THE MYTH OF ECONOMIC SOVEREIGNTY
Every industrial country, including Japan, has more of its economy under the control of foreign firms than a decade ago. As the pace of economic integration has quickened, the complaints have grown louder. Businesses that spend their profits overseas are attacked (at home) for not investing in their own country and (abroad) for scheming to undermine their host economy.
Assessing the impact of foreign direct investment (FDI) is difficult, because every country defines it in its own way. In America owning 10% or more of a company constitutes "control " and thus counts as a direct investment. In West Germany the ratio is 25%, in Britain and France 20%. Foreign ownership is different again. This covers (a) the stock of direct investment that secured control and (b) acquisitions financed in the host country (these are not counted in direct investment). Luckily Ms. DeAnne Julius, the chief economist at Royal Dutch-Shell, an oil company, has in a recent book, done a remarkable job of wading through the national accounts. Unsurprisingly, she finds that the extent of foreign ownership varies tremendously across the big five economies. Only 1% of Japan's assets were owned by foreign-controlled firms in 1986, and just 0.4% of its workers were employed by them. In America, by contrast, foreign-controlled firms owned 9% of the assets, employed 4% of the workers, and accounted for one-tenth of all sales.
Even so, compared with Europe, America looks almost autarkic. In Britain foreign-controlled firms owned 14% of the assets, employed one in seven workers and accounted for one-fifth of all sales. In West Germany the foreign - owned companies owned 17% of assets and accounted for 19% of sales. In France, the dominance of foreigners was greater still.
Foreigners may own only a small share of American business, but in absolute terms America has been the biggest recipient of new foreign investment. Between 1980 and 1988 the flow of foreign investment into America totaled $ 252 billion at 1980 prices (see chart). By 1998 direct investment was flowing in at the rate of $ 41 billion a year. America's direct investment overseas proceeded at a much slower pace. Measured at book value (an unrealistic assumption), America's assets abroad are now worth less than foreigner's assets in America.
Letting foreigners bid for domestic assets should ensure that they will be used in the most efficient way. Domestic consumers will benefit from lower prices and/or better goods. Like free trade in goods, free trade in capital lets companies exploit their comparative advantage in superior management, better technology, what have you. Investors and recipients alike should gain from FDI.
Usually, anyway. In principle, direct investment might sometimes harm the recipient country. A company's spending on R & D, for example, may benefit the economy by more than the cost to the business : it may, in other words, carry an external benefit. If, so and if foreign firms spent less on R & D than domestic firms, then purchases of domestic firms by foreign ones could harm the country's economy. By a similar argument, if there are economies of scale in producing something, then letting a foreign firm into the domestic market might enable it to drive out domestic producers and make monopoly profits.
The most authoritative analysis of these and other economic objections to foreign investment is a study by Edward Graham of Duke University and Paul Krugman of the Massachusetts Institute of Technology. In America, they found, foreign companies spend more per worker on R & D than their domestic counterparts, and pay their workers as much. So even if foreign companies merely displace domestic firms, the spin-offs are unlikely to be smaller than from domestic investment. Some advocates of "industrial policy", such as Mr. Robert Reich of Harvard University, therefore argue that foreign investment should be subsidised.
LET GOVERNMENTS COMPETE
Perhaps the most profound change that flows of foreign investment cause is this: a country's trade balance, so often a focus of attention, no longer reflects how well a country's businesses are doing.
When Texas Instruments sells a silicon chip from its plant in Singapore to its parent in America this counts as an American import. If trade balances were defined in terms of ownership, rather than geography, it would not. In many ways it would indeed make more sense to measure trade balances that way.
Putting America's trade balance on to an ownership basis would make pleasant reading for Americans worried about role in the world economy. Ms. Julius estimates that in 1986 third of America's exports were bought by American-owned companies abroad. About a fifth of America's imports were bought from American-owned companies abroad, and another third were bought by foreign - owned companies in America receiving goods from their own countries.
Worldwide, sale by American-owned companies to non-American owned ones exceeded America's conventionally measured exports by a factor of five. Purchases from foreign companies were three times greater than America's trade deficit of $ 144 billion in 1986 becomes a surplus of $ 57 billion.
Foreign direct investment has already reduced the freedom of governments to determine their own economic policy. If a government tries to push tax rates up, for example, it is increasingly easy for businesses to shift production overseas. Equally, if governments fail to invest in roads, education and so on, domestic entrepreneurs are likely to migrate. In short, foreign investment is forcing governments, as well as companies to compete.
CROSS - BORDER ALLIANCES BECOME FAVORITE WAY TO CRACK NEW MARKETS.
American Telephone & Telegraph co. has big ambitions in the semiconductor industry. It wants to sell a broad range of chips head to head with some of the world's largest chip makers. There is just one problem : AT & T has nowhere near enough products to vault it into the big leagues. In fact, as a niche player, it constantly risks getting outflanked - if not crushed - by competitors who have a full lone of chips and services.
So a few weeks ago, AT & T struck a deal, the sort of deal that will probably be a hallmark of business in the 1990s. The company reached out to NEC Corp., the big chip maker in Tokyo, and proffered a trade : some of AT & T's computer-aided design technology for some of NEC's advanced logic chips, a product AT & T doesn't make but very much wants to sell.
"These days it's just too expensive to go it alone," says Rock Pennella, AT & T Microelectronics' vice president of marketing.
TYING THE KNOT
This sort of cross-border marriage has been around for 30 years. But in the last few years - and especially in the last few weeks - the number of international joint ventures has rocketed. It has become clear that new alliances of this sort are now often crucial for dealing with increasingly global markets for a variety of products. Just last week, Texas Instruments Inc. and Kobe Steel Ltd. announced plans to make logic semiconductors in Japan. They join a growing list of similar ventures: Corning and Ciba-Geigy (medical equipment); Volvo and Renault (autos); Motorola and Toshiba; Texas Instruments and Hitachi (semiconductors). All have found that forming a partnership is sometimes the fastest, cheapest and least risky way to stay in, or get in the global game.
But probably the most striking example of late is the decision by giants Mitsubishi of Japan and Daimler-Benz AG of West Germany to talk about an array of possible joint projects spanning everything from autos to aircrafts. Both want to get into new markets and new products, and see each other as the means to that end.
"It's a world - wide trend," says Arthur Mitchell, a New York lawyer who has negotiated a number of U.S. Japanese joint ventures. "Above all, it's a way to get into markets."
The European market is driving many of the alliances these days. The post - 1992 European Community , as planned, will be an integrated economy of 320 million consumers. Upheaval in the East bloc has only increased the potential size of this new market. Japanese companies, traditionally weak in Europe, are desperate to be players. Hence, Mitsubishi's interest in teaming up with a powerful European "insider." (It is conceivable, for instance, that Daimler-Benz could distribute Mitsubishi's small cars in Easter Europe).
The sizzling pace of developments in Europe doesn't fully explain the rash of partnerships announced in recent months, however. In the past few weeks alone, IBM and Siemens announced joint research in advanced semiconductors chips; the chairman of British Aerospace said he was looking for a "strategic alliance" with U.S. companies; and, AT & T formed another joint venture : It agreed to make and market Mitsubishi Electric's memory chips in exchange for access to the technology that goes into designing the chip, and the right to sell the semiconductor.
KEEP SEPARATE CHECKING ACCOUNTS
Alliances - different from simply buying a stake in another company - can get complicated fast, and the successful ventures tend to carefully follow a couple of rules of thumb: The partners know exactly what the common objective is, and they make contingency plans in case the marriage doesn't work out. "It's a bit like prenuptial agreements, " says Martyn Roetter, a director of the consulting firm Arthur D. Little. "You don't want to think about divorce in the throes of love. But the name of the game in alliances is to be specific and realistic about what all the partners are trying to get out of it."
Compared with their Asian partners and rivals, U.S. companies sometimes appear naïve in this regard. They fail to understand that collaboration is another form of competition. "In an alliance you have to learn skills of the partner, rather than just see it as a way to get a product to sell while avoiding a big investment," says C.K. Prahalad, professor of business at the University of Michigan and an expert on global alliances.
Toyota Motor Corp. , for example, has certainly benefited from its five years of joint venture with General Motors Corp. in operating an auto plant in Fremont, Calif. But did GM ?
Kunio Shimazu, a senior Toyota executive and one of the planners of the California venture, called New United Motor Manufacturing Inc., can tick off the objectives Toyota achieved: "We learned about U.S. supply and transportation. And we got the confidence to manage U.S. workers." And all that knowledge, he says, was quickly transferred to Georgetown, Ky., where Toyota opened a plant of its own in 1988.
General Motors, on the other hand, had a product, the Chevrolet Nova, which the plant produced. But some of the GM managers assigned to the joint venture complain that their new knowledge was never put to good use inside GM. They say they should have been kept together as a team to educate GM's engineers and workers about the Japanese system. Instead, they were dispersed - to Canada, to Europe, to the truck division, to GM's Electronic Systems subsidiary.
Says a GM spokesman: "Who learned more, Toyota or GM? I don't know. I learned a lot, we experienced the Toyota system and we adapted a lot." He admits that some of the joint venture's "graduates" were clustered together as a team at GM, and others, although dispersed, nonetheless transferred useful skills form the venture.
Part of Japan's advantage is that it often does view the ventures as largely another form of competition. You shake hand with your right hand, while making a fist with your left. You learn everything you can from your Western partner while keeping as many of your own secrets to yourself. Then you strike out on your own, sometimes in the very market once controlled by your partner. The American European company has historically gone into deals as teacher rather than student.
