows down.
In September, for example, Western Digital announced that American Telephone & Telegraph--which had an excess of plant capacity--will supply it with at least $50 million a year in computer chips. “It (cooperative production arrangements) just makes economic sense for those of us who have been through these cycles,” Johnson said. “As a trend, I think you’re going to see more companies using each other’s capacities.”
Contradictory Findings
Attempts to fathom what all these conflicting perspectives will mean for American business expansion this year have netted contradictory findings.
In December, the Commerce Department reported that company executives planned to increase spending by more than 7% in 1988, a surprisingly high level. At the same time, however, the Conference Board, a research group, reported that “1988 is not likely to be a year of investment boom,” based on its own survey of 1,000 major manufacturers.
Kenneth Goldstein, an economist with the board, said he foresees lackluster investment growth in the range of 0% to 3%, which may mean lost opportunities to reduce the trade deficit and capture business domestically--opportunities that may instead go to America’s competitors. If the U.S. economy grows by 2% or more this year and investment still remains sluggish, Goldstein contended, “Clearly we’re blowing an opportunity. If you do that too often, we all know what happens.”
Recession Possible
But if American business resists growing, it will do so because of certain widely shared fears. A principal one is the possibility of a recession by 1989, a situation forecast by many economists.
Another is concern about the level of the dollar. The dollar’s lower value relative to Japanese and European currencies has made it more expensive for foreign companies to compete here. And many analysts expect the dollar to sink further in light of the U.S. deficits in trade and the budget. But executives who keenly remember the cost problems they faced when the dollar peaked in the mid-1980s do not dismiss the possibility of a recurrence.
Moreover, there are lingering concerns about the availability and cost of financing growth in the wake of the stock market crash and the fear that more financial disruptions are in store. Even with a weaker dollar, it can be cheaper to finance a project and set it up in another country, depending on a company’s particular aims.
“It’s true that if you’re running at full capacity and you expect your market to expand, that’s a textbook case for rising investment,” the Conference Board’s Goldstein said. “But we’re looking at the real world--and things don’t always come out that way.”
