In a Global Economy, You're Always on the Front Line
The international crisis hits companies even if they stick close to home
If you think U.S. small businesses are safe from the global financial
crisis, consider Jacob Gorsky. His company, New
Market Commercial Ltd. in Norfolk, Mass., builds multimillion-dollar cold storage plants
in Russia, Central Asia, and the Mideast. "This was supposed to be a banner
year for our business," he says. Now he's got $600,000 of equipment in
Russia and, since the ruble devaluation, his customers can't pay. "Right
now, we are in big trouble as a company," he says.
Gorsky, with his Russian ventures, may be more exposed than most small-business people to the global crisis. But as a small exporter, he's hardly
alone. The U.S. Small Business Administration says 96% of U.S. exporters
are companies with under 500 employees, and they generate almost 30% of
the value of total U.S. exports. That's up from 26% in 1987, under
the prodding of business gurus and government agencies who downplayed the
risks and exhorted small companies to look beyond the local markets they
knew best. The reality has proved to be somewhat more treacherous.
Anyone who sells to developing countries is "very, very scared of what's
going on," says Alfred Thieberger, president for Century Merchandising Corp.,
an export management company in New York that caters to small businesses.
Plenty of other small-business sectors are a lot closer to the front
lines of the global crisis than they might think, as cheap foreign currencies
entice business away from Americans. Take the U.S. movie industry, where
most companies employ fewer than 15 people. With the U.S. dollar
fetching $1.50 (Canadian), about $1 billion of U.S. production is
being done in Canada, says Cody Cluff, president for
Entertainment Industry Development Corp. in Los Angeles. As for Asia, "Now there's a tendency
to pick up less American product for TV and cable and [there's] less demand for
To be sure, many businesses remain upbeat despite the gathering
clouds. "There's still a euphoria effect," says Jack Kyser, chief economist
for the Los Angeles Development Corp. "People generally feel good, though
they know there are strange things going on." And there's some justification
for the euphoria, at least if you look backward. "We had the best profitability
reports since the mid-'80s in August," says Bill Dunkelberg, chief
economist for the 600,000-member National Federation of Independent Business.
But what's keeping U.S. consumption chugging miraculously along "is new
job creation, new income streams, and credit cards," he adds. "If the job
creation stops, it will slow consumer spending."
BIG LOSSES. On that score, the signs from big business are ominous. Tyson Foods, Hewlett-Packard, FDX, Harnischfeger Industries, and DuPont, to name a few, have all announced earnings damage or layoffs or postponed
investment -- the fallout from Russia, Asia, or Latin America.
In New York, where finance underpins the local economy, a slew of major
banks, including Citicorp, Salomon Smith Barney, Credit Suisse First Boston, and Banker's Trust has taken a hit in foreign markets.
It's almost inevitable that if big businesses are in pain, they'll squeeze
their smaller suppliers. That's all the more likely because of the way
the collapse in Asian demand is filtering through to the U.S. Cheap imports,
commodities, and energy keep the lid on inflation and interest rates, all
positives for consumption. But they also make it almost impossible for
U.S. companies to raise prices. If the big players decide to cut prices
to keep less-confident customers buying, they'll pressure their suppliers
to cut prices, too.
With the number of small businesses raising prices already "stunningly
low," according to the NFIB, that's a game they're sure to lose.
It could hardly come at a worse time. Despite the low-inflation environment,
small businesses are under the cost gun in two areas -- wages and health
care. In the current tight labor market, many small businesses have raised
wages, which they'll be hard put to rescind in a downturn. Meanwhile, health-care costs are rising again as insurers answer pressure to improve coverage
and their dismal bottom lines. Big employers have staved off
big premium increases, but smaller ones have less leverage, leaving them
sandwiched between still-rising costs and falling prices. "It's a
classic disinflation scenario," says Pete Collins, director for Entrepreneurial
Services at PricewaterhouseCoopers LLP in New York.
CAREFUL SHOPPERS. In all this, the wild card is how long consumer confidence will hold
up. With the value of the family retirement portfolio rising and plunging
daily, "the consumer will be a careful shopper," warns Irwin Kellner, an
economics professor at Hofstra University in Hempstead, N.Y., and former
chief economist at Chemical Bank. He says that's bad news for anyone
dealing in purchases that can be postponed, like a new home.
"If I were a homebuilder, I'd be very careful."
The construction area is already flashing red for small companies. The
NFIB's August survey showed that 42% of construction companies had to raise
wages, as housing starts hit their fastest pace in 11 years. With home
ownership already high, the NFIB's Dunkelberg says it looks like a classic
setup for a bust. He likens the global crisis working through the U.S.
economy to a Bruegel painting, The Parable of the Blind Leading the Blind:
"There's one guy down in the mud," he says. "The people at the end have this
stupid grin, and the people in the middle have various degrees of realization
of what's happening to them. The construction guys are the ones at the
end." Judging by the way events are unfolding, there may be
plenty of other entrepreneurs heading for the mud, too.
By Julia Lichtblau in New York