YANKS, TO THE BLACKBOARD
"There's a lot of cultural arrogance in American and European firms - the not - invented - here syndrome," says Prof. Prahalad. "But the value in these partnerships is learning what the other guy knows. That is why Japanese and Korean companies seem to get most of the benefits."
The good news here is that American and European attitudes are changing. Probably nowhere has this sea change been more profound than in the semiconductor industry. Ten years ago, the leading edge of the industry was firmly in the U.S. All throughout the 1980s, however, that leadership has moved toward Japan, especially in state-of-the -art memory chips.
When the West German electronics giant Siemens tried to get back into the semiconductor business a few years ago, it played student to Toshiba, because it had little choice. "We couldn't afford the 'not-invented-here' syndrome," says Karl Zaininger, president of Siemen's U.S. research and development operation. He points out that Siemens learned to produce the one-megabit memory chip with Toshiba, then produced the next generation on its own. And that gave Siemens the credibility to join up with IBM on even more advanced chip projects. For its part, Toshiba says it got an improved sales network in Europe and a second source for its chips.
While American may lack experience in learning from Asian rivals, they have plenty of experience in European markets. More experience than Japanese companies, certainly. IBM, Hewlett - Packard, Digital Equipment, Ford and others have been in Europe for decades. Perhaps more important, the U.S. firms have tended to regard Europeans a whole, more so than even indigenous companies. That philosophy will be a big plus come the 1992 integration.
HAPPY TOGETHER
Take, for instance, General Electric's jet engine partnership with snecma, a French government - controlled aerospace concern. It was formed in 1974, mostly as a way for GE to penetrate the market for engines for the Airbus that, until then, had been dominated by Airbus Industries, the highly politicized and protected European aircraft consortium. What came out of the GE - French partnership was the most successful commercial-jet-engine in history, a midsized engine for the Airbus 320, the Boeing 737 and other planes. Last year alone, the joint venture landed orders or commitments for engines valued at more than $ 11 billion.
Throughout the 1970s and 1980s, the GE venture steadily took business away from its rivals, principally United Technologies' Pratt & Whitney unit. In so doing, GE had to overcome cultural, linguistic, logistical and foreign - exchange problems that remain vexing, says Brian Rowe, senior vice president in charge of GE's engine group. The French side, for example, likes to bring in senior executives from outside the industry, such as from the air force, who then have to spend valuable time getting up to speed. GE is more inclined to bring in experienced GE executives. Then there is the matter of problem solving. "The French want more data," Mr. Rowe says, "the Americans are more intuitive."
Yet the venture works, observers say because it is structured well. Investment and revenue are split 50 - 50. Both GE and Snecma delegate broad responsibility to their senior engine executives. GE handles system design and much of the highest-tech work, while the French company works on fans, boosters, low pressure turbines and the like. Until recently, GE handled most of the marketing, but Snecma is taking a bigger role in that, since the number of customers has steadily expanded to 125 from six.
IRRECONCILABLE DIFFERENCES
No amount of cross-cultural harmony can fix a venture with deep conceptual flaws, though. One of the most talked up alliances of the 1980s, the partnership between AT & T and Ing. C. Olivetti & Co. . the Italian office equipment maker, failed because it was simply a bad idea - at least according to Carlo De Benedetti, chairman of Olivetti.
The deal called for AT & T to sell Olivetti's personal computers in the U.S. In return, Olivetti would sell AT & T's computers and telephone-switching machines in Europe. But the logic of the deal was based on the assumption that the two industries - computers and telecommunications - were converging. To this day, there is debate whether a convergence is actually happening. Olivetti is now convinced it isn't.
"What's the result today of putting together computers and telecommunications? A total failure, which everybody now realized, " says Mr. De Benedetti. "It wasn't the fault of AT & T or Olivetti. The idea wasn't right."
That is easy to say in hindsight. But it wasn't so clear when the deal started unraveling a couple of years ago. Tensions between the two companies were high. Olivetti thought AT & T wasn't marketing Olivetti computers hard enough in the U.S. AT & T complained that Olivetti wasn't selling enough of AT & T's computers and telecommunications products in Europe.
One top AT & T executive believes that most of the problems in the venture stemmed from cultural differences. "I don't think we or Olivetti spent enough time understanding behaviour patterns," says Robert Kavner. AT & T group executive. "We knew the culture was different but we never really penetrated. We would get angry, and they would get upset. "
Mr. Kavner says AT & T's attempts to fix the problems, such as delays in deliveries, were transmitted in curt memos that offended Olivetti officials. "They would get an attitude, "Who are you to tell us what to do, " he says. Or the Olivetti side would explain its own problems, Mr. Kavner says, and AT & T managers would simply respond, "Don't tell me about your problems. Solve them." What the AT & T executives did develop, however, was a close working relationship with some Olivetti executives, friendships that Mr. Kavner says continue to this day. "The irony is, " he says, "we probably have the foundation in place today" for a successful AT & T - Olivetti joint venture.
Not to say that Olivetti and AT & T don't still disagree. Ask them about the prospects for the Mitsubishi-Daimler alliance, and you get a reminder not only of the challenges of putting a venture together, but of how partners can see the world in very different - an potentially divisive - ways.
"I don't think global alliances like this (Mitsubishi-Daimler) will be a major factor in the future, " contends the chastened Mr. De Benedetti of Olivetti. "I'm incapable of seeing the practical, common immediate results of these sort of mythical alliances."
Notes Mr. Kavner of AT & T: " I think it could be wonderfully successful - if people go to work on the specifies. But people won't get suntans putting this together. It's hard work."
THE PERIL OF PROTECTIONISM :
WHY 'MANAGED TRADE' IS A SHAM
Few industries receive more protection from imports than textiles and apparel. Quotas limit imports. Tariffs are still high, averaging about 22 percent on apparel. In 1986, this protection raised clothing expenses for a typical American family about $ 240. For every extra job saved in the United States, consumers pay about $ 50,000. So what do these industries want ? Yes: more protection.
Congress is complying, and it's hard to say anything kind about the result. Legislation passes by both the House and Senate would limit growth of textile and apparel imports to a mere 1 percent annually. Consumer clothing costs would rise further. Poor families would be hurt most, because they spend a larger share of their income on clothes. All this legislation shows is that trade protection is addictive.
Guiding the legislation through the Senate is Ernest Hollings of South Carolina. Back in 1960, when Hollings was his state's governor, he successfully urged presidential candidate John Kennedy to support action to restrict textile imports. In 1961, the Kennedy administration began negotiating quotas on cotton products. Since then, restrictions have been progressively toughened and extended to more products.
The time has long passed when protection might be justified as a way of saving jobs. Consider South Carolina. Its unemployment rate (4.7 percent in July) is below the national average. True, textile employment dropped about 30,000 (22 percent) between 1980 and 1987. But the state's total employment jumped 206,000 in the same period. Textile jobs now account for only one in 10 of nonfarm jobs; in 1950, the share was one in three. The decline mostly reflects the growth of other jobs.
Listening to Hollings' rhetoric, you'd think that imports had obliterated the textile and apparel industries. Not so. Imports are highest in apparel, where they had 34 percent of domestic consumption in 1987. In textiles - the yarns and fabrics used for clothes, curtains and other products - import penetration was much lower. It was 5 percent for yarns and 14 percent for the industrial and household textiles that go into sheets and towels.
It's important to distinguish between the textile and apparel industries. Textiles is highly automated, and the drop in its work force (down 123,000 since 1980 to 725,000) mostly reflects the adoption of faster, more efficient machinery. Production has been rising slowly. By contrast, apparel has always been labor intensive. The image of women at sewing machines is not far from the truth. Lots of workers are always losing their jobs, because small companies constantly go in and out of business. In 1982, 45 percent of apparel establishments had fewer than 20 workers.
The wonder is that Congress is considering this dreary legislation at all. It flagrantly violates the United State's foreign trade obligations and would surely provoke retaliation by other countries against U.S. exports. Any gains made by U.S. textile and apparel workers would probably be offset by losses in other industries. The timing is particularly bad, because U.S. exports are expanding rapidly. It makes no sense to give countries a pretext to impose their own limits.
For years, protectionists have sought to make their cause respectable. "Managed trade" is one idea they've tried to peddle. "Free trade" may be economically efficient, the argument goes, but it's socially undesirable. Import surges cause too much unemployment too quickly. It's better to negotiate import restrictions. Everyone ultimately benefits. Exporting countries can predict their markets. Industries in importing countries can adapt to new competition or contract gradually.
It sounds reasonable. But in practice, "managed trade" is a sham. Textiles and apparel are no exception. Once industries get protection, they simply want more. The United States has had quotas on sugar imports since 1934. Imports have been cut so severely in the 1980s that they're now a third of what they were in 1982. U.S. sugar prices are about double the world level.
Or take steel. In 1983, the Reagan administration negotiated import quotas on steel that expire in 1989. Because the U.S. industry has improved its competitiveness, any need for protection has diminished. Between 1982 and 1987, the cost of producing a ton of steel dropped from about $ 700 to $ 480. Still, the industry wants the quotas renewed and tightened. Protection is being used to raise prices. The victims are major steel users, such as Deer & Co. , which makes tractors and farm equipment.
This isn't "managed" trade; it's permanent protection. The point of trade is to raise living standards of all countries. Inevitably, that means specialization Countries' export industries are those where relative efficiency is highest. Of course, there's some disruption. All economic changes - from new technologies, for example - risk disruption. But are Americans better off because they export computers and import clothes and shoes ? The answer is yes.
