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Capital expenditures by majority-owned foreign affiliates of U.S. companies, latest plans for 1992.

Majority-owned foreign affiliates of U.S. companies plan to increase capital expenditures 4 percent in 1992, to $64.5 billion, after a 2-percent increase in 1991 (table 1, chart 1).(1) The slow rate of spending growth in both years reflects two key factors: Rapid growth in spending during 1987-90, which moderated the need for additional overseas capacity, and the continuing economic slowdown in the United States and other major industrial countries, which has reduced corporate cash flow and constrained the. ability of parent companies to finance overseas operations.

[TABULAR DATA OMITTED]

Because the U.S. dollar depreciated during 1991-92 and, to a lesser extent, because foreign-currency prices of capital goods increased, real spending abroad by foreign affiliates in 1992 will probably increase considerably less than the projected 4-percent current-dollar increase, and it may well decrease.(2) The 4-percent increase in current-dollar spending projected for 1992 is in line with the 4-percent increase projected by the Census Bureau for domestic capital spending by all U.S. businesses.(3)

Revisions for 1991 and 1992

Planned spending for 1992 has been revised downward by 2 percent from the level reported 6 months earlier; the estimate of planned spending for 1991, which now represents actual spending, has been revised down 1 percent (table 2). The most recent estimates for 1991 and 1992 are based on a BEA survey conducted in June 1992; the previous estimates were based on a survey conducted in December 1991.
 Table 2.-Revisions to Capital Expenditures Estimates,
 1991-92
 Percent
 change from
 1991 1992 preceding
 year
 1991 1992
 Billions of dollars
 Date of BEA survey:(1)
 June 1990 56.6 1
 December 1990 61.2 6
 June 1991 67.3 10
 December 1991 63.1 65.8 3 4
 June 1992 62.3 64.5 2 4
 Percent
 Addenda:
 Revision from previous to most recent
 estimate -1 -2
 Revision from first to most recent
 estimate 10 -2
(1) The results of each survey are published 3 months later in the Survey of Cur
rent
Business.


Estimates for 1992 were revised downward for all major industries except finance (except banking), insurance, and real estate (FIRE); the largest revisions were in petroleum and manufacturing. By area, the revision was more than accounted for by affiliates in Canada and "International"; spending plans by affiliates in all other areas combined were revised up slightly.

Plans for 1992

This section discusses the 1992 spending plans of majority-owned foreign affiliates by area and by industry. In the discussion, information from outside sources, mainly press reports, has been used to supplement BEA'S survey data.

Area highlights

By major geographic area, changes in planned spending in 1992 range from increases of more than 20 percent in the Middle East and "Other Asia and Pacific" to a 10-percent decrease in Canada. Capital spending by affiliates in the Middle East and in the newly industrialized countries in the Far East and Latin America is expected to increase much faster than capital spending by affiliates in other industrial countries.

In the Middle East, affiliates plan to increase spending 24 percent in 1992, to $0.9 billion, after a 4-percent decrease in 1991. Most of the increase is accounted for by Yemeni affiliates engaged in the exploration and development of petroleum and natural gas.

In "Other Asia and Pacific," affiliates plan to increase spending 21 percent, to $6.7 billion, after a 9-percent increase. Growth in spending is particularly rapid in the petroleum-producing countries: Affiliates in Indonesia, Malaysia, Thailand, and Singapore plan to increase spending 28 percent, to 4.5 billion, after an 8-percent increase. The increased spending is being attracted by the area's potentially large oil and gas reserves and by growing energy needs resulting from rapid economic development. Spending increases are also planned by manufacturing affiliates in response to rising consumer incomes.

