A Lesson in Global Economics for Clinton in Big Blue's Troubles

By JAMES FLANIGAN

Dec. 16, 1992 12 AM PT

President-elect Bill Clinton got a glimpse of just how tough an economy he’s facing when International Business Machines announced Tuesday that it would cut 25,000 employees, close manufacturing facilities and take a $6-billion write-off.

From his economic conference in Little Rock, Ark., Clinton reacted negatively to IBM’s announcement of factory closures, job reductions and cutbacks in research. Those are “the exact things we don’t want them to be cutting,” Clinton said.

But Clinton, who heard suggestions Tuesday that he stimulate the economy with a $30-billion to $60-billion hike in government spending, may not understand what’s happening--while IBM, finally, is beginning to.

The giant firm, which had sales last year of $65 billion, is cutting manufacturing capacity for large computers, computer chips and data storage devices. At the same time, IBM is racing ahead with new lines and prices for its personal computers, holding its own in an intensely competitive field worldwide.

But the Armonk, N.Y.-based company is also losing money in PCs because its costs are too high, thanks in part to all the under-performing real estate and equipment in its $92 billion in assets, and all the underemployed people among its more than 300,000 employees.

IBM is being forced to reorganize by the incredible changes it helped bring to computers in the last decade--computing power that once demanded room-sized machines is now available in a desktop model no bigger than a shoe box. But a company that built operations and staff to sell large million-dollar computers is overstaffed and cumbersome in a world where small computers sell for thousands of dollars and are constantly changing.

These are critical times. IBM could prosper if it comes through this period alive. And if Clinton gains a better understanding of the period, he’ll know where to invest the $30 billion in economic stimulus.

It’s not a simple matter of big computer, little computer. IBM’s plant closings are part of global trend.

The problem is that the world is awash in goods and factories. There are too many cars and too many washing machines--which is why General Motors and General Electric have restructured operations. In offices, computers have made changes but still the numbers of clerks have grown. So productivity gains have been meager, one reason today’s economy seems so pinched. It has been a long time since we produced the surplus that pays for higher wages and more generous benefits.

The postwar boom--including the population boom--that overbuilt factories and office buildings is now over, explains Charles Clough, Merrill Lynch investment strategist. What will follow is a period of low growth but also low inflation.

That’s good news for Clinton. With prices falling for most goods, he need not worry about setting off a cost spiral if he pumps $30 billion or more into the economy.

But it means the stimulus must be targeted carefully. Old-fashioned job creation by putting people to work on the roads may not help the economy much. But education and training so that U.S. workers can take advantage of developments in computers and telecommunications will pay dividends. U.S. industry can have manufacturing jobs, but they must be modern, knowledge-driven jobs for our high-wage economy, argues Peter F. Drucker in his new book “Post-Capitalist Society,” coming out next year.

As for IBM, analysts’ opinions are divided between horror and hope.

IBM’s write-offs this year--$5.4 billion earlier, $6 billion now--speak volumes about how badly the economies of Europe and Japan are doing.

IBM has been getting more than half its sales and almost all its profit from overseas. But now international markets are turning away from IBM’s large computers as U.S. markets did earlier, reports Bob Djurdevic, head of Annex Research, a Phoenix consulting firm.

Still, IBM management failed to anticipate the change and now looks rattled.

To follow one write-off with another, and a cut of 44,000 employees with another of 25,000, bespeaks a company reeling from pillar to post. IBM Chairman John Akers indicated Tuesday that the company will probably lower its dividend. The stock was down $6.75 a share to $56.125 on Tuesday, an 11-year low.

And yet IBM also gets credit for trying to remake itself in difficult circumstances. It is now dividing operations such as personal computers, computer chips and disk drives into separate companies that will be able to sell directly to outside customers, become more competitive and get costs lower. Public sales of shares in these “mini-IBMs” may follow.

The company’s personal computers and software are winning the respect of experts. “Their personal computer line is now vibrant,” says Richard Shaffer, head of Technologic Partners, a research firm.

The potential is hefty. Akers, who on Tuesday rejected pointed suggestions that he resign, has said the company could get back to earning 18% on shareholders’ investment within three years.

The last time IBM did that was 1987, when profit was $5.3 billion and the stock price hit $175 a share.

The U.S. economy was looking good that year, too--but appearances can be deceptive.

The view, from Armonk or Little Rock, is gloomier today, but perhaps the possibilities are better.