Sen. Hollings and other supporters of the textile bill seem oblivious to this logic. The logic works especially well in clothing. Developing countries with large numbers of low-skilled workers can make clothes inexpensively. Export earnings then enable them to buy more advanced consumer products and machinery from developed countries. What Hollings proposes is a policy to depress the living standards of Americans and the Third World.
But why should he care? The great beneficiaries of the drive for more trade restrictions are political middlemen. These are legislators, lawyers, lobbyists, publicists and consultants. The more power is centralized in Washington, the more important they become. So Hollings' policy is as self-interested as it is undesirable. President Reagan has promised to veto the textile bill. It doesn't appear that Hollings and friends have enough votes to override the veto. Good: the sooner this legislation is killed, the better.
GOING GLOBAL IN THE NEW WORLD
Tiananmen Square. Eastern Europe. Kuwait.
Change has rarely been so swift, so widespread. For business, the new order clearly offers the potential for incalculable prosperity.
But it comes at a difficult juncture. For at a time when "going global" has become a competitive necessity, the international business landscape seems to change almost daily.
China, for instance, has suddenly regressed - its image transformed from one of stability to one of fragility and riskiness. Eastern Europe, which a year ago seemed a backward bulwark of socialism, is widely regarded as one of the great economic growth areas of the 1990s. And in the Mideast, after the Iraqi invasion of Kuwait, oil prices turned suddenly volatile, threatening to toss the world's economies into recession.
Who will survive - and thrive - in this new world ?
It isn't easy to predict, but one thing is clear: Companies can't simply pretend that the rest of the world doesn't exist. Wherever a company is based, whatever a company makes, competition is pushing it to think globally. Even the executives of a small Oregon company that makes robotic vision systems to cut French fries discovered recently that the Belgian company had developed a similar, competing device.
Such competitive pressures are growing in all the world's major markets. U.S. companies are intensifying their efforts in Europe and Asia. European companies are pushing hard into the U.S. and Asia. And Japanese companies, once focused heavily on exports to the U.S. , are buying and building aggressively almost everywhere.
The result is that companies that wee primarily domestic, or merely exporters, are becoming truly global at a furious rate. All of which leads to far-flung operations and a much greater degree of complexity.
How will American companies fare in this new world ? Many U.S. companies long ago staked out beachheads overseas, especially in Europe. They also did what few European companies could bring themselves to do : They considered Europe a single market. Today, as Europe hurtles toward economic unity by the end of 1992, many American companies are already well positioned.
Ford Motor Co., Merck & Co., Coca - Cola Co., International Business Machines Corp. Hewlett-Packard Co. are just a few of the companies with strong, profitable operations in Europe.
In Asia, too, many U.S. companies have preserved and prospered. McDonald's Corp. and Walt Disney Co. are among them. Also successful are companies as diverse as Du Pont Co. and Amway, the latter having sold more than $ 500 million in house wares door-to-door in Japan last year.
Yet there are also signs of American companies in retreat from abroad. Some U.S. companies, including Chrysler Corp. and Honeywell Inc., have cashed out part of their stakes in Japan. Many overseas, even from some of the fast-growing markets of Asia.
Does this matter? It could matter greatly. Competing in the 1990s is likely to require large amounts of long-term investment overseas in many of the most important industries - in autos, in electronics, in pharmaceuticals. The necessity to be "insiders" rather than mere exporters is growing day by day.
The insider status becomes particularly important should the world economy tumble into protectionist regional trading "blocs." If trade were to be relatively free within North America, Europe or Asia, but relatively restricted between blocs, then a significant presence inside each block would be crucial.
For the U.S. such a trading - bloc world conjures up a nightmarish scenario : An American regional bloc could turn out to be the debt bloc - a collection of countries that import capital, run big budget deficits, and invest pathetically small amounts in new ventures.
Fortunately, no such thing is preordained. These days, in fact, it seems that no idea is too bold, too farfetched, to be taken seriously. At a recent meeting at the Japan Society in New York, management guru Peter Drucker, asked about the likelihood of an East Asian trade bloc, responded, "If China breaks up under regional warlords, then we'll see an East Asian bloc."
Two years ago, Mr. Drucker might have been laughed out of the room. The breakup of China? Impossible.
It no longer seems like such a radical idea.
BLOCKING TRADE
Regional trading alliances. Slowly - and haltingly-nations seem to be embracing them. Which leads to a question :- Are trading alliances a boon or a hindrance to international trade?
The answer is yes.
Free-trade agreements within regions are designed to expand trade and are roundly welcomed by most economists. The worry is that such agreements can easily lead to the dreaded protectionist trading blocs - defensive pacts that set up barriers around regions and prevent the flow of goods from one region to another.
What might a world of regional trading blocs look like? One possible scenario, based on today's conventional wisdom, divides the world into three major trading blocs - the Americas bloc, the European bloc, and the Asian bloc.
The Americas bloc consists of three countries. As the strongest nation economically and politically, the United States is naturally at the center of the bloc. Canada and Mexico would be important secondary players in the Americas bloc, as would the rest of Latin America.
The U.S. - Canada free - trade agreement, which took effect last year, is widely regarded in the U.S. with alarm by some Japanese as the beginning of a regional, protectionist bloc. The same is true about the recently discussed possibility of a free - trade agreement between the U.S. and Mexico.
The same conflicting perspectives define the second bloc - the European bloc. The 1992 economic integration of Western Europe and the dramatic developments in Eastern Europe suggest a potential for a large and strong economic alliance. But the question remains: Will European unity be primarily a trade - expanding measure by the EC countries ? Or will it facilitate the erection of protectionist walls, the so-called fortress Europe.
Japanese government officials loudly assail regional trading blocks that serve a protectionist trade umbrellas. But they also concede that blocs may be an unfortunate but emerging trend.
"There is a little bit of cohesiveness among the nations of the Pacific Rim, " said Kazuo Nukazawa, managing director of Keidanren, the Japanese big-business organization, on a recent Public Broad-casting Service television program. "Largely, they are afraid of American protectionism or European protectionism."
Whether blocs emerge is impossible to say. Already, however many companies are hedging their bets by establishing a large presence in each region. Hence the recent flurry of cross-border acquisitions and the rash of global alliances and joint ventures. Direct investment, as the U.S. discovered in the 1950s and 1960s in Europe, is the way to become an "insider" in foreign lands. In a world of blocs, mere exporters are the biggest losers.
DAY IN THE LIFE OF TOMORROW'S MANAGER
6:10 a.m. The year is 2010 and another Monday morning has began for Peter Smith. The marketing vice-president for a home-appliance division of a major U.S. manufacturer is awakened by his computer alarm. He saunters to his terminal to check the weather outlook in Madrid, where he'll fly late tonight, and to send an electronic voice message to a supplier in Thailand.
Meet the manager of the future.
A different breed from his contemporary counterpart, our fictitious Peter Smith inhabits an international business world shaped by competition, collaboration and corporate diversity. (For one thing, he's just as likely to be a woman as a man and - with the profound demographic changes ahead - will probably manage a work force made up mostly of women and minorities.)
Comfortable with technology, he's been logging on to computers since he was seven years old. A literature honors student with a joint M.B.A./advanced - communications degree, the 38 - year - old joined his current employer four years ago after stints at two other corporations - one abroad - and a marketing consulting firm. Now he oversees offices in a score of countries on four continents.
Tomorrow's manager "will have to know how to operate in an any-time, any-place universe," says Stanley Davis, a management consultant and author of "Future Perfect," a look at the 21st century business world.
Adds James Maxmin, chief executive of London - based Thorn EMI PLC's home-electronics division: "We've all come to accept that organisations and managers who aren't cost-conscious and productive won't survive. But in the future, we'll also have to be more flexible, responsive and smarter. Managers will have to be nurturers and teachers, instead of policemen and watchdogs."
7:20 a.m. Mr. Smith and his wife, who heads her own architecture firm, organize the home front before darting to the super train. They leave instructions for their personal computer to call the home-cleaning service as well as a gourmet - carryout service that will prepare dinner for eight guests Saturday. And they quickly go over the day's schedules for their three - and six-year old daughters with their nanny.
On the train during a speedy 20-minute commute from suburb to Manhattan, Mr. Smith checks his electronic mailbox and also reads his favorite trade magazine via his laptop computer.
The jury is still out on how dual-career couples will juggle high-pressure work and personal lives. Some consultants and executives predict that the frenetic pace will only quicken. "I joke to managers now that we come in on London time and leave on Tokyo time, " says Anthony Teracciano, president of Mellon Bank Corp., Pittsburgh. He foresees an even more difficult work schedule ahead.
But others believe that more creative uses of flexible schedules as well as technological advances in communications and travel will allow more balance. "In the past, nobody cared if your staff had heart attacks, but in tomorrow's knowledge - based economy we'll be judged more on how well we take care of people," contends Robert Kelley, a professor at Carnegie Mellon University's business school.
8:15 a.m. In his high-tech office that doubles as a conference room, Mr. Smith reviews the day's schedule with his executive assistant (traditional secretaries vanished a decade earlier). Then it's on to his first meeting: a conference via video screen between his division's chief production manager in Cincinnati and a supplier near Munich.
The supplier tells them she can deliver a critical component for a new appliance at a 10% cost saving if they grab it within a week. Mr. Smith and the production manager quickly concur that it's a good deal. While they'll be able to snare a new customer who has been balking about price.
