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Is The Bonanza Over Over There?


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IS THE BONANZA OVER OVER THERE?

Call it a double whammy: The dollar is steaming ahead, and overseas economies are huffing and puffing. This turnabout follows five years during which overseas operations meant money in the bank for U. S. companies, thanks to a declining dollar and strong economic growth abroad.

Just look at the difference. Since February of this year, the dollar has climbed 15% against the German mark and gained 6% against the Japanese yen. For IBM, Ford, Polaroid, and other manufacturers, that has made overseas profits look smaller when converted into dollars. But for many companies, earnings are shrinking even in foreign-currency terms, at the same time as overseas economies stall out.

'MESS ON OUR HANDS.' All of a sudden, the windfall from overseas profits has disappeared. Alan M. Siqueira, an economist at DRI/McGraw-Hill Inc., figures international profits will fall 4% this year--the first drop since 1985 (chart). The expected decline will only make it harder for many U. S. manufacturers to slog their way through the recession. Says Rick Martin, a computer industry analyst at Prudential Securities Inc.: "We've got a potential mess on our hands."

Mess is about right. International operations now account for 19% of all U. S. corporate earnings, the Commerce Dept. estimates, nearly double the level of the 1970s. So for most multinationals, swings in overseas sales and profits are having a larger impact than ever.

The bad-earnings surprises could be more frequent as 1991 progresses, if many economists' forecasts of an additional 10% increase in the dollar's value prove correct. But even the craziest currency gyrations can't do the kind of damage to corporate profits that weak economies can.

Right now, many of America's biggest customers are hurting: Canada, Britain, France, Australia, and New Zealand are deep in recession. Meanwhile, the locomotive economies of Germany and Japan are slowing, and much of Latin America is in chaos. In Brazil, for example, economic and labor turmoil have led to big losses for Whirlpool Corp. and others.

IN MISERY. Few are feeling the pinch more than computer makers. The first solid indication that trouble was brewing came from IBM, where first-quarter earnings were only half of what analysts had expected. Big Blue is facing slowing sales across Europe. It is also suffering from a sluggish mainframe market in Japan, where banks and other big computer users are trimming capital spending in the face of high interest rates, a weak stock market, and slowing growth in gross national product.

At least IBM has company in its misery. Major U. S. computer makers' international revenues grew only 5% in the first quarter, estimates John Levinson of Goldman, Sachs & Co., down from 7% a year ago. But some manufacturers are much worse off. Unisys Corp., for example, is expected to post a first-quarter loss, partly because of a drop in sales in Europe, Australia, and much of Latin America. "When we look around the world, the picture is very spotty," says Unisys President Reto Braun. Joseph Zemke, president of Amdahl Corp., meanwhile, admits that poor European sales kept first-quarter earnings "well below" last year's 27~ a share. Digital Equipment Corp., which "has been living off international business for a while," says analyst Stephen P. Cohen of the SoundView Financial Group, is also finding it's a drag overseas. Digital's international revenues grew only 3% in 1990, and sales in its major European markets are continuing to weaken.

Analysts expect DEC's international profits to be flat, at about $400 million, in the fiscal year ending June 30. The company first noticed a slowdown in computer sales in Britain two years ago. More recently, its once-booming business in France and Italy has begun to falter. Even the buoyant German computer market has cooled amid rising interest rates and political uncertainty in the Soviet Union.

Robust international sales helped Compaq Computer Corp. ride out a domestic slump last year. But the bonanza appears to be ending. Currency-translation benefits are evaporating fast as the dollar strengthens. By the second half, says First Boston Corp. analyst Charles R. Wolf, they will disappear altogether--just as the growth rate in its overseas sales starts to slow.

CLOBBERED. Not just computer makers are ailing. Polaroid Corp., which gets 45% of its revenues overseas, is also feeling rather queasy. Its first-quarter net of $16.4 million was about half the amount it earned a year earlier. Analysts say Polaroid was counting on currency benefits to offset the cost of an aggressive advertising campaign to promote camera and film sales worldwide. Instead, the company was clobbered by a $5.5 million foreign-exchange loss when it translated its overseas sales back into dollars.

The news isn't much better for auto makers. With the exception of Germany, car sales are skidding throughout Europe. Ford Motor Co.'s overseas earnings fell last year, because of the weak British market, strikes at three key European factories, and the costs of launching a new Escort line. Ford Europe might not be down again in 1991, but the spreading European slowdown will keep gains to a minimum. And Ford of Canada, which includes results from Australia and New Zealand, is likely to limp along for the duration of the deep recessions in those three countries. General Motors Corp., meanwhile, is hanging its hopes on Germany, where pent-up demand among eastern Germans makes for continuing strong sales of Opels. But even the German economy is tiring. "That's the wild card," says Jean-Claude Gruet of UBS Securities Inc. "If Germany turns over, then you'll have a much worse earnings picture."

EUROSHOCK. Detroit's big overseas suppliers are getting squeezed, too. David V. S. Williamson, president of Du Pont Co.'s European unit, says sales of plastics to carmakers froze solid when the gulf war put auto sales on ice. But weeks after the war's end, sales are barely beginning to thaw. "Consumer confidence doesn't seem to be coming back very quickly," he says.

Like Du Pont, Dow Chemical Co. is facing Euroshock. Dow's European sales of polystyrene, used to manufacture insulation and consumer-goods packaging, have been hit particularly hard. And European appliance sales are feeble, too. Although demand in Germany unleashed by reunification has boosted turnover of washing machines, refrigerators, and dishwashers, Whirlpool's European sales will still be flat this year.

Not all U. S. companies doing business overseas are having a tough time. Corporations in traditionally recession-resistant industries such as food and beverages are weathering the storm quite well. And Levi Strauss & Co., for example, is riding high on a wave of foreign demand that pushed its latest quarter's profits up 89%, to $85.7 million.

But in these days of the double whammy, such good news is more the exception than the rule. With each new surge, the dollar is making U. S. corporations less competitive, just as demand is slowing in nearly every corner of the globe. The bottom line is: Overseas results are bringing scant relief to the bottom line.

AMDAHL European sales slump; expected first-quarter net well below 1990's

COMPAQ Foreign sales cooling; cheap-dollar advantage eroding

DIGITAL EQUIPMENT Overseas sales up only 3% in 1990; Europe still weakening

DOW CHEMICAL European profits still falling after a 42% drop in 1990

FORD Sales slumping in Europe, Brazil, Canada, Australia GM Slowing German economy; rising dollar may cut foreign profits

IBM Japanese mainframe sales hurting; European revenues slowing

POLAROID Dollar's rise took $5.5 million off profits in first quarter

UNISYS Expects first-quarter loss as sales tumble around the world

WHIRLPOOL Appliance profits drop in Europe; losses mount in Brazil DATA: BWMonica Roman in New York, with James B. Treece in Detroit, Barbara Buell in San Francisco, Gary McWilliams in Boston, and bureau reports


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