New Era Favors Only Toughest Competitors

Alan Greenspan in congressional testimony Tuesday, apart from lamenting the threat of corruption in corporate America, also defined this era for U.S. and world business.

It’s not a return of the boom, but it’s not a continuing bust either. It’s a time in which U.S. companies may report narrower profits, but gain in productivity and competitive- ness. Stock prices are unlikely to shoot to the stars, but neither are they likely to fall into a hole.

It’s a time, said the Federal Reserve chairman, when increasing competition at home and in the global market place is “damping pricing power across developed and developing nations alike.”

In a highly competitive world economy, it means even major corporations are unable to unilaterally raise prices or exercise control over their markets. That describes a tougher economic climate that is both a threat and an opportunity for highly productive American firms.

Translated liberally, that explains why Dell Computer Corp. Chairman Michael S. Dell announced last week that he is confident of growing sales and earnings for his firm, but other companies in the technology field are not so confident.

It’s a line that also explains why General Electric Co. Chairman Jeffrey R. Immelt issued a bullish forecast last week, noting that GE’s plastics business is growing again and therefore he sees no sign of the economy dipping back into recession.

Dell is confident because his company, which he founded when he was an 18-year-old student at the University of Texas, is the low-cost producer of computers, servers, information storage equipment and other devices.

Dell Computer is low-cost because it doesn’t dwell on unique technology but on its ability to deliver products at prices that beat the competition. At Allen & Co.’s gathering of communications and technology top executives last week in Sun Valley, Idaho, Michael Dell boasted that his company’s gross pretax profit margin--sales revenue minus costs of goods sold, the broadest measure of profit--was only 17.6%. Four years ago, in the technology boom, that margin was 22%.

Yet the 36-year-old entrepreneur was boasting because his company is not only surviving the technol- ogy downturn but expanding by taking business from other firms in the brutally competitive world marketplace. In the fiscal year ended in February, Dell Com-

puter had $31.2 billion in sales. Four years ago it had $12.3 billion.

Despite the technology bust, companies of all kinds need computers and other information technology gear to reduce costs and boost output--thereby increasing productivity.

Other firms are trying to define which way technology is going, says Richard Bernstein, investment strategist for Merrill Lynch & Co. “But Dell basically knows that everything in technology is becoming a commodity and it’s the low-cost producer who wins in a commodity industry.”

Information technology is the cornerstone of U.S. companies’ efforts to become efficient and competitive. Greenspan noted that the “productivity of the U.S. economy has continued to rise at a remarkably strong pace”--close to 7% so far this year.

Part of those gains were achieved by companies holding back on hiring while boosting output with the same or fewer workers, Greenspan conceded, but “benefits from the rapid pace of technological advances” also played a crucial role.

Greenspan forecast an economy expanding at about 3.5% this year, a pace that could add almost $400 billion in output of goods and services. That’s not rapid growth following a recession but not a slowdown either.

One proxy for the economy is GE’s plastics business, which supplies basic materials for car bodies, electronic parts and medical devices. “I see plastics as a basic indicator of the economy’s downs and ups,” said Immelt, who came up through that $6.8-billion sales division, as did his prede- cessor, Jack Welch.

What GE and Dell and Greenspan’s testimony to Congress point to is an economy plowing out gains in sales and profits in basic industries by dint of tough competitive tactics and strict cost controls.

Companies will be hard pressed to increase profits dramatically. The stock market’s decline is an adjustment to that prospect. Investors are reducing the premiums still attached to many company’s shares, but still rewarding efficient and successful companies, such as Dell.

It’s a recovering economy that is being greeted with more determination than enthusiasm across most of U.S. and global industry. And that’s just about the right perspective for this new era.

James Flanigan can be reached at jim.flanigan@latimes.com.