While today's manager spends most of his time conferring with bosses and subordinates within his own company, tomorrow's manager will be "intimately hooked t suppliers and customers" and well-versed in competitors' strategies, says Mr. Davis, the management consultant.
The marketplace will demand customized products and immediate delivery. This will force managers to make swift product-design and marketing decisions that now often take months and reams of reports. "Instant performance will be expected of them, and it's going to be harder to hide incompetence, " says Ann Barry, vice president-research at Handy Associates, Inc., a New York consultant.
10:30 a.m. At a staff meeting, Mr. Smith finds himself refereeing between two subordinates who disagree vehemently on how to promote a new appliance. One, an Asian manager, suggests that a fresh campaign begin much sooner than initially envisioned. The other, a European, wants to hold off until results of a test market are received later that week.
Mr. Smith quickly realizes this a cultural, not strategic, clash pitting a let's-do-it-now, analyze-it-later approach against a more cautious style. He makes them aware they're not really far apart and the European manager agrees to move swiftly.
By 201o, managers will have to handle greater cultural diversity with subtle human-relations skills. Managers will have to understand that employees don't think alike about such basics as "handling confrontation or even what it means to do a good day's work," says Jeffrey Sonnenfeld, a Harvard Business School professor.
12:30 p.m. Lunch is in Mr. Smith's office today, giving him time to take a video lesson in conversational Chinese. He already speaks Spanish fluently, learned during a work stint in Argentina, and wants to master at least two more languages. After 20 minutes, though, he decides to go to his computer to check his company's latest political-risk assessment on Spain, where recent student unrest has erupted into riots. The report tells him that the disturbances aren't anti-American, but he decides to have a bodyguard meet him at the Madrid airport anyway.
Technology will provide managers with easy access to more data than they can possibly use. The challenge will be to "synthesize data to make effective decisions," says Mellon's Mr. Terracciano.
2:20 p.m. Two of Mr. Smith's top lieutenants complain that they and others on his staff feel a recent bonus payment for a successful project wasn't divided equitably. Bluntly, they note that while Mr. Smith received a hefty $ 20,000 bonus, his 15-member staff had to split $5,000, and they threaten to defect. He quickly calls his boss, who says he'll think about increasing the bonus for staff members.
With skilled technical and professional employees likely to be in short supply, tomorrow's managers will have to share more authority with subordinates and, in some cases, pay them as much as or more than the managers themselves earn.
While yielding more to their employees, managers in their 30s in 2010 may find their own climb up the corporate ladder stalled by superiors. After advancing rapidly in their 20s, this generation "will be locked in a heated fight with older baby boomers who won't want to retire," says Harvard's Mr. Sonnenfeld.
4:00 p.m. Mr. Smith learns from the field that a large retail customer has been approached by a foreign competitor promising to quickly supply him with a best selling appliance. After conferring with his division's production managers, he phones the customer and suggests that his company could supply the same product but with three slightly different custom designs. They arrange a meeting later in the week.
Despite the globalization of companies and speed of overall change, some things will stay the same. Managers intent on rising to the top will still be judged largely on how well they articulate ideas and work with others.
In addition, different corporate cultures will still encourage and reward divergent qualities. Companies banking on new products, for example, will reward risk takers, while slow-growth industries will stress predictability and caution in their ranks.
6 p.m. Before heading to the airport, Mr. Smith uses his video phone to give his daughters a good-night kiss and to talk about the next day's schedule with his wife. Learning that she must take an unexpected trip herself the next evening, he promises to catch the Super Concorde home in time to put the kids to sleep himself.
GOING GLOBAL
THE CHIEF EXECUTIVES IN YEAR 2000 WILL BE EXPERIENCED ABROAD
Since World War II, the typical corporate chief executive officer has looked something like this:
He started out as a finance man with an under-graduate degree in accounting. He methodically worked his way up through the company from the controller's office in a division, to running that division, to the top job. His military background shows: He is used to giving orders - and to having them obeyed. As the head of the United Way drive he is a big man in his community. However, the first time he traveled overseas on business was as chief executive: Computers make him nervous.
But peer into the executive suite of the year 2000 and see a completely different person.
His undergraduate degree is in French literature, but he also has a joint M.B.A./engineering degree. He started in research and was quickly picked out as a potential CEO. He zigzagged from research to marketing to finance. He proved himself in Brazil by turning around a flailing joint venture. He speaks Portuguese and French and is on a first-name basis with commerce ministers in half a dozen countries. Unlike his predecessor's predecessor, he isn't a drill sergeant. He is first among equals in a five -person Office of the Chief Executive.
As the 40 - year postwar epoch of growing markets and domestic - only competition fades, so too is vanishing the narrow one-company, one industry chief executive. By the turn of the century, academicians, consultants and executives themselves predict, companies' choices of leaders will be governed by increasing international competition, the globalization of companies, the spread of technology, demographic shifts, and the speed of overall change.
"The world is going to be so significantly different it will require a completely different kind of CEO, " says Ed Dunn, corporate vice president of Whirlpool Corp. The next century's corporate chief, Mr. Dunn adds, "must have a multienvironment, multicountry, multifunctional, maybe even multicompany, multi-industry experience."
The changing requirements bemuse some who hold, or once held, the top slot. "I'm glad I lived when I did, " says William May, who was chief executive officer of American Can Co. between 1965 and 1980. "I'd have to really learn a whole lot of new tricks" to be a chief executive today.
LOOKING AHEAD
With the 21st century slightly over a decade away, many companies are already trying to figure out just who the chief executive of the future ought to be.
To study that question, Dow Chemical Co. is setting up a world-wide panel of senior executives. "We want to know what kind of skills and knowledge will be needed so we can give the heirs apparent that training in the next few years, "says Willard B. Maxwell, a senior training consultant at Dow. Whirlpool, which until recently identified potential chief executives about five years in advance, now believes that the selection process may have to begin as early as 25 years ahead. "We're thinking more about development throughout someone's career, " Mr. Dunn says.
Until recently, the road to the top in a big corporation has been fairly well marked. General Motors Corp. , for example, has been run by a finance man for 28 of the past 32 years. More than three-quarters of the chief executives surveyed in 1987 by search firm Heidrick & Struggles had finance, manufacturing or marketing backgrounds.
'CONVENTIONAL ROUTE'
Donald Frey, recently retired chairman of Bell & Howell Co., started in product engineering and product planning at Ford Motor Co. "It was a fairly conventional route for the sacred few in my generation. We became CEOs by virtue of being able to design and get products made."
In the future, however, specific functional backgrounds such as marketing or finance are becoming less important for chief executives. "Where they come from won't be at all relevant, " says Jerry Wind of the University of Pennsylvania's Wharton School. With creative financing techniques that turn financial decisions into marketing questions, manufacturing processes that center on computer technology, and product designs that depend on rapid market feedback, the chief executive will, instead, need a varied background.
"It will be very difficult for a single-discipline individual to reach the top, " predicts Douglas Danforth, former chairman of Westinghouse Electric Co.
Specific industry experience will also become less relevant because there will be fewer one-industry companies. More than two - thirds of chief executives in a survey to be released later this year by executive-search firm Korn/Ferry International and Columbia University Graduate School of Business said their companies would be involved in several different industries by the year 2000, compared with fewer than half who described their companies that way today.
Intensifying international competition will make the home-grown chief executive obsolete. "Global, global, global," is how Noel Tichy, a professor at University of Michigan's graduate school of business, describes the wider-ranging chief executive of the future. "Travel overseas," Mr. Danforth of Westinghouse advises future chief executives. "Meet with the prime minister, the ministers of trade and commerce. Meet with the king of Spain and the chancellor of West Germany. Get yourself known."
With over half of Arthur Andersen & Co.'s revenue generated outside the U.S., the company's next chief executive "will be a person with experience outside the borders of the U.S. , which I have not," says Duane R. Kullberg, the head of the big accounting and consulting company. "If you go back 20 years, you could be pretty insular and still survive. Today, that's not possible.
TRAINING INTERNATIONALIZED
Dow Chemical figures that mere international exposure isn't enough. It wants chief executives who have run foreign businesses for a long time and foresees the day when may other companies will, too. "About five years of international experience " will do, says Dow Chemical Chairman Paul Orrefice, who worked for Dow in Switzerland, Italy, Brazil and Spain and was its first president of Latin American operations in 1966. "It should be long enough to really run it.."
Others predict that by the next century, overseas executives will be equal contenders in the race for the top. This year, for the first time, Merck & Co. won't segregate its senior-executive training programs by country. "We have internationalized our training," says Art Strohmer, Merck's executive director of human resources. "We have high-level employees from Europe. Latin America, the U.S. and the rest of the world rubbing shoulders with each other." The model many cite for future chief executives is Coca-Cola Co.'s chairman, Roberto Golzueta, who started out with the company in Havana, Cuba, in 1954.
Computer - shy executives probably won't make it to the top of the company of 2000. Not that computer wizards or techies will be taking over - far from it. "The computer in the basement is a utility, not a source of competitive advantage," says Gerald R. Faulhaber, an associate professor at Wharton. Rather, chief executives will have to be comfortable exchanging information electronically and dealing with the ensuing organizational changes.
five years ago, William McGowan, the chief executive of MCI Communications Corp., held a breakfast meeting every Monday morning at 7:30 with his 25 top executives to bring each other up to date. Today, that meeting is held electronically in the form of a memo - called "Breakfast" - that is compiled Friday afternoons from submissions by each former participant. Mr. McGowan says a chief executive has to get used to relinquishing some power. "The information has an immediacy to it. The person who receives that information can act on it right away," he says.
