| BUSINESSWEEK ONLINE : MAY 17, 1999 ISSUE | ||||||||
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| NEWS: ANALYSIS & COMMENTARY
Speed Up That Line! Cost-cutting, signs of life in Asia, and lean inventories may mean manufacturing will join the profit party For the past 18 months, consumers, Wall Street investors, homebuilders, and just about everybody else in the economy have been enjoying a nonstop party. But old-line U.S. manufacturers have been sulking in the corner like wallflowers. The rest of the economy shrugged off the global financial crisis--even profited from it, as prices of all sorts of goods plunged. Meanwhile, manufacturers were pummeled by the collapse of export markets, falling profits, and stock prices that were anything but exuberant. While most companies were scrounging for workers in a tight labor market, manufacturers cut payrolls by some 400,000 workers last year. Suddenly, however, it looks as if those forgotten goods producers may be joining the fun. On May 5, the Commerce Dept. reported that factory orders in March rose a surprising 2%, and bookings in the first quarter were up 3.6% from 1998. The same day, the Federal Reserve's monthly survey of regional economies found an almost uniform uptick in manufacturing. Add to that low inventories, and the prospects are good for increasing output this summer as business rebuilds stocks. What's more, the crisis in Asia seems to be easing, and in some nations recovery is under way. Little wonder some corporate executives are feeling a little more upbeat. ''We're optimistic, but not euphoric,'' says Sunoco Inc. CEO Robert H. Campbell. A major reason for the rosier outlook is the improving demand overseas. ''We ran into a buzzsaw when the Asian crisis hit,'' notes Edward F. DeGraan, executive vice-president of Gillette Co., which saw its Asian sales drop 11% in the fourth quarter. ''But now we are seeing good indicators that Asia is coming back.'' In the first quarter, Gillette's Asian sales rose 11%, and the company expects a 20% increase in the second quarter. ''BIGGEST SURPRISE.'' Gillette (G) and Sunoco (SUN) are not alone in their optimism. I/B/E/S International Inc., a financial forecasting firm, says operating profits of the Standard & Poor's composite of industrial companies rose 7.1% in the first quarter, after falling 1.8% in 1998's fourth quarter. I/B/E/S sees profits growing 12.4% in the second quarter, 20.9% in the third quarter, and 23.5% in the fourth. True, the profit comeback may look more dramatic than it really is, measured against such dismal 1998 results. Still, Wall Street is starting to notice the turnaround, bidding up share prices for companies that were being dismissed this winter as stodgy, low-tech performers. 3M (MMM), for example, has seen its stock jump more than 30% since just early April. That's nothing compared with the stock of Whirlpool Corp. (WHR), which has soared 66% since Mar. 1, to around 68. That's about where it was before it tanked after the emerging-markets crisis hit Brazil, where the Benton Harbor (Mich.) appliance maker was once getting 50% of its operating profits. But the company has since cut costs, and foreign markets are firming up. As a result, operating income rose 12% in the first quarter. ''The biggest surprise has been our growing earnings in Europe,'' says Chief Financial Officer Ralph F. Hake. Prospects are good for even stronger profit gains for many manufacturers, with only scant improvement in global demand. Why? As prices of commodities and other goods fell over the past year because of weak global demand and overcapacity, producers were forced to slash costs any way they could. So they trimmed their workforces and kept pay raises to a minimum. Hourly earnings of production workers increased just 1.8% from March, 1998, to March, 1999, after rising 3% the year before. The result: productivity growth in the manufacturing sector of 4% a year--double the recent national trend. That has bolstered profit margins. Further evidence that the factory sector is on the mend, albeit slowly, comes from the May 3 report by the National Association of Purchasing Management that its index of manufacturing activity was 52.8 in April. That's the third straight month that the index has been above 50, the level that indicates an expansion for goods production (chart). The index stood at 45.3 at the end of last year. The NAPM report also shows a firming up of prices, signaling that the deflation that hobbled commodity suppliers and producers may be at an end. Still, the manufacturing rebound remains uneven. Auto makers have been enjoying such intoxicating boom times that they are actually beginning to build new capacity: Both General Motors Corp. (GM) and Honda Motor Co. (HMC) have announced plans to add new factories in Lansing, Mich. and Lincoln, Ala. But the outlook remains less clear for companies that depend heavily on foreign markets, have lost market share to imports, or operate in still-weak commodity industries. While the consensus seems to be that manufacturing has hit bottom, it is still hard to tell how long it will take before companies report sustainable profit and revenue growth. ''Volume is up, but this will have to go on for a couple more years to have a real effect,'' says Ernest W. Deavenport Jr., CEO of Eastman Chemical Co. in Kingsport, Tenn., and past president of the National Association of Manufacturers. His company's first-quarter revenue slid 13%, and profits plunged 57%--even though it shipped a higher volume of chemicals. Still, the signs of an Asian rebound are growing. And if the seemingly unstoppable U.S. economy keeps going, even old-line manufacturers may finally get a chance to celebrate. By Owen Ullmann in Washington and James C. Cooper in New York, with Laura Cohn in Washington, Dave Lindorff in Philadelphia, and bureau reports _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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