The Sixth Annual CEO leadership summit: global forces are transforming the U.S. economy. Wise policy will be essential to maintain competitiveness.
That was the view of a roundtable of top CEOs launching the Sixth Annual CEO Leadership Summit in Palm Beach, Fla. The session, held on Dec. 9 in the former Kennedy Winter White House, now owned by John Castle of Castle Harlan, included CEOs representing the services sector, retailing, finance, technology and manufacturing as well as John Thain, CEO of the New York Stock Exchange (see sidebar, page 53).
Fred Smith of FedEx is riding high on global economic trends while Gary Cowger of General Motors and J.T. Battenberg of Delphi are on the receiving end of brutal pressures. "The manufacturing base is migrating away from the United States," said Smith. "Our traffic from Asia right at the moment is up 24 percent and from China it's up more than 50 percent over last year. The high-tech and value-added industries are seeking more accommodating locations than the United States. It's that simple."
Retailing, represented by The Home Depot's Bob Nardelli and Albertsons' Larry Johnston, also is benefiting from the trend toward cheaper offshore manufacturing, much of it in China. Home Depot, in particular, wins because as the nation's second largest importer (following Wal-Mart) it is able to drive down prices for its customers, who conduct 1.2 billion transactions a year with it.
The question on the minds of all the CEOs is how sustainable U.S. consumption patterns are. "If you've got jobs going offshore, that's going to shrink the labor market," said Nardelli. He noted the emergence of a "two-tier" consumer market where the affluent can afford to buy what they want, but other consumers who live paycheck to paycheck are much more sensitive to rising oil prices and job worries. "As interest rates go up, it's going to squeeze the consumer," said Nardelli. "As jobs go offshore, that's going to squeeze them, too. If we aren't careful, we're going to find ourselves right back to where we were three or four years ago. I think it's a very fragile economy."
Johnston is feeling similar pressures from customers who visit Albertsons 1.6 billion times a year. "In the epicenter of where poor consumers live in big numbers, we see people changing buying habits because of this economy and because of the globalization pressures," said Johnston.
Dick Syron of Freddie Mac noted that consumers were able to keep spending through the most recent recession and stock market slump partly by tapping into the equity in their homes, which had gained so rapidly in value. But with interest rates now rising, that source of capital will not be as readily available to sustain consumer spending.
It was striking at the roundtable just how deeply China is now touching Americans, from average consumers to major CEOs. One major imponderable that hangs over U.S.-Chinese relations is the value of the renminbi, which is pegged to the dollar. Manufacturers such as GM and Delphi are eager for a weaker dollar to ease Chinese and Japanese competition.
But Syron, who had just returned from a trip to Asia where he sold 40 percent of a $5 billion Freddie Mac bond offering, said he thinks the Chinese will hold firm on not devaluing their currency. The reason is that social and political stability at home means more to them than the fact that their more than $500 billion in U.S.-dollar-denominated assets loses value as the American currency declines.
"If you're the Chinese government, you've got a Faustian bargain that you have to make," Syron argued. "Either I'm going to try to keep those people working in the interior of China, which means I'm going to run up a bigger current account surplus with the U.S., and I'm probably going to lose on it. But I don't have to mark that loss down to market and I'm probably not going to lose politically on that. On the other hand, if those 200 million people who are still living in caves don't find jobs, I could well be hung up in a square."
So the stage is set for a continued exodus of manufacturing jobs out of the U.S. to China and elsewhere (see story, page 69). "About 70 percent of our manufacturing is not in the U.S.--only 30 percent is left here," said Battenberg, who heads the world's largest automotive supplier. "I see that declining continuously as the baby boomers retire. They're just not going to be replaced. Many of the contracts of the 1960s and 1970s, which had lifetime provisions for health care, pensions and retirement, will never be replaced."
Can currency shifts help U.S. manufacturing survive? Manufacturers certainly hope so. "We're one of the ones who don't mind seeing the dollar weaken," said GM's Cowger. "A strong yen looks pretty good from this vantage point. If you look at the goods that we're selling up against, a $50,000 Lexus comes in at 10 percent or 20 percent under the cost to make it. That's a lot of money that Toyota can take in profitability, use to add extra content or put back into product development."
And GM is carrying a much heavier cost burden than Toyota does. "You add that to health care costs that we're carrying, which no other competitors carry," said Cowger. "We're the poster child for that, given that we support 1.1 million retirees and families. You're starting in a pretty steep hole, competitively speaking."
Positive Outlook for Technology
One force that could greatly buoy the overall U.S. economy is technology. CEOs believe they have found better ways to link technology to their underlying business objectives (see page 60) and that they will be able to stimulate growth by capturing emerging technologies (page 74). Telecommunications, in particular, is set for an exciting wave of new offerings. "The price curves are phenomenal, the innovation just continues, and I think in an increasingly digital, affordable personal kind of world, we're going to continue to see all kinds of technology enablers and technology capability," said Lucent Technologies' Pat Russo.
Overall technology spending seems to be increasing, she noted. "We're seeing some spending come back as companies look to get to the next generation of technology, which is all packet and IP enabled."