Every industrial country, including Japan, has more of its economy under the control of foreign firms than a decade ago. As the pace of economic integration has quickened, the complaints have grown louder. Businesses that spend their profits overseas are attacked (at home) for not investing in their own country and (abroad) for scheming to undermine their host economy.
Assessing the impact of foreign direct investment (FDI) is difficult, because every country defines it in its own way. In America owning 10% or more of a company constitutes "control " and thus counts as a direct investment. In West Germany the ratio is 25%, in Britain and France 20%. Foreign ownership is different again. This covers (a) the stock of direct investment that secured control and (b) acquisitions financed in the host country (these are not counted in direct investment). Luckily Ms. DeAnne Julius, the chief economist at Royal Dutch-Shell, an oil company, has in a recent book, done a remarkable job of wading through the national accounts. Unsurprisingly, she finds that the extent of foreign ownership varies tremendously across the big five economies. Only 1% of Japan's assets were owned by foreign-controlled firms in 1986, and just 0.4% of its workers were employed by them. In America, by contrast, foreign-controlled firms owned 9% of the assets, employed 4% of the workers, and accounted for one-tenth of all sales.
Even so, compared with Europe, America looks almost autarkic. In Britain foreign-controlled firms owned 14% of the assets, employed one in seven workers and accounted for one-fifth of all sales. In West Germany the foreign - owned companies owned 17% of assets and accounted for 19% of sales. In France, the dominance of foreigners was greater still.
Foreigners may own only a small share of American business, but in absolute terms America has been the biggest recipient of new foreign investment. Between 1980 and 1988 the flow of foreign investment into America totaled $ 252 billion at 1980 prices (see chart). By 1998 direct investment was flowing in at the rate of $ 41 billion a year. America's direct investment overseas proceeded at a much slower pace. Measured at book value (an unrealistic assumption), America's assets abroad are now worth less than foreigner's assets in America.
Letting foreigners bid for domestic assets should ensure that they will be used in the most efficient way. Domestic consumers will benefit from lower prices and/or better goods. Like free trade in goods, free trade in capital lets companies exploit their comparative advantage in superior management, better technology, what have you. Investors and recipients alike should gain from FDI.
Usually, anyway. In principle, direct investment might sometimes harm the recipient country. A company's spending on R & D, for example, may benefit the economy by more than the cost to the business : it may, in other words, carry an external benefit. If, so and if foreign firms spent less on R & D than domestic firms, then purchases of domestic firms by foreign ones could harm the country's economy. By a similar argument, if there are economies of scale in producing something, then letting a foreign firm into the domestic market might enable it to drive out domestic producers and make monopoly profits.
The most authoritative analysis of these and other economic objections to foreign investment is a study by Edward Graham of Duke University and Paul Krugman of the Massachusetts Institute of Technology. In America, they found, foreign companies spend more per worker on R & D than their domestic counterparts, and pay their workers as much. So even if foreign companies merely displace domestic firms, the spin-offs are unlikely to be smaller than from domestic investment. Some advocates of "industrial policy", such as Mr. Robert Reich of Harvard University, therefore argue that foreign investment should be subsidised.
LET GOVERNMENTS COMPETE
Perhaps the most profound change that flows of foreign investment cause is this: a country's trade balance, so often a focus of attention, no longer reflects how well a country's businesses are doing.
When Texas Instruments sells a silicon chip from its plant in Singapore to its parent in America this counts as an American import. If trade balances were defined in terms of ownership, rather than geography, it would not. In many ways it would indeed make more sense to measure trade balances that way.
Putting America's trade balance on to an ownership basis would make pleasant reading for Americans worried about role in the world economy. Ms. Julius estimates that in 1986 third of America's exports were bought by American-owned companies abroad. About a fifth of America's imports were bought from American-owned companies abroad, and another third were bought by foreign - owned companies in America receiving goods from their own countries.
Worldwide, sale by American-owned companies to non-American owned ones exceeded America's conventionally measured exports by a factor of five. Purchases from foreign companies were three times greater than America's trade deficit of $ 144 billion in 1986 becomes a surplus of $ 57 billion.
Foreign direct investment has already reduced the freedom of governments to determine their own economic policy. If a government tries to push tax rates up, for example, it is increasingly easy for businesses to shift production overseas. Equally, if governments fail to invest in roads, education and so on, domestic entrepreneurs are likely to migrate. In short, foreign investment is forcing governments, as well as companies to compete.
CROSS - BORDER ALLIANCES BECOME FAVORITE WAY TO CRACK NEW MARKETS.
American Telephone & Telegraph co. has big ambitions in the semiconductor industry. It wants to sell a broad range of chips head to head with some of the world's largest chip makers. There is just one problem : AT & T has nowhere near enough products to vault it into the big leagues. In fact, as a niche player, it constantly risks getting outflanked - if not crushed - by competitors who have a full lone of chips and services.
So a few weeks ago, AT & T struck a deal, the sort of deal that will probably be a hallmark of business in the 1990s. The company reached out to NEC Corp., the big chip maker in Tokyo, and proffered a trade : some of AT & T's computer-aided design technology for some of NEC's advanced logic chips, a product AT & T doesn't make but very much wants to sell.
"These days it's just too expensive to go it alone," says Rock Pennella, AT & T Microelectronics' vice president of marketing.
TYING THE KNOT
This sort of cross-border marriage has been around for 30 years. But in the last few years - and especially in the last few weeks - the number of international joint ventures has rocketed. It has become clear that new alliances of this sort are now often crucial for dealing with increasingly global markets for a variety of products. Just last week, Texas Instruments Inc. and Kobe Steel Ltd. announced plans to make logic semiconductors in Japan. They join a growing list of similar ventures: Corning and Ciba-Geigy (medical equipment); Volvo and Renault (autos); Motorola and Toshiba; Texas Instruments and Hitachi (semiconductors). All have found that forming a partnership is sometimes the fastest, cheapest and least risky way to stay in, or get in the global game.
But probably the most striking example of late is the decision by giants Mitsubishi of Japan and Daimler-Benz AG of West Germany to talk about an array of possible joint projects spanning everything from autos to aircrafts. Both want to get into new markets and new products, and see each other as the means to that end.
"It's a world - wide trend," says Arthur Mitchell, a New York lawyer who has negotiated a number of U.S. Japanese joint ventures. "Above all, it's a way to get into markets."
The European market is driving many of the alliances these days. The post - 1992 European Community , as planned, will be an integrated economy of 320 million consumers. Upheaval in the East bloc has only increased the potential size of this new market. Japanese companies, traditionally weak in Europe, are desperate to be players. Hence, Mitsubishi's interest in teaming up with a powerful European "insider." (It is conceivable, for instance, that Daimler-Benz could distribute Mitsubishi's small cars in Easter Europe).
The sizzling pace of developments in Europe doesn't fully explain the rash of partnerships announced in recent months, however. In the past few weeks alone, IBM and Siemens announced joint research in advanced semiconductors chips; the chairman of British Aerospace said he was looking for a "strategic alliance" with U.S. companies; and, AT & T formed another joint venture : It agreed to make and market Mitsubishi Electric's memory chips in exchange for access to the technology that goes into designing the chip, and the right to sell the semiconductor.
KEEP SEPARATE CHECKING ACCOUNTS
Alliances - different from simply buying a stake in another company - can get complicated fast, and the successful ventures tend to carefully follow a couple of rules of thumb: The partners know exactly what the common objective is, and they make contingency plans in case the marriage doesn't work out. "It's a bit like prenuptial agreements, " says Martyn Roetter, a director of the consulting firm Arthur D. Little. "You don't want to think about divorce in the throes of love. But the name of the game in alliances is to be specific and realistic about what all the partners are trying to get out of it."
Compared with their Asian partners and rivals, U.S. companies sometimes appear naïve in this regard. They fail to understand that collaboration is another form of competition. "In an alliance you have to learn skills of the partner, rather than just see it as a way to get a product to sell while avoiding a big investment," says C.K. Prahalad, professor of business at the University of Michigan and an expert on global alliances.
Toyota Motor Corp. , for example, has certainly benefited from its five years of joint venture with General Motors Corp. in operating an auto plant in Fremont, Calif. But did GM ?
Kunio Shimazu, a senior Toyota executive and one of the planners of the California venture, called New United Motor Manufacturing Inc., can tick off the objectives Toyota achieved: "We learned about U.S. supply and transportation. And we got the confidence to manage U.S. workers." And all that knowledge, he says, was quickly transferred to Georgetown, Ky., where Toyota opened a plant of its own in 1988.
General Motors, on the other hand, had a product, the Chevrolet Nova, which the plant produced. But some of the GM managers assigned to the joint venture complain that their new knowledge was never put to good use inside GM. They say they should have been kept together as a team to educate GM's engineers and workers about the Japanese system. Instead, they were dispersed - to Canada, to Europe, to the truck division, to GM's Electronic Systems subsidiary.
Says a GM spokesman: "Who learned more, Toyota or GM? I don't know. I learned a lot, we experienced the Toyota system and we adapted a lot." He admits that some of the joint venture's "graduates" were clustered together as a team at GM, and others, although dispersed, nonetheless transferred useful skills form the venture.
Part of Japan's advantage is that it often does view the ventures as largely another form of competition. You shake hand with your right hand, while making a fist with your left. You learn everything you can from your Western partner while keeping as many of your own secrets to yourself. Then you strike out on your own, sometimes in the very market once controlled by your partner. The American European company has historically gone into deals as teacher rather than student.
