Managing in the downturn
Desperately seeking a cash cure
Nov 20th 2008
From The Economist print edition
Many firms urgently need more cash to boost their liquidity and to help ward off the economic ills
AT FIRST glance Citigroup, a giant of American banking, and Wolseley, a British firm that makes building products, have little in common. The former is part of the plumbing of the global financial system; the latter is the world’s biggest distributor of pipes, bathroom fittings and other plumbing paraphernalia. Yet both have found themselves on the rapidly growing list of victims of the global economic turmoil.Citigroup has been hammered by the fallout from the subprime-mortgage debacle and its repercussions in financial markets. But as the chaos spills into the real economy, firms in many different industries are being infected by it. Hence Wolseley has seen demand for its products dry up as the number of new homes being built has plummeted.
Now they have something else in common: this week both announced a further round of mass lay-offs. On November 17th Vikram Pandit, Citi’s boss, said his bank would shed a whopping 52,000 jobs in the next few months, bringing the total number of planned job cuts to 75,000, or 20% of the bank’s workforce (see article). On November 18th Chip Hornsby, Wolseley’s boss, announced another 2,300 job cuts at his firm. Once these employees have departed, his company will have cut 14,500 jobs, or roughly 18% of its total.
现在他们在某事上有共同之处了：本周这两家公司都宣布了新一轮的大规模裁员。11月17日，花旗的老总Vikram Pandit表示在接下来的几个月中他们将裁剪52,000个职位；这一举措将计划裁员数增加到了75,000个，相当于整个银行职工总数的20％（见文章）。11月18日，沃尔斯利的老板Chip Hornsby又宣布了另外2300个职位裁减的决定。随着这些职工的离开，公司的裁员数将达到14,500位，约占职工总数的18％。
With Messrs Pandit and Hornsby, bosses at many other firms have been cutting hundreds of thousands of jobs. Apart from carmakers and other manufacturers, the list of those laying people off now includes Pepsi bottlers, law firms, retailers, media companies, chemicals producers and even technology firms. All are desperately seeking a cure. And the most attractive medicine on offer looks like cash.
Hoarding for hard times
Preserving cash in such formidable times will present managers with an unprecedented test of their skills. “We’ve come through a half-century of history where recessions have been sort of mild,” notes Richard Sylla, a professor at New York University’s Stern School of Business. “But never have problems in the financial sector been as great as they are now.”
Faced with huge difficulties of their own, banks have tightened their purse strings, lending less and driving up the cost of credit to consumers and corporations. That is compounding an already grim prognosis for the world economy. This week Japan said its economy had shrunk for the second quarter running. Much of Europe is in a similar state. And a new survey by the Federal Reserve Bank of Philadelphia has shown that many economists believe the United States went into recession in April and will not emerge from it until the middle of 2009.
Opinions differ as to how long and deep the global slowdown might be. But the combination of a battered banking system and shell-shocked consumers mired in debt suggests it could be particularly hard for many businesses, whatever the duration. So bosses are rushing to secure as much cash as they can now to see their companies through the downturn.
How times change. Not long ago companies with cash piles were assailed by corporate activists to return money to shareholders. Nowadays it is only a slight exaggeration to say that the more cash that investors see in a firm’s coffers, the happier they are. A recent report from Citigroup’s investment bank shows that since the credit crisis began the returns of firms with ample liquidity have outperformed those of their cash-strapped industry peers by almost 7%. Before the crunch, cash-rich firms were generally underperforming.
There is a big risk that some behemoths will run out of money. Moody’s, a credit-rating agency, says its liquidity-stress index, which tracks the cash position of heavily indebted American firms, shows they are feeling as pinched as at any time since late 2002. Among those most at risk are some casinos and carmakers. Harrah’s Entertainment, a Las Vegas-based casino, is trying to persuade creditors to renegotiate its payment terms to avoid a default. General Motors (GM), along with Ford and Chrysler, islobbying Congress for a bail-out after burning through billions of dollars in the third quarter of the year.
4.Harrah’s Entertainment 请参考http://en.wikipedia.org/wiki/Harrah%27s_Entertainment
5.General Motors 请参考http://en.wikipedia.org/wiki/General_Motors
Few companies are in as bad shape as the three American carmakers. Yet that is no excuse for complacency. Faced with such difficult markets, firms in many industries are likely to see sales fall, bad debts soar and cash flows deteriorate sharply-if they have not done so already. Although every company’s situation is unique, there are some common themes that managers would do well to bear in mind when tackling the current crisis.