In "Latin America and Other Western Hemisphere," affiliates plan to increase spending 15 percent, to $6.0 billion, after a 2-percent increase. More than three-quarters of the increase is in Mexico, where affiliates plan to boost spending 58 percent, to $1.7 billion. The prospective free-trade agreement with the United States and Canada has further enhanced the already favorable conditions for direct investment in Mexico. In manufacturing, particularly in transportation equipment, affiliates are expanding capacity to serve both export markets and the rapidly growing domestic market. Affiliates in some other Latin American countries also plan to increase spending in response to economic reforms, including liberalized regulations governing trade and foreign direct investment. For example, in Chile, affiliates in "other industries," particularly in mining, plan to more than double spending, and in Colombia, affiliates in petroleum and manufacturing plan increases. In Brazil, spending increases by affiliates in manufacturing are partly offset by spending decreases by affiliates in petroleum.

In Europe, affiliates plan to increase spending 4 percent, to $36.3 billion, after a 3-percent increase. Most of the increase is accounted for by affiliates in the European Communities (EC(12)), where, as of the survey date, the prospect of greater economic integration was continuing to attract new affiliates and to encourage existing affiliates to increase their capacity. Within the EC(12), most of the increase in spending is by affiliates in Spain, Germany, and Ireland. In Spain and Germany, the largest increases are planned by affiliates in transportation equipment; in Ireland, the largest increases are planned by affiliates in chemicals and food products. Large decreases in spending are planned in the United Kingdom, particularly in transportation equipment and FIRE.

Capital spending by affiliates in Europe has also been stimulated by market-oriented reforms in Eastern Europe. These reforms are encouraging parent companies to expand their EC(12) affiliates to service Eastern Europe and, increasingly, to establish production facilities within the region itself Operating in this region may entail unusual constraints and risks; however, for some companies these factors are outweighed by the potentially vast future growth in consumer markets. Although the dollar amounts involved so far are small, expenditures by affiliates in the region have grown rapidly during the last 2 years.

In Japan, affiliates plan to hold their spending constant at $2.3 billion after an 11-percent increase. A decrease in spending by affiliates in manufacturing is partly offset by increases in spending by affiliates in FIRE and wholesale trade.

In "Australia, New Zealand, and South Africa," affiliates plan to decrease spending 6 percent, to $2.9 billion, after a 20-percent increase. The decrease is concentrated in Australia, where it is widespread by industry.

In Canada, affiliates plan to decrease spending 10 percent, to $7.6 billion, after a 12-percent decrease. Although sluggish economic conditions continue to restrain spending in most industries, affiliates in transportation equipment plan large increases.

Industry detail

Petroleum. - Petroleurn affiliates plan to increase spending 5 percent in 1992, to $20.2 billion, after a 15-percent increase in 1991. The continued weakness in oil prices - a consequence of the oil glut that has developed during the prolonged period of weak worldwide industrial activity - apparently is constraining growth in planned spending abroad. Although probably representing little or no growth in real terms, the planned 1992 increase is nevertheless in sharp contrast to the 15-percent decline in domestic capital spending projected by the Census Bureau for U.S. petroleum companies.(4) These spending patterns indicate that U.S. petroleum companies plan to maintain their emphasis on overseas operations. This emphasis has resulted from several factors. First, oil and gas reserves abroad are potentially larger and can be developed more economically than those in the United States. Because the maturing oilfields in the United States are well explored, petroleum companies are increasingly attracted to frontier fields abroad, where they expect to discover larger deposits and to extract oil at lower cost than in the United States. Second, environmental concerns have tended to restrict the areas where petroleum resources can be developed in the United States. Third, a number of host governments are currently offering multinational oil companies favorable production licenses and financial or tax incentives.

