Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, May 20, 1990 TAG: 9005170670
SECTION: BUSINESS PAGE: D-1 EDITION: METRO
SOURCE: By JOHN HOLUSHA THE NEW YORK TIMES
DATELINE: LENGTH: Long
To the plaudits of securities analysts in New York last November, he declared that GE would purchase up to $10 billion worth of its own stock over the next five years, the single largest gesture of its kind in history.
Buying the stock, Welch said, was a better way to generate value for shareholders than taking a "wild swing" on an acquisition or investing in new technology.
Wall Street apparently agrees.
Welch has since been hailed as a tough-minded, results-oriented manager, and GE shares have climbed by more than 23 percent, to about $68, compared with the 3 percent rise in the Standard & Poors 500.
A company's stock price usually rises after a buyback because, with fewer shares in circulation, its earnings-per-share are likely to improve.
But many economists, academics, executives, and other experts on American industrial policy say financial engineering of this sort is often indicative of short-term thinking and a lack of confidence.
They say it is sapping the nation's global competitiveness.
Rather than buying stock, they say, chief executives like Welch should be investing in new products and processes to keep home-grown inventions from being wrested away by more efficient producers abroad.
And they should be plowing money into leading-edge technologies and into basic research to develop products not even imagined today.
Otherwise, companies in Europe and Asia will surpass the Americans as they have done in consumer electronics, machine tools and semiconductors.
And that could endanger America's wealth.
"If we are not willing to get to a long-term orientation, we are going to lose one strategic industry after another, and that has implications for our standard of living," said Rep. Mel Levine, D-Calif.
Corporate America's preoccupation with quarterly results emerged as a serious irritation in the '80s.
But some experts believe the '90s may provide an opportunity for change.
Hostile takeovers and "junk bond" financing, which drove companies to keep their stock prices aloft to avoid being a target of predators, have fallen out of favor.
And institutional investors, politicians, economists and industry itself are stepping forward with their pet incentives for instigating change.
But the remedies will need to be potent. Industrial America, some experts believe, has lost its vision and nerve.
"Deep down, there is a defeatist attitude in this country about manufacturing," said Andrew Grove, the president of Intel Inc., a world leader in computer chip manufacturing.
"Part of the justification process for investments includes figuring out how to compete with the Japanese. There have been few success stories."
Perhaps nothing symbolizes this malaise better than the growing popularity of stock repurchases.
"The attitude is to throw up their hands," said Michael Borrus, a professor at the University of California at Berkeley. "They figure, `If I cannot compete, at least I can boost my stock price.' "
The buybacks, the critics warn, hurt all companies by shrinking the pool of available capital.
Shareholders who sell their stock after a buyback-induced price rise reinvest only about a third of the proceeds, estimated Fred Branfman, director of Rebuild America in Washington, which advocates increased industrial investment.
"It is now clear that a lot is lost to consumption - to swimming pools and things like that," said Lester Thurow, dean of the Sloan School of Management at the Massachusetts Institute of Technology.
What also disturbs some economists is that the practice is no longer just a novelty among the dozen or so companies the nation depends on to lead innovation.
Among them are GE, IBM, Ford and General Motors - companies that by virtue of their size and brain-power are best equipped to do battle in the global war zone.
To be sure, the leaders of these companies believe they are doing what is best for their businesses and shareholders: balancing short-term financial considerations against longer-term goals.
Most say they are adequately financing research and development and spending sufficiently on new plants and equipment.
It is difficult to compare investment levels from company to company.
One may spend less than another on research, but may use those dollars more efficiently.
And critics empathize with chief executives' philosophical balancing act.
But they wonder if the money they are devoting to buybacks wouldn't be more wisely spent strengthening their businesses.
When they examine particular buybacks, critics often speak of missed opportunities:
GE might have pursued consumer electronics like television and other high-risk markets rather than withdrawing to concentrate on areas where competition is more limited.
Instead of sinking more than $10 billion into a series of stock purchases, IBM might have lunged more aggressively into the critical supercomputer segment or pursued the laptop computer market.
To help shore up its shrinking market share, GM could have used the $2 billion it has spent on stock since 1987 to build cars with more distinctive designs.
The Chrysler Corp., which has spent $1.4 billion on stock since 1984, could have developed its own subcompact cars rather than buying them from Japan.
Instead of spending what could approach $1 billion on stock, Honeywell Inc. might have stuck it out in the computer market and in semiconductor manufacturing.
Apple Computer, which said in March that it would add 5 million shares to its repurchase program, lacks innovative new products.
Like GE, these companies contend that the stock repurchases were the best available use for surplus cash.
Each said its objective was to increase shareholder value by acting as a steady buyer for its shares.
Welch declined to be interviewed for this article.
But discussing GE's vitality, Joyce Hergenhan, vice president for public relations, pointed out that the company has remained at the forefront of businesses in which it has chosen to compete.
"We are world leaders in medical imaging," she said. "We are world leaders in gas turbines. We are world leaders in plastics. Do we have to be in Walkmen and pantyhose as well?"
Clearly, companies have also been spooked by the corporate raiders.
Chief executives have been forced to make shareholder returns their top priority over the last decade or risk an uninvited takeover.
And for America, a company like GE is worth more whole than broken into pieces, sold to raise cash by a raider.