YANKS, TO THE BLACKBOARD
"There's a lot of cultural arrogance in American and European firms - the not - invented - here syndrome," says Prof. Prahalad. "But the value in these partnerships is learning what the other guy knows. That is why Japanese and Korean companies seem to get most of the benefits."
The good news here is that American and European attitudes are changing. Probably nowhere has this sea change been more profound than in the semiconductor industry. Ten years ago, the leading edge of the industry was firmly in the U.S. All throughout the 1980s, however, that leadership has moved toward Japan, especially in state-of-the -art memory chips.
When the West German electronics giant Siemens tried to get back into the semiconductor business a few years ago, it played student to Toshiba, because it had little choice. "We couldn't afford the 'not-invented-here' syndrome," says Karl Zaininger, president of Siemen's U.S. research and development operation. He points out that Siemens learned to produce the one-megabit memory chip with Toshiba, then produced the next generation on its own. And that gave Siemens the credibility to join up with IBM on even more advanced chip projects. For its part, Toshiba says it got an improved sales network in Europe and a second source for its chips.
While American may lack experience in learning from Asian rivals, they have plenty of experience in European markets. More experience than Japanese companies, certainly. IBM, Hewlett - Packard, Digital Equipment, Ford and others have been in Europe for decades. Perhaps more important, the U.S. firms have tended to regard Europeans a whole, more so than even indigenous companies. That philosophy will be a big plus come the 1992 integration.
HAPPY TOGETHER
Take, for instance, General Electric's jet engine partnership with snecma, a French government - controlled aerospace concern. It was formed in 1974, mostly as a way for GE to penetrate the market for engines for the Airbus that, until then, had been dominated by Airbus Industries, the highly politicized and protected European aircraft consortium. What came out of the GE - French partnership was the most successful commercial-jet-engine in history, a midsized engine for the Airbus 320, the Boeing 737 and other planes. Last year alone, the joint venture landed orders or commitments for engines valued at more than $ 11 billion.
Throughout the 1970s and 1980s, the GE venture steadily took business away from its rivals, principally United Technologies' Pratt & Whitney unit. In so doing, GE had to overcome cultural, linguistic, logistical and foreign - exchange problems that remain vexing, says Brian Rowe, senior vice president in charge of GE's engine group. The French side, for example, likes to bring in senior executives from outside the industry, such as from the air force, who then have to spend valuable time getting up to speed. GE is more inclined to bring in experienced GE executives. Then there is the matter of problem solving. "The French want more data," Mr. Rowe says, "the Americans are more intuitive."
Yet the venture works, observers say because it is structured well. Investment and revenue are split 50 - 50. Both GE and Snecma delegate broad responsibility to their senior engine executives. GE handles system design and much of the highest-tech work, while the French company works on fans, boosters, low pressure turbines and the like. Until recently, GE handled most of the marketing, but Snecma is taking a bigger role in that, since the number of customers has steadily expanded to 125 from six.
IRRECONCILABLE DIFFERENCES
No amount of cross-cultural harmony can fix a venture with deep conceptual flaws, though. One of the most talked up alliances of the 1980s, the partnership between AT & T and Ing. C. Olivetti & Co. . the Italian office equipment maker, failed because it was simply a bad idea - at least according to Carlo De Benedetti, chairman of Olivetti.
The deal called for AT & T to sell Olivetti's personal computers in the U.S. In return, Olivetti would sell AT & T's computers and telephone-switching machines in Europe. But the logic of the deal was based on the assumption that the two industries - computers and telecommunications - were converging. To this day, there is debate whether a convergence is actually happening. Olivetti is now convinced it isn't.
"What's the result today of putting together computers and telecommunications? A total failure, which everybody now realized, " says Mr. De Benedetti. "It wasn't the fault of AT & T or Olivetti. The idea wasn't right."
That is easy to say in hindsight. But it wasn't so clear when the deal started unraveling a couple of years ago. Tensions between the two companies were high. Olivetti thought AT & T wasn't marketing Olivetti computers hard enough in the U.S. AT & T complained that Olivetti wasn't selling enough of AT & T's computers and telecommunications products in Europe.
One top AT & T executive believes that most of the problems in the venture stemmed from cultural differences. "I don't think we or Olivetti spent enough time understanding behaviour patterns," says Robert Kavner. AT & T group executive. "We knew the culture was different but we never really penetrated. We would get angry, and they would get upset. "
Mr. Kavner says AT & T's attempts to fix the problems, such as delays in deliveries, were transmitted in curt memos that offended Olivetti officials. "They would get an attitude, "Who are you to tell us what to do, " he says. Or the Olivetti side would explain its own problems, Mr. Kavner says, and AT & T managers would simply respond, "Don't tell me about your problems. Solve them." What the AT & T executives did develop, however, was a close working relationship with some Olivetti executives, friendships that Mr. Kavner says continue to this day. "The irony is, " he says, "we probably have the foundation in place today" for a successful AT & T - Olivetti joint venture.
Not to say that Olivetti and AT & T don't still disagree. Ask them about the prospects for the Mitsubishi-Daimler alliance, and you get a reminder not only of the challenges of putting a venture together, but of how partners can see the world in very different - an potentially divisive - ways.
"I don't think global alliances like this (Mitsubishi-Daimler) will be a major factor in the future, " contends the chastened Mr. De Benedetti of Olivetti. "I'm incapable of seeing the practical, common immediate results of these sort of mythical alliances."
Notes Mr. Kavner of AT & T: " I think it could be wonderfully successful - if people go to work on the specifies. But people won't get suntans putting this together. It's hard work."
THE PERIL OF PROTECTIONISM :
WHY 'MANAGED TRADE' IS A SHAM
Few industries receive more protection from imports than textiles and apparel. Quotas limit imports. Tariffs are still high, averaging about 22 percent on apparel. In 1986, this protection raised clothing expenses for a typical American family about $ 240. For every extra job saved in the United States, consumers pay about $ 50,000. So what do these industries want ? Yes: more protection.
Congress is complying, and it's hard to say anything kind about the result. Legislation passes by both the House and Senate would limit growth of textile and apparel imports to a mere 1 percent annually. Consumer clothing costs would rise further. Poor families would be hurt most, because they spend a larger share of their income on clothes. All this legislation shows is that trade protection is addictive.
Guiding the legislation through the Senate is Ernest Hollings of South Carolina. Back in 1960, when Hollings was his state's governor, he successfully urged presidential candidate John Kennedy to support action to restrict textile imports. In 1961, the Kennedy administration began negotiating quotas on cotton products. Since then, restrictions have been progressively toughened and extended to more products.
The time has long passed when protection might be justified as a way of saving jobs. Consider South Carolina. Its unemployment rate (4.7 percent in July) is below the national average. True, textile employment dropped about 30,000 (22 percent) between 1980 and 1987. But the state's total employment jumped 206,000 in the same period. Textile jobs now account for only one in 10 of nonfarm jobs; in 1950, the share was one in three. The decline mostly reflects the growth of other jobs.
Listening to Hollings' rhetoric, you'd think that imports had obliterated the textile and apparel industries. Not so. Imports are highest in apparel, where they had 34 percent of domestic consumption in 1987. In textiles - the yarns and fabrics used for clothes, curtains and other products - import penetration was much lower. It was 5 percent for yarns and 14 percent for the industrial and household textiles that go into sheets and towels.
It's important to distinguish between the textile and apparel industries. Textiles is highly automated, and the drop in its work force (down 123,000 since 1980 to 725,000) mostly reflects the adoption of faster, more efficient machinery. Production has been rising slowly. By contrast, apparel has always been labor intensive. The image of women at sewing machines is not far from the truth. Lots of workers are always losing their jobs, because small companies constantly go in and out of business. In 1982, 45 percent of apparel establishments had fewer than 20 workers.
The wonder is that Congress is considering this dreary legislation at all. It flagrantly violates the United State's foreign trade obligations and would surely provoke retaliation by other countries against U.S. exports. Any gains made by U.S. textile and apparel workers would probably be offset by losses in other industries. The timing is particularly bad, because U.S. exports are expanding rapidly. It makes no sense to give countries a pretext to impose their own limits.
For years, protectionists have sought to make their cause respectable. "Managed trade" is one idea they've tried to peddle. "Free trade" may be economically efficient, the argument goes, but it's socially undesirable. Import surges cause too much unemployment too quickly. It's better to negotiate import restrictions. Everyone ultimately benefits. Exporting countries can predict their markets. Industries in importing countries can adapt to new competition or contract gradually.
It sounds reasonable. But in practice, "managed trade" is a sham. Textiles and apparel are no exception. Once industries get protection, they simply want more. The United States has had quotas on sugar imports since 1934. Imports have been cut so severely in the 1980s that they're now a third of what they were in 1982. U.S. sugar prices are about double the world level.
Or take steel. In 1983, the Reagan administration negotiated import quotas on steel that expire in 1989. Because the U.S. industry has improved its competitiveness, any need for protection has diminished. Between 1982 and 1987, the cost of producing a ton of steel dropped from about $ 700 to $ 480. Still, the industry wants the quotas renewed and tightened. Protection is being used to raise prices. The victims are major steel users, such as Deer & Co. , which makes tractors and farm equipment.
This isn't "managed" trade; it's permanent protection. The point of trade is to raise living standards of all countries. Inevitably, that means specialization Countries' export industries are those where relative efficiency is highest. Of course, there's some disruption. All economic changes - from new technologies, for example - risk disruption. But are Americans better off because they export computers and import clothes and shoes ? The answer is yes.