Spending increases by affiliates in petroleum are planned in "Other Asia and Pacific," Europe, and the Middle East. Most of the increase is accounted for by affiliates in "Other Asia and Pacific," which plan to increase spending 36 percent to $3.8 billion. The increased spending has been attracted by the area's potentially large oil and gas reserves and by growing energy needs resulting from rapid economic development. Contributing to the increase are increases in crude petroleum and natural gas exploration in Indonesia and Malaysia and the expansion of refineries in Thailand and Singapore. In Europe, affiliates plan to increase spending 4 percent to $9.9 billion; affiliates in the United Kingdom, the Netherlands, and Germany account for nearly 80 percent of the total increase. Although the United Kingdom has the largest dollar increase, the rate of increase for that country is relatively low (2 percent); only in the Netherlands (up 27 percent) and Germany (up 17 percent) do the increases probably represent real growth. In the Middle East, the planned spending increase is mainly for the exploration and development of oil reserves in Yemen.

Spending decreases by affiliates in petroleum are planned in Canada, Brazil, and Australia. In Nigeria, spending is expected to remain at about the same high level as in 1991, as an affiliate continues to develop several oilfields in a joint venture with the State-owned petroleum corporation.

Manufacturing. - Manufacturing affiliates plan to increase spending 5 percent in 1992, to $29.1 billion, after a 5-percent decrease in 1991. In contrast, domestic capital spending by all U.S. manufacturing companies (excluding petroleum manufacturing) is projected by the Census Bureau to remain flat in 1992. By area, most of the increase in affiliate spending will occur in the EC(12); increases are also expected in Mexico and in several countries in the Far East. Decreases are expected in Canada, Japan, and Australia.

Increases in spending are planned in all major manufacturing industries except chemicals and nonelectrical machinery. In food products, affiliates plan a 16-percent increase, to $2.9 billion, after a similar increase in 1991. The 1992 increase is concentrated in the EC(12), particularly in Ireland, eastern Germany, and Portugal, where U.S. soft drink producers are expanding their capacity.

In transportation equipment, affiliates plan to increase spending 13 percent, to $6.4 billion, after a 6-percent decrease. In Europe, spending is expected to increase 4 percent, to $4.2 billion, after a 6-percent decrease. Within the EC(12), large increases are planned by affiliates in Spain and Germany. In Germany, two affiliates plan large increases: One is building a state-of-the-art auto plant; another is expanding engineering and research facilities as part of a U.S. multinational company's plan to reorganize these activities and consolidate them into fewer European locations. Both actions reflect automobile producers' efforts to improve production efficiency and to develop improved products in response to growing competition from Japanese-owned European producers. Affiliates are also increasing capacity in Eastern Europe in response to the expansion and development of auto markets in that area. In contrast, large spending decreases are planned by affiliates in the United Kingdom, where recessionary conditions have weakened sales. Outside Europe, affiliates in Mexico and Canada plan increases. In Mexico, factors that appear to have stimulated spending include a booming auto market, more favorable government policies toward foreign investment, and the prospective free-trade agreement. In Canada, the increase reflects retooling expenses for production of minivans and a new line of truck engines.

In primary and fabricated metals, affiliates plan to increase spending 13 percent, to $1.3 billion, after a 39-percent decrease. Manufacturers of fabricated products in Spain and Germany account for a large portion of the overall increase. The 1991 decrease mainly resulted from completion of a project by a Canadian aluminum smelter.

In "other manufacturing, affiliates plan to increase spending 7 percent, to $5.4 billion, after a 6-percent decrease. Major producers of consumer nondurables are planning sizable spending increases in the United Kingdom and France.

In electric and electronic equipment, affiliates plan to increase spending 4 percent, to $2.7 billion, after little change. Increases in spending by manufacturers of household appliances in Brazil and by semiconductor producers in Singapore are partly offset by decreases in spending by semi-conductor producers in the United Kingdom and Japan.

In chemicals, affiliates plan to decrease spending 2 percent, to $6.3 billion, after a 5-percent decrease. Spending decreases by industrial chemical producers, who are experiencing weak demand and overcapacity, are more than offsetting spending increases by manufacturers of drugs.

In nonelectrical machinery, affiliates plan to decrease spending 7 percent, to $4.1 billion, after a 5-percent decrease. The decreases in both years mostly reflect reductions planned by computer-manufacturing affiliates, particularly in Germany and Canada.

