Industries Find Surging Profits in Deeper Cuts

By: Nelson D. Schwartz, The New York Times

Commentary:

At the end of every recession there is a reordering of the business landscape as companies attempt to figure out what works now and what they will need to abandon as far as past strategies. In the decade before the crash the name of the game was expansion and competition for market share at all costs and why not. It was cheap to borrow money to finance these deals and there were always opportunities to buy into a new sector, to take out a competitor or to diversify either upstream or downstream. Those days ended with the collapse of the credit markets and the subseyqnet recession that sent the economy into six quarters of negative growth. As companies have evaluated the strategies they wish to pursue going forward there are some new priorities and these have started to manifest in the latest roiund of earnings reports. Companies that once made money through market expansion are making money through cost savings and efficiencies and that is a shift that will reverberate through the entire business sector.

The profits that have been reported are higher than they have been in well over a year but at the same time revenue numbers are down. A few years ago this would not have seemed likely or maybe even possible but now this may well be the new business paradigm. The decisions made by most companies had both an immediate impact on the recession and a lingering impact on recovery. The rapid retrenchment practiced by businesses that saw the imminent decline of their markets meant that large layoffs happened relatively quickly, capital expenditures were delayed and every potential opportunity was pursued to save costs. The result was an erosion of capacity utilization at the same time that productivity surged. The companies that had once asserted that they were lean and mean had actually achieved that status.

Now comes the recovery and this pattern will have implications here as well. The companies that reduced staff have no desire to return to old numbers any time soon and there is not much of a demand for new machinery either. There are already signs that replacement is out and repairs are in. This will mean much slower overall economic recovery but it will also be recovery that will be built on a much more solid base. The fact is that corporations are sitting on much larger cash supplies than has been the case in past years. That offers a sense of flexibility that many have not experienced in decades.

The major question is how long the corporations will maintain this strategic position but most analysts are convinced thatb this approach will last for a while. Unless there is a surge in demand there is no reason for the companies to rush to rebuild and there is a certain comfort level that comes with having control of one’s own financial position.

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