GM and IBM Face That Vision Thing
The humbling of the once impregnable industrial fortresses of General Motors and International Business Machines continued last week. At GM, directors all but dismissed Chairman Robert C. Stempel--his job hangs by a thread, his authority is a memory--and IBM’s stock was dumped on the market by investors weary of repeated losses and disappointments.
GM’s stock rose on reports that outside directors, at the urging of institutional investors, would make sure that GM slashes costs aggressively. The company is expected to report another massive loss this week.
A loss of $2.8 billion at IBM in the third quarter surprised and dismayed investors. There were no public moves on Chairman John Akers’ job, but if losses continue such ignominy will come to IBM, too.
Big outfits are under pressure here--IBM, the world’s largest computer maker at more than $60 billion in sales; GM, the world’s largest car maker at more than $100 billion in sales. The fact that they’re getting kicked in the pants tells you that trends at work in the global economy are far more powerful than the fictions about competitiveness you hear in this year’s presidential campaign.
What’s buffeting these big companies--and Japanese, German and every other kind of company too--is a worldwide phenomenon that might be called “pricing power to the people.” The customer doesn’t care who you are or about your traditions, but only what you can deliver today at the best possible price.
That sounds simple, but it’s not--and it makes a difference to you whether IBM and GM can respond successfully to today’s marketplace. Though they do business globally, both are distinctly American corporations, pursuing most of their research and spreading knowledge in the United States.
Also, many people want to know whether IBM at roughly $68 a share and GM at roughly $31 are priced low or high. That, too, is not a simple matter.
First, understand that neither company has scrimped on investing to compete. GM spends more than $10 billion a year on new plants and equipment; IBM spends $6 billion on plants and another $6 billion on research and technological development.
Nor are they unkind to employees. GM’s current agreement with the United Auto Workers union guarantees annual income to its workers, even if the company closes a plant. GM health benefits are a model for other industries.
Non-union IBM has always been known for motivating, rewarding and treating employees with dignity. It is now contemplating layoffs as a last resort, but for years it kept to a no-layoff policy in spirit even as it cut 60,000 employees through early retirements.
Yet these giants are being forced to change or die, not by “greedy” investors or “unfair” foreign competitors. GM and IBM are owned, respectively, by 500 to 750 pension funds of public and private employees; large Japanese and German companies--Fujitsu, Siemens, Matsushita, Sony, etc.--all face similar pressures to downsize and cut costs.
The driving force behind it all is the worldwide customer who is presented with a surplus of goods at what amount to declining prices.
Computing power, which has come down in price at least a hundredfold over the last decade, is largely responsible--computing microchips that bring power to car engines without adding cost, making car manufacturing cheaper and easier. GM faces dozens of competitors in cars, IBM faces in effect 10,000 competitors in computers and computer parts.
And the big fellows have trouble keeping up. It costs GM $800 more to make a car than it costs Ford or Japanese competitors--and $1,000 more than it costs Chrysler. The cost of GM’s health benefits accounts for much of that differential, but customers don’t care about GM’s health--only the price of its cars. So GM must sell cars at a narrower profit or loss and thus is in danger of going out of business unless reforms are taken.
IBM has extensive manufacturing facilities for computers and computer parts, but with the overhead that goes with an organization of 370,000 employees, it can’t make things as cheaply as the many small manufacturers worldwide--which have sprung up ironically because of advances in computing that IBM pioneered. So Gulliver is forced to adapt to a world of Lilliputians.
Cost-cutting alone won’t be enough. In an attempt to revive entrepreneurial vigor, IBM has split its operations into 13 business units. But computer consultant Bob Djurdjevic, of Annex Research in Phoenix, suggests that splitting operations could take away IBM’s advantage--as the most global computer company--of being able to serve all of a customer’s computing needs worldwide. It’s not a simple world, and IBM will need a renewal of its traditional vision and dedication to survive.
GM, meanwhile, faces a critical year of making reforms in encrusted union and management practices. If the company adapts the forward-looking practices of its new Saturn division, that will be a good sign. But right now, it’s hard to see the vision through the turmoil.
Are GM and IBM good investments at current prices--especially as their dividends offer a 5% to 7% return? Not necessarily. Dividends can be cut in troubled times--as GM’s was in 1990. In any case, more important than dividends for these companies will be vision--a common theme to inform all their changes and restructurings.
If they can impart to their embattled employees a vision of where they’re going, then investors will see it too.
A good summation of what’s happening today appears in a 1989 book about IBM, with the ironic title, “Who’s Afraid of Big Blue?” Author Regis McKenna wrote that in this new era, “competition can’t be defined by how large a company is, how much self-sufficiency it has, or how much tradition it brings with it. It is really defined in terms of how quickly it can respond to the changes of this global dynamic network. How can it compete with competitors who may not even exist for another five years?”
It’s a new world, in many ways better than the old, in some ways harsher. GM and IBM are finding that a business must respond to the world as it is--not as it was.