All other industries. - In all other industries combined, affiliates plan to decrease spending 1 percent in 1992, to $15.2 billion, after a 1-percent increase in 1991. In services, affiliates plan to increase spending 11 percent, to $3.2 billion, after a 19-percent decrease. The largest increase is in the United Kingdom, where affiliates in auto rental and leasing services are expanding capacity. Sizable increases are also planned in Germany and France.

In wholesale trade, affiliates plan to increase spending 2 percent, to $4.7 billion, after a 5-percent increase. The largest increase is in Austria; it partly reflects an automobile producer's plans to expand distribution and production facilities.(5) Large increases are also planned in Japan and Canada. In contrast, large decreases are planned in the United Kingdom.

In FIRE, affiliates plan to decrease spending 6 percent, to $2.1 billion, after a 7-percent increase. The decrease is more than accounted for by affiliates in the United Kingdom, where spending by real estate and insurance affiliates has fallen off sharply, partly in response to a decline in property values.

In "other industries," affiliates plan to decrease spending 8 percent, to $5.2 billion, after a 10-percent increase.(6) The largest decrease is in Canada, mainly in mining and retail trade.

Tables 3.1 through 3.3 follow.

[TABULAR DATA OMITTED]

(1.) Capital expenditures estimates are for majority-owned nonbank foreign affiliates of nonbank U.S. parents. (An affiliate is majority-owned when the combined ownership of all U.S. parents exceeds 50 percent.) Capital expenditures include all expenditures that are charged to capital accounts and are made to acquire, add to, or improve property, plant, and equipment. For affiliates engaged in natural resource exploration and development, they also include those exploration and development expenditures that are expensed on the books of the affiliates. Capital expenditures are measured on a gross basis; sales and other dispositions of fixed assets are not netted against them.

(2.) Weighted by the value of assets of majority-owned foreign affiliates in 1990, the U.S. dollar depreciated from mid-1991 to mid-1992 by 10 percent against the currencies of 21 countries that accounted for over 80 percent of affiliates' assets. Weighted in the same manner and over the same period, foreign-currency wholesale prices (or consumer prices, in the few cases in which wholesale prices were unavailable) increased 1-4 percent. Both dollar depreciation and inflation in foreign-currency prices tend to boost the value, denominated in dollars, of a given volume of capital goods purchased by foreign affiliates.

(3.) The projected increase in capital spending by all U.S. businesses is from a survey conducted in July-August 1992 by the Bureau of the Census. Although the Census Bureau projection covers all U.S. businesses rather than only U.S. parent companies, the available estimates of domestic capital spending of parent companies (covering 1982-90) are significantly correlated with spending by all U.S. businesses.

(4.) This figure is from the Census Bureau survey identified in footnote Both the Census Bureau data and the BEA data for foreign affiliates are classified according to the primary activity of each company, but they differ in coverage. The Census Bureau data cover only companies primarily engaged in petroleum manufacturing, whereas BEA'S data cover all phases of the industry - including not only manufacturing but also extraction and distribution. Nevertheless, the Census Bureau figure for petroleum manufacturing includes the large, integrated companies that account for much of the total activity in the domestic petroleum industry; thus, it probably would not be greatly affected if domestic spending by smaller, independent companies primarily engaged in extraction or other phases of the industry were included to make it more comparable with BEA'S data for foreign affiliates.

(5.) Affiliates are classified in wholesale trade because that industry accounts for the largest part of their total sales; some may also have operations in other industries, such as manufacturing.

(6.) "Other industries" consists of agriculture, forestry, and fishing; mining; construction; transportation, communication, and public utilities; and retail trade.
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Author:Fahim-Nader, Mahnaz; Downey, Laura A.
Publication:Survey of Current Business
Date:Sep 1, 1992
Words:2783
Previous Article:National income and product accounts.
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