Sen. Hollings and other supporters of the textile bill seem oblivious to this logic. The logic works especially well in clothing. Developing countries with large numbers of low-skilled workers can make clothes inexpensively. Export earnings then enable them to buy more advanced consumer products and machinery from developed countries. What Hollings proposes is a policy to depress the living standards of Americans and the Third World.
But why should he care? The great beneficiaries of the drive for more trade restrictions are political middlemen. These are legislators, lawyers, lobbyists, publicists and consultants. The more power is centralized in Washington, the more important they become. So Hollings' policy is as self-interested as it is undesirable. President Reagan has promised to veto the textile bill. It doesn't appear that Hollings and friends have enough votes to override the veto. Good: the sooner this legislation is killed, the better.
GOING GLOBAL IN THE NEW WORLD
Tiananmen Square. Eastern Europe. Kuwait.
Change has rarely been so swift, so widespread. For business, the new order clearly offers the potential for incalculable prosperity.
But it comes at a difficult juncture. For at a time when "going global" has become a competitive necessity, the international business landscape seems to change almost daily.
China, for instance, has suddenly regressed - its image transformed from one of stability to one of fragility and riskiness. Eastern Europe, which a year ago seemed a backward bulwark of socialism, is widely regarded as one of the great economic growth areas of the 1990s. And in the Mideast, after the Iraqi invasion of Kuwait, oil prices turned suddenly volatile, threatening to toss the world's economies into recession.
Who will survive - and thrive - in this new world ?
It isn't easy to predict, but one thing is clear: Companies can't simply pretend that the rest of the world doesn't exist. Wherever a company is based, whatever a company makes, competition is pushing it to think globally. Even the executives of a small Oregon company that makes robotic vision systems to cut French fries discovered recently that the Belgian company had developed a similar, competing device.
Such competitive pressures are growing in all the world's major markets. U.S. companies are intensifying their efforts in Europe and Asia. European companies are pushing hard into the U.S. and Asia. And Japanese companies, once focused heavily on exports to the U.S. , are buying and building aggressively almost everywhere.
The result is that companies that wee primarily domestic, or merely exporters, are becoming truly global at a furious rate. All of which leads to far-flung operations and a much greater degree of complexity.
How will American companies fare in this new world ? Many U.S. companies long ago staked out beachheads overseas, especially in Europe. They also did what few European companies could bring themselves to do : They considered Europe a single market. Today, as Europe hurtles toward economic unity by the end of 1992, many American companies are already well positioned.
Ford Motor Co., Merck & Co., Coca - Cola Co., International Business Machines Corp. Hewlett-Packard Co. are just a few of the companies with strong, profitable operations in Europe.
In Asia, too, many U.S. companies have preserved and prospered. McDonald's Corp. and Walt Disney Co. are among them. Also successful are companies as diverse as Du Pont Co. and Amway, the latter having sold more than $ 500 million in house wares door-to-door in Japan last year.
Yet there are also signs of American companies in retreat from abroad. Some U.S. companies, including Chrysler Corp. and Honeywell Inc., have cashed out part of their stakes in Japan. Many overseas, even from some of the fast-growing markets of Asia.
Does this matter? It could matter greatly. Competing in the 1990s is likely to require large amounts of long-term investment overseas in many of the most important industries - in autos, in electronics, in pharmaceuticals. The necessity to be "insiders" rather than mere exporters is growing day by day.
The insider status becomes particularly important should the world economy tumble into protectionist regional trading "blocs." If trade were to be relatively free within North America, Europe or Asia, but relatively restricted between blocs, then a significant presence inside each block would be crucial.
For the U.S. such a trading - bloc world conjures up a nightmarish scenario : An American regional bloc could turn out to be the debt bloc - a collection of countries that import capital, run big budget deficits, and invest pathetically small amounts in new ventures.
Fortunately, no such thing is preordained. These days, in fact, it seems that no idea is too bold, too farfetched, to be taken seriously. At a recent meeting at the Japan Society in New York, management guru Peter Drucker, asked about the likelihood of an East Asian trade bloc, responded, "If China breaks up under regional warlords, then we'll see an East Asian bloc."
Two years ago, Mr. Drucker might have been laughed out of the room. The breakup of China? Impossible.
It no longer seems like such a radical idea.
BLOCKING TRADE
Regional trading alliances. Slowly - and haltingly-nations seem to be embracing them. Which leads to a question :- Are trading alliances a boon or a hindrance to international trade?
The answer is yes.
Free-trade agreements within regions are designed to expand trade and are roundly welcomed by most economists. The worry is that such agreements can easily lead to the dreaded protectionist trading blocs - defensive pacts that set up barriers around regions and prevent the flow of goods from one region to another.
What might a world of regional trading blocs look like? One possible scenario, based on today's conventional wisdom, divides the world into three major trading blocs - the Americas bloc, the European bloc, and the Asian bloc.
The Americas bloc consists of three countries. As the strongest nation economically and politically, the United States is naturally at the center of the bloc. Canada and Mexico would be important secondary players in the Americas bloc, as would the rest of Latin America.
The U.S. - Canada free - trade agreement, which took effect last year, is widely regarded in the U.S. with alarm by some Japanese as the beginning of a regional, protectionist bloc. The same is true about the recently discussed possibility of a free - trade agreement between the U.S. and Mexico.
The same conflicting perspectives define the second bloc - the European bloc. The 1992 economic integration of Western Europe and the dramatic developments in Eastern Europe suggest a potential for a large and strong economic alliance. But the question remains: Will European unity be primarily a trade - expanding measure by the EC countries ? Or will it facilitate the erection of protectionist walls, the so-called fortress Europe.
Japanese government officials loudly assail regional trading blocks that serve a protectionist trade umbrellas. But they also concede that blocs may be an unfortunate but emerging trend.
"There is a little bit of cohesiveness among the nations of the Pacific Rim, " said Kazuo Nukazawa, managing director of Keidanren, the Japanese big-business organization, on a recent Public Broad-casting Service television program. "Largely, they are afraid of American protectionism or European protectionism."
Whether blocs emerge is impossible to say. Already, however many companies are hedging their bets by establishing a large presence in each region. Hence the recent flurry of cross-border acquisitions and the rash of global alliances and joint ventures. Direct investment, as the U.S. discovered in the 1950s and 1960s in Europe, is the way to become an "insider" in foreign lands. In a world of blocs, mere exporters are the biggest losers.
DAY IN THE LIFE OF TOMORROW'S MANAGER
6:10 a.m. The year is 2010 and another Monday morning has began for Peter Smith. The marketing vice-president for a home-appliance division of a major U.S. manufacturer is awakened by his computer alarm. He saunters to his terminal to check the weather outlook in Madrid, where he'll fly late tonight, and to send an electronic voice message to a supplier in Thailand.
Meet the manager of the future.
A different breed from his contemporary counterpart, our fictitious Peter Smith inhabits an international business world shaped by competition, collaboration and corporate diversity. (For one thing, he's just as likely to be a woman as a man and - with the profound demographic changes ahead - will probably manage a work force made up mostly of women and minorities.)
Comfortable with technology, he's been logging on to computers since he was seven years old. A literature honors student with a joint M.B.A./advanced - communications degree, the 38 - year - old joined his current employer four years ago after stints at two other corporations - one abroad - and a marketing consulting firm. Now he oversees offices in a score of countries on four continents.
Tomorrow's manager "will have to know how to operate in an any-time, any-place universe," says Stanley Davis, a management consultant and author of "Future Perfect," a look at the 21st century business world.
Adds James Maxmin, chief executive of London - based Thorn EMI PLC's home-electronics division: "We've all come to accept that organisations and managers who aren't cost-conscious and productive won't survive. But in the future, we'll also have to be more flexible, responsive and smarter. Managers will have to be nurturers and teachers, instead of policemen and watchdogs."
7:20 a.m. Mr. Smith and his wife, who heads her own architecture firm, organize the home front before darting to the super train. They leave instructions for their personal computer to call the home-cleaning service as well as a gourmet - carryout service that will prepare dinner for eight guests Saturday. And they quickly go over the day's schedules for their three - and six-year old daughters with their nanny.
On the train during a speedy 20-minute commute from suburb to Manhattan, Mr. Smith checks his electronic mailbox and also reads his favorite trade magazine via his laptop computer.
The jury is still out on how dual-career couples will juggle high-pressure work and personal lives. Some consultants and executives predict that the frenetic pace will only quicken. "I joke to managers now that we come in on London time and leave on Tokyo time, " says Anthony Teracciano, president of Mellon Bank Corp., Pittsburgh. He foresees an even more difficult work schedule ahead.
But others believe that more creative uses of flexible schedules as well as technological advances in communications and travel will allow more balance. "In the past, nobody cared if your staff had heart attacks, but in tomorrow's knowledge - based economy we'll be judged more on how well we take care of people," contends Robert Kelley, a professor at Carnegie Mellon University's business school.
8:15 a.m. In his high-tech office that doubles as a conference room, Mr. Smith reviews the day's schedule with his executive assistant (traditional secretaries vanished a decade earlier). Then it's on to his first meeting: a conference via video screen between his division's chief production manager in Cincinnati and a supplier near Munich.
The supplier tells them she can deliver a critical component for a new appliance at a 10% cost saving if they grab it within a week. Mr. Smith and the production manager quickly concur that it's a good deal. While they'll be able to snare a new customer who has been balking about price.
