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9.17.98  
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 American-made movies."

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
julia_lichtblau@businessweek.com


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