One paradox the CEOs considered was whether sourcing of IT and software functions to India is part of the problem or part of the solution. Vivek Paul of Wipro, which is at the epicenter of the outsourcing trend, argued that only 2 percent of the job loss in the U.S. over the past few years is attributable to outsourcing.
Indeed, in his view, American companies should look at outsourcing as a competitive tool. CEOs of software companies are asking, "How can I deconstruct my R & D chain? How can I do testing, which is about moving the R & D somewhere else? How do I do globalization?" In that sense, Paul said, U.S. CEOs are concluding, "I can use this as a benefit if I embrace it upfront. If a company like Wipro is helping me do my testing, they're not becoming my next opportunistic competitor."
Russo and Paul agreed that the search for the best technical talent will drive the strategies of most technology companies. Fortunately, President Bush has signed into law a change in the H1B visa system. Previously, a high percentage of foreign nationals who graduated from U.S. universities had to return to their native lands. Now, that stricture has been eased and more workers are available for hire here.
Another piece of the solution to the competitive challenges facing American CEOs is the prospect for tort reform. Smith, Nardelli and Thain all said some kind of tort reform will be enacted in 2005. But lasting solutions to rising health care costs (see page 54) and the failure of the K-12 educational system (see page 70) are elusive.
So beneath the surface of daily economic reports, huge global pressures are at work. China is primary among them. "I think the difference between the Chinese and any other economy that we've faced since the end of World War II is that they are entrepreneurial in nature," said Smith. "They're not xenophobic like the Japanese are and, to a lesser degree, the German and European economies were. China is going to become a massive and technologically advanced society with the capabilities and a lot of the incentives and rationale to become a peer competitor to us."
RELATED ARTICLE: Who's Who
Financial Times Americas
Concentra Preferred Systems
J.T. Battenberg III
Saul J. Berman
IBM Business Consulting Services
Omega World Travel
William R. Brody
Johns Hopkins University
John K. Castle
Gary L. Cowger
General Motors North America
John M. Danielson
The Dilenschneider Group
Institute of Global Competitiveness
The Foley Group
John D. Forsyth
Wellmark Blue Cross and Blue Shield of Iowa and South Dakota
Ernest L. Godshalk
Varian Semiconductor Equipment Associates
Harry E. Gould, Jr.
Steven T. Halverson
The Haskell Company
Leonard M. Harlan
William J. Holstein
Lawrence R. Johnston
IBM Global Services
New York City School System
Edward M. Kopko
Butler International Chief Executive Group
Robert Marston and Associates
Andy W. Mattes
Eugene R. McGrath
Professor of Economics Boston University
Patrick M. Murray
Robert L. Nardelli
The Home Depot
Thomas J. Neff
IBM Business Consulting Services
Edward W. Rabin
IBM Business Consulting Services
Patricia F. Russo
Austin J. Shanfelter
John J. Sickler
Frederick W. Smith
Richard F. Syron
Maurice Taylor Jr.
John A. Thain
New York Stock Exchange
Mark F. Thimmig
White Hat Ventures
Leslie A. Viegas
Blue Cross Blue Shield of Michigan
American Society For Quality
Harold L. Yoh III
Day & Zimmermann
RELATED ARTICLE: The World According To John Thain
* Section 404 of Sarbanes-Oxley (requiring a company's internal controls to be certified by outside auditors by Dec. 31, 2004): "I think it's mixed whether or not there's actually a benefit from Section 404 as opposed to a bureaucratic kind of checking the box. There's no question that the accounting firms are making this more difficult and more expensive than they need to."
* 404 Compliance Period Extension: "The numbers thrown around are as high as 25 percent of companies won't, in fact, be able to meet the deadline. You've seen recently that the Securities and Exchange Commission has been accommodating to some of the smaller companies in giving them some more time to satisfy the 404 certification process. I still think there is a big issue on 404 about what is exactly going to happen when companies get to the deadline and either aren't done yet or don't get a clean opinion. I don't think there has been enough focus on exactly what will happen to companies that get qualified 404 opinions."
* SEC Enforcement Climate: "We're not going to get any relief out of the SEC for those of you who are dealing with the enforcement side of the SEC. I think they continue to suffer from being behind the curve of our New York attorney general in particular. The fact is that Eliot Spitzer, whether we like him or not, has in general been right at least in finding bad behavior."
* Eliot Spitzer: "He's now running for governor, which is probably good. He did catch some mutual funds on late trading and market timing. He did catch the insurance brokers rigging their bids. Now, what I think is a concern is he took those violations of law and then pushed them beyond the law and then started setting the fees that mutual funds should charge. I'm not sure we want our New York attorney general setting fees for our entire industry. He's also changing the fee structure for the insurance brokerage world."
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|Title Annotation:||CEO2CEO SUMMIT; chief executive officer|
|Author:||Holstein, William J.|
|Publication:||Chief Executive (U.S.)|
|Article Type:||Panel Discussion|
|Date:||Jan 1, 2005|
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