While today's manager spends most of his time conferring with bosses and subordinates within his own company, tomorrow's manager will be "intimately hooked t suppliers and customers" and well-versed in competitors' strategies, says Mr. Davis, the management consultant.
The marketplace will demand customized products and immediate delivery. This will force managers to make swift product-design and marketing decisions that now often take months and reams of reports. "Instant performance will be expected of them, and it's going to be harder to hide incompetence, " says Ann Barry, vice president-research at Handy Associates, Inc., a New York consultant.
10:30 a.m. At a staff meeting, Mr. Smith finds himself refereeing between two subordinates who disagree vehemently on how to promote a new appliance. One, an Asian manager, suggests that a fresh campaign begin much sooner than initially envisioned. The other, a European, wants to hold off until results of a test market are received later that week.
Mr. Smith quickly realizes this a cultural, not strategic, clash pitting a let's-do-it-now, analyze-it-later approach against a more cautious style. He makes them aware they're not really far apart and the European manager agrees to move swiftly.
By 201o, managers will have to handle greater cultural diversity with subtle human-relations skills. Managers will have to understand that employees don't think alike about such basics as "handling confrontation or even what it means to do a good day's work," says Jeffrey Sonnenfeld, a Harvard Business School professor.
12:30 p.m. Lunch is in Mr. Smith's office today, giving him time to take a video lesson in conversational Chinese. He already speaks Spanish fluently, learned during a work stint in Argentina, and wants to master at least two more languages. After 20 minutes, though, he decides to go to his computer to check his company's latest political-risk assessment on Spain, where recent student unrest has erupted into riots. The report tells him that the disturbances aren't anti-American, but he decides to have a bodyguard meet him at the Madrid airport anyway.
Technology will provide managers with easy access to more data than they can possibly use. The challenge will be to "synthesize data to make effective decisions," says Mellon's Mr. Terracciano.
2:20 p.m. Two of Mr. Smith's top lieutenants complain that they and others on his staff feel a recent bonus payment for a successful project wasn't divided equitably. Bluntly, they note that while Mr. Smith received a hefty $ 20,000 bonus, his 15-member staff had to split $5,000, and they threaten to defect. He quickly calls his boss, who says he'll think about increasing the bonus for staff members.
With skilled technical and professional employees likely to be in short supply, tomorrow's managers will have to share more authority with subordinates and, in some cases, pay them as much as or more than the managers themselves earn.
While yielding more to their employees, managers in their 30s in 2010 may find their own climb up the corporate ladder stalled by superiors. After advancing rapidly in their 20s, this generation "will be locked in a heated fight with older baby boomers who won't want to retire," says Harvard's Mr. Sonnenfeld.
4:00 p.m. Mr. Smith learns from the field that a large retail customer has been approached by a foreign competitor promising to quickly supply him with a best selling appliance. After conferring with his division's production managers, he phones the customer and suggests that his company could supply the same product but with three slightly different custom designs. They arrange a meeting later in the week.
Despite the globalization of companies and speed of overall change, some things will stay the same. Managers intent on rising to the top will still be judged largely on how well they articulate ideas and work with others.
In addition, different corporate cultures will still encourage and reward divergent qualities. Companies banking on new products, for example, will reward risk takers, while slow-growth industries will stress predictability and caution in their ranks.
6 p.m. Before heading to the airport, Mr. Smith uses his video phone to give his daughters a good-night kiss and to talk about the next day's schedule with his wife. Learning that she must take an unexpected trip herself the next evening, he promises to catch the Super Concorde home in time to put the kids to sleep himself.
GOING GLOBAL
THE CHIEF EXECUTIVES IN YEAR 2000 WILL BE EXPERIENCED ABROAD
Since World War II, the typical corporate chief executive officer has looked something like this:
He started out as a finance man with an under-graduate degree in accounting. He methodically worked his way up through the company from the controller's office in a division, to running that division, to the top job. His military background shows: He is used to giving orders - and to having them obeyed. As the head of the United Way drive he is a big man in his community. However, the first time he traveled overseas on business was as chief executive: Computers make him nervous.
But peer into the executive suite of the year 2000 and see a completely different person.
His undergraduate degree is in French literature, but he also has a joint M.B.A./engineering degree. He started in research and was quickly picked out as a potential CEO. He zigzagged from research to marketing to finance. He proved himself in Brazil by turning around a flailing joint venture. He speaks Portuguese and French and is on a first-name basis with commerce ministers in half a dozen countries. Unlike his predecessor's predecessor, he isn't a drill sergeant. He is first among equals in a five -person Office of the Chief Executive.
As the 40 - year postwar epoch of growing markets and domestic - only competition fades, so too is vanishing the narrow one-company, one industry chief executive. By the turn of the century, academicians, consultants and executives themselves predict, companies' choices of leaders will be governed by increasing international competition, the globalization of companies, the spread of technology, demographic shifts, and the speed of overall change.
"The world is going to be so significantly different it will require a completely different kind of CEO, " says Ed Dunn, corporate vice president of Whirlpool Corp. The next century's corporate chief, Mr. Dunn adds, "must have a multienvironment, multicountry, multifunctional, maybe even multicompany, multi-industry experience."
The changing requirements bemuse some who hold, or once held, the top slot. "I'm glad I lived when I did, " says William May, who was chief executive officer of American Can Co. between 1965 and 1980. "I'd have to really learn a whole lot of new tricks" to be a chief executive today.
LOOKING AHEAD
With the 21st century slightly over a decade away, many companies are already trying to figure out just who the chief executive of the future ought to be.
To study that question, Dow Chemical Co. is setting up a world-wide panel of senior executives. "We want to know what kind of skills and knowledge will be needed so we can give the heirs apparent that training in the next few years, "says Willard B. Maxwell, a senior training consultant at Dow. Whirlpool, which until recently identified potential chief executives about five years in advance, now believes that the selection process may have to begin as early as 25 years ahead. "We're thinking more about development throughout someone's career, " Mr. Dunn says.
Until recently, the road to the top in a big corporation has been fairly well marked. General Motors Corp. , for example, has been run by a finance man for 28 of the past 32 years. More than three-quarters of the chief executives surveyed in 1987 by search firm Heidrick & Struggles had finance, manufacturing or marketing backgrounds.
'CONVENTIONAL ROUTE'
Donald Frey, recently retired chairman of Bell & Howell Co., started in product engineering and product planning at Ford Motor Co. "It was a fairly conventional route for the sacred few in my generation. We became CEOs by virtue of being able to design and get products made."
In the future, however, specific functional backgrounds such as marketing or finance are becoming less important for chief executives. "Where they come from won't be at all relevant, " says Jerry Wind of the University of Pennsylvania's Wharton School. With creative financing techniques that turn financial decisions into marketing questions, manufacturing processes that center on computer technology, and product designs that depend on rapid market feedback, the chief executive will, instead, need a varied background.
"It will be very difficult for a single-discipline individual to reach the top, " predicts Douglas Danforth, former chairman of Westinghouse Electric Co.
Specific industry experience will also become less relevant because there will be fewer one-industry companies. More than two - thirds of chief executives in a survey to be released later this year by executive-search firm Korn/Ferry International and Columbia University Graduate School of Business said their companies would be involved in several different industries by the year 2000, compared with fewer than half who described their companies that way today.
Intensifying international competition will make the home-grown chief executive obsolete. "Global, global, global," is how Noel Tichy, a professor at University of Michigan's graduate school of business, describes the wider-ranging chief executive of the future. "Travel overseas," Mr. Danforth of Westinghouse advises future chief executives. "Meet with the prime minister, the ministers of trade and commerce. Meet with the king of Spain and the chancellor of West Germany. Get yourself known."
With over half of Arthur Andersen & Co.'s revenue generated outside the U.S., the company's next chief executive "will be a person with experience outside the borders of the U.S. , which I have not," says Duane R. Kullberg, the head of the big accounting and consulting company. "If you go back 20 years, you could be pretty insular and still survive. Today, that's not possible.
TRAINING INTERNATIONALIZED
Dow Chemical figures that mere international exposure isn't enough. It wants chief executives who have run foreign businesses for a long time and foresees the day when may other companies will, too. "About five years of international experience " will do, says Dow Chemical Chairman Paul Orrefice, who worked for Dow in Switzerland, Italy, Brazil and Spain and was its first president of Latin American operations in 1966. "It should be long enough to really run it.."
Others predict that by the next century, overseas executives will be equal contenders in the race for the top. This year, for the first time, Merck & Co. won't segregate its senior-executive training programs by country. "We have internationalized our training," says Art Strohmer, Merck's executive director of human resources. "We have high-level employees from Europe. Latin America, the U.S. and the rest of the world rubbing shoulders with each other." The model many cite for future chief executives is Coca-Cola Co.'s chairman, Roberto Golzueta, who started out with the company in Havana, Cuba, in 1954.
Computer - shy executives probably won't make it to the top of the company of 2000. Not that computer wizards or techies will be taking over - far from it. "The computer in the basement is a utility, not a source of competitive advantage," says Gerald R. Faulhaber, an associate professor at Wharton. Rather, chief executives will have to be comfortable exchanging information electronically and dealing with the ensuing organizational changes.
five years ago, William McGowan, the chief executive of MCI Communications Corp., held a breakfast meeting every Monday morning at 7:30 with his 25 top executives to bring each other up to date. Today, that meeting is held electronically in the form of a memo - called "Breakfast" - that is compiled Friday afternoons from submissions by each former participant. Mr. McGowan says a chief executive has to get used to relinquishing some power. "The information has an immediacy to it. The person who receives that information can act on it right away," he says.