Tuesday, November 22, 2011

STOP WORRYING ABOUT GLOBILIZATION...START WORRYING ABOUT OURSELF

A while back we wrote about the effect of the tablet on PC sales. At that time we didn't fully grasp the competitive impact. It's real, it will continue.

Meg Whitman is a smart woman. She was recently appointed CEO of Hewlett Packard. Traditionally, a new management of a historically great company, with a low share price based on historical financial relationships, would be a good place to consider investing. Over time, many financial assets that go out of favor return to favor at another time. But some do not. They go down, they stay down. Looking backwards to their prior greatness becomes a loser's game.

I took a quick look at the recent financials on Hewlett. I hadn't done it in awhile. What I found was a company with about $127 billion in revenues and costs which used up $115 billion of the $127 billion in revenues. That means that before taxes, interest and depreciation, Hewlett was making about $.10 per dollar of revenue. Now imagine this, you have to sell $130 billion dollars of goods, have a couple of hundred thousand employees and end up with what is low return on a dollar of sales.

But that's not the real story. The real story is much more dramatic. The implications are scary.

Way back when, a company like Hewlett Packard went to find manufacturers overseas for its products. It significantly dictated the terms as the foreign manufacturers needed business. Now, whether we like it or not, the negotiating power has shifted. It's as if the foreign manufacturers say "We'll make the product for you, we'll let you sell it under your name, but most of the money from the sale of the products will go to us". There are only so many places an American company can go to offset this type of negotiating tactic. It's complicated to change manufacturers. The net result is that power, in terms of trade, has shifted more than most of us realize. Obviously we now know what CEO Meg Whitman has to do, drive the cost of sales down .

Fifty years ago, the President of US Steel, when I asked him about imports said, "We are US Steel, we never lose".

1 comment:

  1. Now this is an interesting piece. Stay away from politics and focus on stuff that really makes u stand out from the masses.

    ReplyDelete

 

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