View from New York: Darkness before a new dawn

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The Independent Online
THINGS are certainly bad these days for many of America's big industrial conglomerates, but nowhere near as desperate as their recent results might suggest.

The 1992 losses reported in recent weeks by the country's best-known companies sound staggering, with virtually every one of the 30 'blue chips' that make up the Dow Jones Industrial Average reporting billion- dollar charges. Three times in the past month alone, the record for the largest loss in corporate history has been broken - first by IBM's dollars 5bn shortfall, which was eclipsed on Wednesday by Ford's dollars 7.5bn, which was dwarfed by the dollars 23.5bn General Motors announced a day later. At this rate - GM erased three-quarters of its net worth in a single year - it would seem that the world's largest car maker will be out of business before the end of its current model year.

GM's loss amounted to dollars 38.28 a share, just a dollar shy of its opening price on the New York Stock Exchange on Thursday. The market, however, responded not with panic but by buying GM's shares, indeed several hundred thousand of them, at a premium of more than a dollar. In fact, Wall Street's reaction to the bloodbath has been to push the Dow index to a record high.

The sanguine attitude of investors is explained by the fact that the losses are largely the product of one-off charges, incurred to reflect a change in American US accounting standards known as FAS 106. With America's healthcare system in crisis, companies that have long offered their employees full medical benefits are now being obliged to recognise their eventual cost. And given the option of taking the hit all at once, or bleeding several hundred million dollars a year over the next 20, most companies are opting for the former.

The charges have no direct impact on the companies' cash flow, and so have largely been ignored by Wall Street. This is not to say the effects of FAS 106 are not real: one study by Goldman Sachs suggests it will reduce the value of affected companies by an average 10 per cent. In the case of companies with large numbers of retired staff, like GM, or with already weak balance sheets, like Chrysler, FAS 106 threatens to wipe out shareholders' equity, and the resulting rise in debt ratios may well force many back into equity markets this year for new capital.

FAS 106 also tends to discriminate between older, traditional manufacturing industries, like cars, steel and aerospace, and emerging technology and service industries.

Trust busters

One very large company that therefore does not have a FAS 106 problem is Microsoft, the Seattle software firm that recently surpassed IBM as the world's most valuable computer company. But Microsoft does share a different problem with 'Big Blue', the scrutiny of 'trust busters'.

Those most keen on IBM's break-up these days are its shareholders. But a decade ago the pressure to split the computer giant into smaller, more competitive units came from Washington. IBM dominated its industry not only by sheer size, the US government complained, but by monopolistic tactics designed to deny its customers alternatives.

This week, Microsoft won a reprieve from the government agency that is considering charges that it uses its dominance of computer operating systems - it has 90 per cent of the market - to force customers to use its applications programs. While it is judged very unlikely, the Federal Trade Commission could yet decide to order Microsoft broken up.

But the irony of the situation lies not in comparing IBM's plight with that of its upstart supplier, but in the contrast between its fate 10 years later and that of another object of regulatory scrutiny in the early 1980s, AT&T, then America's only telephone utility.

IBM won its long battle with Washington in January 1982, when the government abandoned its anti-trust case. But on the same day, AT&T capitulated, agreeing to spin off its local exchange operations into seven regional companies - now known as the Baby Bells - while retaining its long- distance service, research labs and equipment subsidiary.

Last month, on the same day Microsoft overtook IBM in market capitalisation, AT&T surpassed Exxon to become America's most valuable company. And a week after IBM announced what was briefly the largest loss in corporate history, AT&T reported record quarterly earnings.

'We were forced by the divestiture to make changes that probably were good for us,' AT&T's chief executive, Robert Allen, says in an interview in the current issue of the New Yorker magazine. 'We may have been more fortunate than IBM in that change was forced on us.'

The analogy between the two break-ups - one imposed by government intervention a decade ago, the other, still imminent, by investor despair - is not perfect. IBM's chief counsel at the time, Nicholas Katzenbach, suggests the comparison is naive, and that the main result of dismembering IBM then would have been to 'turn over the (computer) hardware business to the Japanese'.

But as the New Yorker article notes, today it is the Japanese who are reeling, victims of their own anti-competitive policies.

'Like IBM, many of its leading industries grew complacent and failed to innovate,' argues the author, James Stewart. 'Industries once all but ceded to the Japanese are being reinvented by Americans, from advanced microchips to high-definition television.'

Dumping protection

'Perhaps the seeds of self-destruction lie within all monopolies,' Mr Stewart continues. 'If so, why should society pay the costs - in higher prices, misguided research, lack of innovation and poor-quality products - while waiting for competition to re- emerge?'

Indeed, and the very same argument can be made with regard to trade protectionism - something America's car makers, despite their miserable overall results, seemed to appreciate this week when they decided against launching a huge anti-dumping suit against their Japanese competitors.

For all the fears of a new trade war now that a Democrat is in the White House, the mood in America these days is decidedly liberal on economic matters. Detroit's big three were genuinely worried that their dumping suit would make them sound 'like whining protectionists', as the Wall Street Journal put it.

One-time advocates of industrial policy in President Bill Clinton's cabinet, ranging from the Labor Secretary, Robert Reich, to the Commerce Secretary, Ron Brown, sound increasingly credible when they say American companies and workers will have to compete to survive. Exports are what pulled the American economy out of recession, and US industry - leaner and meaner after four years of struggle - appears anxious to press its advantage over competitors in Europe and Japan mired in their own downturn.

'American producers have made tremendous gains in increasing productivity and are poised to sell into world markets,' says John Makin, an economist and a former chairman of the Japan US Friendship Commission.

Europe and Japan may have good reason to fear changing American attitudes towards trade. But perhaps it is not new US trade barriers they should be worried about.

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