Don’t bet on the bank
One thing not to take for granted, even for firms with strong balance-sheets, is that they will get access to external capital. For the foreseeable future, bank credit is likely to be harder to come by and will certainly be more expensive than when the financial crisis began. Strong companies may be able to issue corporate debt at a more reasonable price, but that market remains fragile. Although government action has unblocked the commercial-paper market, an important source of short-term funding, the cost of tapping it remains very high for all but the healthiest of issuers.
Faced with all this, some companies such as Marriott International, an American hotel group, have drawn down bank credit lines, even though they did not need the money urgently. Many of these so-called “revolving credit facilities” were set up during the boom, when credit was cheap. A recent paper by two Harvard Business School economists, David Scharfstein and Victoria Ivashina, shows that between April 2006 and April 2008, such credit lines grew by 36%, to $3.5 trillion.
面对这一切，一些公司例如万豪国际集团，一家美国酒店集团，制定了新的银行信贷额度，即使他们并不急需资金。许多这些所谓的”循环融资贷款”都是在信贷廉价时被采用的。最近由哈佛商学院的两位经济学家David Scharfstein和Victoria Ivashina发表的论文显示：从2006年四月到2008年四月，信贷额度增长了36％，已上升到3.5万亿。
8.Marriott International 请参考http://en.wikipedia.org/wiki/Marriott_International
However, some analysts argue that tapping relatively cheap bank credit is not wise unless firms really need the money. They argue that rating agencies and investors are likely to see this as a black mark against managers who have increased leverage for no good reason. But in such uncertain times, that may be a small price to pay for securing a cushion of cash.
A few companies have tapped new pools of capital, like sovereign-wealth funds, to bolster their finances. In July GE, an American conglomerate, set up an $8 billion, 50-50 joint venture with Mubadala, an investment arm of Abu Dhabi, to invest in areas such as clean energy and aviation. Mubadala is expected to become one of GE’s ten largest shareholders.
9.sovereign-wealth funds 请参考http://en.wikipedia.org/wiki/Sovereign-wealth_funds
A third way to raise cash is to sell businesses no longer central to a firm’s strategy. Although prices for corporate assets have been depressed by the downturn, this has not deterred some companies from putting them up for auction. This week, for instance, GM and Ford sold shares in Suzuki and Mazda respectively. By selling their stakes back to the Japanese firms, the American carmakers raised a total of $770m of badly needed liquidity.
Managers can also boost liquidity by letting less cash go out of the door. Several big companies including Alcoa, an American aluminium giant, Target, an American discount retailer, and AkzoNobel, a Dutch firm that makes paint and specialty chemicals, have recently cancelled plans to buy back shares using what was previously viewed as excess cash. Companies are starting to trim dividends too, though this will be unpopular with investors expecting a regular stream of income.
14.Aloca 请参考 http://en.wikipedia.org/wiki/Aluminum_Company_of_America
15.Target 请参考 http://en.wikipedia.org/wiki/Target_Corporation
16.AkzoNobel 请参考 http://en.wikipedia.org/wiki/AkzoNobel
Stretching out the payments on bank debt can also preserve cash. And firms should look out for opportunities to refinance existing loans early to give themselves greater financial flexibility. Sprint Nextel, a troubled American telecoms company, recently replaced a $6 billion revolving credit facility with a $4.5 billion loan agreement due in 2010. The terms allow Sprint to have a higher ratio of debt relative to its profits, making it less likely that it will breach covenants associated with its debt. That gives Sprint, which has been losing subscribers, a slightly better chance of surviving the downturn.
17.Sprint Nextel 请参考 http://en.wikipedia.org/wiki/Sprint_Nextel
A particularly tough challenge is to generate even more cash from existing operations. The Hackett Group, a consulting firm that specialises in this area, reckons that a typical multinational with revenues of about $23 billion can save up to $400m a year by taking a hard look at how it runs areas such as finance, human resources and technology. For example, in a recent study the consultants point out that many first-generation outsourcing efforts have shifted only parts of a process offshore. Firms should review these to see if they can “lift and shift” the whole to cheaper places.
The daily grind
Another area that needs to be put under the microscope is working capital, or the cash that gets tied up in day-to-day operations. “The first place to look for this money is in a firm’s inventory,” says Wayne Mincey, Hackett’s chief operating officer. All too often, poor sales forecasting and production planning mean that a lot of cash ends up trapped in a company’s warehouses in the form of unwanted products. Hackett reckons that the same $23 billion company could save as much as $1 billion a year by improving the lines of communication between executives responsible for sales, procurement and production.