Indeed, stock buybacks and other defensive acts are "an unfortunate corollary of the takeovers and mergers and financial manipulations of the last few years," said Ira Magaziner, a management consultant who counts GE among his clients.
Matter of view
Several academic researchers say that German and Japanese companies still eagerly invest in new technologies because they are managed by technically oriented executives rather than by financial engineers like those who rose up in America in the '80s.
"If you look around the world, the companies that innovate are run by people who are technically competent and who are excited by technology," said Richard Rumelt, an associate professor of business policy at the University of California at Los Angeles.
"Look at the early days in Silicon Valley. The people there measured themselves by their technology. When industry passes into the hands of people who are more interested in money than in innovation, it loses something important."
Some say that to save money, some cost-conscious chief executives have encouraged their research departments to focus on projects most likely to pay off.
It's just starting to affect research spending.
According to the National Science Foundation, investment in research and development declined by 0.9 percent last year, the first drop since 1975.
Welch was educated as a scientist, but made a name at GE for his relentless pursuit of bottom-line gains.
Unlike many companies that have bought back stock, GE's operating performance has been exemplary, with earnings increases in every quarter of the '80s.
Since he took over as chief executive in 1981, Welch has shed businesses that were not either dominant commercially, funded by the Pentagon or immune from international competition, like its NBC television network.
Indeed, in announcing the buyback, Welch said GE is more interested in adding "niches" to existing enterprises, like jet engines, electric power turbines and medical electronic equipment, than in boldly exploring new frontiers.
He said that would give GE "high barriers to entry" by competitors, thereby enhancing profitability.
"No one will change the aircraft business overnight," he said. "It is not like television or appliances. The environment won't spring any surprises on us."
To build a fortress GE, Welch sold all mass-market manufacturing lines, except large appliances and light bulbs.
Gone are the small appliance and television units, fields dominated by the Japanese and Europeans, where GE said it had no hope of becoming No. 1 or No. 2, Welch's goal for all divisions.
But some say that criteria is misguided.
Michael Porter, a Harvard Business School professor who specializes in the nature of competition, says market share is not a measure of a company's profitability.
"Look at BMW and Mercedes-Benz," he said. "They are not No. 1 or No. 2 by any measure, but they are among the most profitable in the industry."
Others view GE's exit from consumer electronics as a grave defeat for America.
"Consumer electronics are the driver at the cutting edge of technology," said Rep. Don Ritter, R-Pa.
Consumer electronics, after all, are considered an ideal market to hone design and manufacturing techniques.
"Strong competition in this industry provides a major impetus for the development of new design and manufacturing technologies," said Susan Walsh Sanderson, a professor at Rensselaer Polytechnic Institute, in Troy, N.Y., in a recent study on the outlook for manufacturing in this country.
"The same design and manufacturing techniques provide the basis for many other product lines, including computers, instrumentation and defense electronics."
But the cutthroat competition in consumer electronics seems to petrify GE.
Discussing the pricing of its CAT scanners and other medical-imaging devices, Bobby J. Bowen, an executive of the company's medical systems groups, said recently, "Thank God it is not consumer electronics."
Setting limits
GE has a reputation for technological greatness.
At its laboratories in Schenectady, N.Y., Charles Steinmetz once explored the basic character of electricity and Irving Langmuir made discoveries in surface chemistry that won a Nobel prize.
But the company's research is now directed toward its existing lines of business, and critics fear the strategy limits the possibilities of a major breakthrough.
"When it limits itself when companies in Europe and Japan are not bound by the same limits, that has national implications," Magaziner said.
GE responds by noting that last year its researchers were granted 275 patents, more than any other year in its history.
It says that research and development spending in key technology businesses has increased 78 percent since 1984.
Of course, no one company can excel in all fields.
And even its critics concede that GE is a world leader in such areas as aircraft jet engines and medical-imaging equipment.
Nevertheless, the company has walked away from some technologies being pursued feverishly in Europe and Japan.
As the largest American manufacturer of locomotives, GE has evaluated the magnetic levitation technology for railroads, but decided not to proceed with the research, according to Walter Robb, senior vice president for corporate research and development.
And the company dropped out of robotics research when the market softened.
"A new appliance for our major appliance division is more important than a new game," Robb said.
Equally troubling to economists is GE's level of investment in research.
Not counting the money from the federal government for research, GE spent only $1.3 billion, or about 2.4 percent of its revenues, on those efforts last year.
That is well below the 3.2 percent national average for all companies in 1988, the latest year for which the National Science Foundation has figures.
According to Hergenhan, GE's spending is below the industry average because large parts of the company, including its financing and broadcasting operations, do not conduct laboratory research.
Taken as a percent of only its product sales, GE's average, without government contracts, is 3.3 percent.
GE, however, spends less than many hard-charging Japanese companies.
The Honda Motor Co., for instance, budgets 5 percent of anticipated sales each year, regardless of its profit level.
The NEC Corp., which is working on telephones that will do instantaneous language translation, sinks 7 percent of annual sales into the laboratory.
"It would be interesting to compare Jack Welch with Akio Morita," the chairman of the Sony Corp., said Robert Cohen, an economist associated with the Economic Policy Institute in Washington.
"Morita is investing in the next generation of video chips, memories and the miniaturization of devices.
"If the Japanese have a breakthrough in something like magnetic levitation trains, we will be left in the dust."
by CNB