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Patient building vs. the profit-NOW drive: Japan comes out ahead

By Richard A. Nenneman / August 26, 1985



THE business news program on TV reported that the stock of Ames Department Stores had dropped 25/8 on the day its quarterly earnings were announced. Earnings were up, the reporter said, but apparently not as much as investors had expected. The incident seemed similar to the way the news media and politicians have been talking about the huge US trade deficit. It's only one part of the puzzle, but certainly an important part: the American fixation with quarterly earnings, and the long-range harm this may be doing to the economy.

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The United States is in a new kind of competition. Many companies already understand this and are trying to adjust. The public is probably not sufficiently aware that the jobs being lost to other countries may never come back. Some of these jobs should be lost -- part of the process by which each nation produces what it can most efficiently, given its labor and natural resources. As other nations industrialize, the US is being forced into even higher-technology manufacturing and a greater e mphasis on services.

But one reason jobs are being lost is that US companies tend to be measured in the stock market on the basis of quarterly performance. Pension funds, whose portfolios make them the biggest traders on Wall Street, also measure performance of their investment managers on a quarterly basis, which compounds the problem. Instant results seem to rule the day.

Now, anyone who has ever been remotely connected with building up something new knows that the real world doesn't operate that way. A product takes time to develop. A marketing strategy takes time to carry out. One must have staying power. All of these elements are available to American corporations, but they are not used to their fullest as long as short-term thinking rules the day.

And who is using a longer-term strategy? First and foremost, the Japanese. Their large companies are also publicly traded, but management and shareholders seem to understand that they need a longer-term horizon.

Americans are worried about Japanese exports. But an even more serious problem is the way Japanese companies figure out their potential in a global market. Four years ago, when I was last in Japan, an executive of a Japanese conglomerate developing a large-scale computer told an investment group I was traveling with how his company was studying American and Southeast Asian markets. The company then intended to spend five years introducing its products and gaining acceptance for them. Nothing secret abou t these plans, you will note, but they do indicate that the Japanese were willing to do a lot of spadework for the ultimate payoff.

In recent years the leveraged buy-out has become popular in American finance. One purpose is for management to privatize a public company so as to escape the tyranny of quarterly earnings reports to the stockholders.

The US led the way in making public ownership of corporations popular and feasible. US markets still attract funds from all over the world because of their size and liquidity. It is not too much to examine how we can keep our markets liquid, keep financial reporting standards high, and introduce a tolerance and desire for longer-term outlooks by investors.

This is not just of interest to wealthy individuals and pension funds. In the end it affects the kinds of jobs that can keep America at the cutting edge of technological change and at the top of the list in standards of living.