[Marxism] "Creative destruction" not so creative
lnp3 at panix.com
Mon Jul 26 06:01:39 MDT 2010
NY Times July 25, 2010
Industries Find Surging Profits in Deeper Cuts
By NELSON D. SCHWARTZ
By most measures, Harley-Davidson has been having a rough ride.
Motorcycle sales are falling in 2010, as they have for each of the last
three years. The company does not expect a turnaround anytime soon.
But despite that drought, Harley’s profits are rising — soaring, in
fact. Last week, Harley reported a $71 million profit in the second
quarter, more than triple what it earned a year ago.
This seeming contradiction — falling sales and rising profits — is one
reason the mood on Wall Street is so much more buoyant than in
households, where pessimism runs deep and joblessness shows few signs of
Many companies are focusing on cost-cutting to keep profits growing, but
the benefits are mostly going to shareholders instead of the broader
economy, as management conserves cash rather than bolstering hiring and
production. Harley, for example, has announced plans to cut 1,400 to
1,600 more jobs by the end of next year. That is on top of 2,000 job
cuts last year — more than a fifth of its work force.
As companies this month report earnings for the second quarter, news of
healthy profits has helped the stock market — the Standard & Poor’s
500-stock index is up 7 percent for July — but the source of those gains
raises deep questions about the sustainability of the growth, as well as
the fate of more than 14 million unemployed workers hoping to rejoin the
work force as the economy recovers.
“Because of high unemployment, management is using its leverage to get
more hours out of workers,” said Robert C. Pozen, a senior lecturer at
Harvard Business School and the former president of Fidelity
Investments. “What’s worrisome is that American business has gotten used
to being a lot leaner, and it could take a while before they start
And some of those businesses, including Harley-Davidson, are preparing
for a future where they can prosper even if sales do not recover.
Harley’s goal is to permanently be in a position to generate strong
profits on a lower revenue base.
In some ways, the ability to raise profits in the face of declining
sales is a triumph of productivity that makes the United States more
globally competitive. The problem is that companies are not investing
those earnings, instead letting cash pile up to levels not reached in
nearly half a century.
“As long as corporations are reinvesting, the economy can grow,” said
Ethan Harris, chief economist at Bank of America Merrill Lynch. “But if
they’re taking those profits and saving them, rather than buying new
equipment, it hurts overall growth. The longer this goes on, the more
you worry about income being diverted to a sector that’s not spending.”
“There’s no question that there is an income shift going on in the
economy,” Mr. Harris added. “Companies are squeezing their labor costs
to build profits.”
The trend is hardly limited to Harley. Giants like General Electric and
JPMorgan Chase, as well as smaller companies like Hasbro, the toymaker,
all improved their bottom lines despite slowing sales in the second
quarter. Among the S.& P. 500 companies that have reported
second-quarter results, more than one in 10 had higher profits on lower
sales, nearly twice the number in a typical quarter before the
recession, according to Thomson Reuters.
“Whole industries are operating at new levels of profitability,” said
David J. Kostin, chief United States equity strategist at Goldman Sachs.
“In the downturn, companies managed to maintain higher profit margins
than ever before.”
Profit margins — the percentage of revenue left over after expenses —
crumble in most recessions, as overall sales fall but fixed costs like
infrastructure, commodities and rent remain the same. In 2002, during
the recession that followed the bursting of the technology bubble in
addition to the Sept. 11 attacks, margins sank to 4.7 percent. Although
the most recent downturn was far more severe, profit margins bottomed
out at 5.9 percent in 2009 and quickly rebounded. By next year, analysts
expect margins to hit 8.9 percent, a record high.
The difference this time is that companies wrung more savings out of
their work forces, said Neal Soss, chief economist for Credit Suisse in
New York. In fact, while wages and salaries have barely budged from
recession lows, profits have staged a vigorous recovery, jumping 40
percent between late 2008 and the first quarter of 2010.
Harley-Davidson’s profit gain last quarter was helped by a turnaround in
its financing unit, as well as more efficient production, but the
company is still cutting.
Harley has warned union employees at its Milwaukee factory that it would
move production elsewhere in the United States if they did not agree to
more flexible work rules and tens of millions in cost-saving measures.
Even if sales do improve, a surge in hiring is unlikely.
“The last thing we’re worried about is when are we going to have to add
more capacity, because what we’re really doing is reconfiguring our
entire operational system for greater flexibility,” Keith Wandell, the
company’s chief executive, said on a conference call with analysts last
Harley’s evolution is part of longer-term shift in American
manufacturing, said Rod Lache, an analyst with Deutsche Bank.
At Ford, revenue in its North American operations is down by $20 billion
since 2005, but instead of a loss like it had that year, the unit is
expected to earn more than $5 billion in 2010. In large part, that is
because Ford has shrunk its North American work force by nearly 50
percent over the last five years.
“These companies have cracked the code of a successful industrial
turnaround,” Mr. Lache said. “They’re shrinking the business to a size
that’s defendable, and growing off that lower base.”
To be sure, sales are rising for many companies, albeit at a much slower
pace than the increase in profits. Among the 175 companies in the S.& P.
500 that have reported earnings for the second quarter, revenues rose
6.9 percent on average while profits jumped 42.3 percent, according to
Still, even at corporations where both the top and bottom lines are
expanding, the focus remains on keeping profits high, not rebuilding
work forces decimated by the recession.
When Alcoa reported a turnaround this month in profits and a 22 percent
jump in revenue, its chief financial officer, Charles D. McLane Jr.,
assured investors that it was not eager to recall the 37,000 workers let
go since late 2008. “We have a tight focus on spending as market
activity increases, operating more effectively and minimizing rehires
where possible,” he said. “We’re not only holding headcount levels, but
are also driving restructuring this quarter that will result in further
Michael E. Belwood, a spokesman for Alcoa, said more than 17,500 of the
former workers were employed at units Alcoa has since sold, but added
that the company “had to be resized to match the realities of the
“We’re keeping a close eye on costs because there is still uncertainty
about the stability of this recovery,” he said.
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