At the same time, managers need to avoid swinging to the opposite extreme. Faced with a more difficult economic environment, retailers in particular have been thinning out inventories to free up cash. But if their sales forecasting is not on the button, companies risk annoying consumers who cannot get hold of their products because they are out of stock.
In a downturn, some firms might be tempted to squeeze suppliers. But they should think twice. Many sophisticated supply chains now stretch across continents and rely on just-in-time delivery. The slightest glitch can cause chaos. To make matters worse, many suppliers have also been hit by the credit crunch and are in need of more cash themselves. According to a recent report in the Financial Times, some companies such as Daimler, a big German carmaker,are so concerned about the financial health of vital suppliers that they are bending over backwards to help.
The problem with working-capital initiatives is they can take a long time to pay off. Yet many managers are under pressure to turn their firms’ fortunes round fast. Hence the predilection for swift and sizeable lay-offs. Announcing earlier this month that Sun Microsystems would cut 5,000-6,000 jobs, Jonathan Schwarz, its chief executive, said he was taking “decisive actions” to align the company’s business with new economic realities.
18.Sun Microsystems 请参考 http://en.wikipedia.org/wiki/Sun_Microsystems
As well as pruning workforces, many manufacturing, metals and mining companies are idling some factories and mothballing others. Capital expenditure is also being axed. After its third-quarter profit fell by more than half, Alcoa cancelled all its “non-essential” capital projects. Severstal, Russia’s biggest steelmaker, has canned most of an $8 billion investment plan.
19.Severstal 请参考 http://en.wikipedia.org/wiki/Severstal
Large companies are not the only ones with a laser-like focus on cash. Small start-ups are also watching every penny more closely than ever. Many of their fresh-faced founders can barely remember the downturn triggered by the dotcom bust in the early part of the decade. Yet at the urging of venture capitalists with somewhat longer memories and plenty of cash at risk, firms across California’s Silicon Valley and beyond have been making big cuts in their relatively small budgets. The goal is to reduce their “burn rates”, or the speed at which they are getting through their backers’ money.
So is all this hyperactivity encouraging? The answer is a qualified yes. Firms that remain standing through a brutal recession will be those that have taken the phrase “cash is king” to heart. Yet there is a risk that in a rush to build up their cash mountains, cuts could be made too fast and too deep when a more targeted approach to surgery is needed. For instance, a recent article in the McKinsey Quarterly points out that technology budgets are a favourite place to make cuts, but indiscriminate chopping will be more damaging than ever before because IT systems are now so tightly interwoven with everything from supply chain management to the determination of pricing strategies.
Another reason for caution is that firms on a cash crusade can all too easily choke off investment in promising new products. That would be a huge mistake because, paradoxically, a recession can be a fantastic time to launch innovations. For one thing, tougher times can make consumers reconsider many of their purchasing decisions, leaving them open to trying something new. For another, a less crowded
marketplace makes it easier-and cheaper-to create awareness of a new offering.
Scott Anthony of Innosight, a consulting firm, points out that during the dotcom bust Apple launched its first version of the iPod music player and that in America alone more than ten other “disruptive” innovations started during the same period. Experienced senior executives are convinced that this downturn will produce a new crop of world-beating businesses. In a recent speech to the Council on Foreign Relations, a think-tank, Sam Palmisano, the boss of IBM, said he was certain that he would see new leaders emerging who would “win not by surviving the storm, but by changing the game”.
咨询公司Scott Anthony of Innosight指出，在网络经济崩溃时期，苹果公司推出了第一个版本的iPod音乐播放器，并且同一时期在美国实行了多达十项的建设性改革。经验丰富的高级管理人员相信经济衰退会带来世界性业务的新发展。极具智慧的IBM公司老总Sam Palmisano，在最近向对外关系委员会的演讲中表示他确信通过改变规则而不是安然度过风暴成功的新领导人将会出现。
Firms who want to be winners coming out of the downturn will also need the financial resources to seize any opportunities that arise during it. Interviewed in the Harvard Business Review, John Chambers, the boss of Cisco Systems, a network equipment-maker, said the firm tended to make more aggressive investments during bad times than good ones. When its rivals pulled back from Asia during the region’s financial crisis in 1997, Cisco deliberately increased its presence there, gaining a leading position it has never relinquished. Cisco’s experience is a timely reminder that while having plenty of cash is a powerful remedy in surviving a recession, if it is also deployed wisely it can produce a champion when the downturn ends.
20. Cisco 请参考 http://en.wikipedia.org/wiki/CISCO