Consumers can crush the Fortune 500

Every year, Fortune magazine brings out data on the 500 biggest American companies. Most people read it to see who has become biggest and most profitable. I read it equally to see who got hammered and humbled. To my mind, the most important lesson from the Fortune 500 is that, no matter how big you are, competitive markets can crush you into losses and bankruptcy. That is why anti-globalists are plain wrong in saying that MNCs are so large–sometimes bigger than entire countries—that they constitute an imperialist threat.

The year 2004 was one of the very best for corporations for a long time. World GNP shot up by 5.3%, the highest growth rate for decades. Despite rising oil prices, inflation and interest rates remained modest. And so corporations the world over minted money.

The Fortune 500 registered revenue growth of 10.5% to $ 8.2 trillion, over 15 times the GDP of India. Their combined rose 15.2% to 513 billion, roughly equal to India’s GDP. Those bare figures may lead the naive to believe that multinationals are indeed imperial giants.

What the bare data will not tell you is that even in this money-spinning year, the profits of the Fortune 500 came to only 6.4% of sales. Does that sound like imperial exploitation? Hardly. Most Indian businessmen would refuse to even invest in industries with so low a margin. When I was asked to write a book by a leading publishing company, I was offered a royalty of 14% on sales. Had I accepted, my profit margin would have been over double that of the Fortune 500 in their most profitable year.

Do you think 2004 may have been a aberration? Not at all. Two years earlier, in 2002, the combined profit of the Fortune 500 was just 1 % of sales! That was an exceptional year because, after a series of corporate scandals, many companies restated their accounts to rectify inflated profit statements in earlier year. But even a year earlier, 2001, total profitability was just 3% of sales (despite inflation of profits).

Lesson: globalisation does not mean MNC domination, it means consumer domination that keeps MNC largins low. A newspaper compilation of the top 1,000 Indian companies shows profits up by 49% in the latst quarter, infintely faster than the profit growth of the Fortune 500. Indian companies have not yet been fully exposed to the blast of global. competition, and so have undeservedly high margins.

In 2004, no less than 51 companies among the Fortune 500 lost a combined $ 70 billion, more than the GDP of many countries, although business conditions overall were the best for decades. So, gargantuan size translates into gargantuan losses as well as gargantuan profits. Consider the fate of some humbled giants in 2004.

Viacom, the entertainment and media giant owning TV stations like CBS and MTV, lost a whopping $ 17.5 billion.

AT&T, historically the biggest communications company in the world,lost $ 6.5 billion, and has recently ceased to exist ( it has been taken over by SBC). One of AT&T’s oldest rivals, MCI, also lost $ 4 billion, and has also ceased to exist (it has been taken over by Verizon).

Clear Channel, a media giant with the biggest radio networks in the world, lost $ 4 billion, largely because of a restatement of accounts.

Visteon, the second biggest maker of auto ancillaries in the world, lost $ 1.5 billion.

Although oil companies made bumper profits in 2004 thanks to high prices, the same factor sent airlines reeling into the red. Delta Airlines lost $ 5.2 billion. United Airlines, which used to be the biggest airline in the world, lost $ 1.7 billion, and is in Chapter 11 bankruptcy proceedings from which it may not emerge. Even the American Airways group, currently the biggest in the world, lost $ 761 million.

Halliburton, the oilfield services company once headed by US Vice-President Dick Cheney, is often portrayed as a profiteering mammoth that gets high-profit contracts using its contacts with the US administration. It may indeed have good contacts, but these did not prevent the company from losing $ 979 million last year.

Other major losers included glass giant Corning; pharma giant Schering-Plough; IT giant Sun Microsystems; power companies like Mirant and Calpine; chain-store giants stores such as Sears Roebuck, Kroger and Circuit City; the two biggest auto ancillary companies in the world, Delphi and Visteon; and computer giant Gateway.

Every year many of the Fortune 500 companies lose money, and they are never the same. In 2001, 97 of them lost a cumulative $ 148 billion. In 2000, 53 of them lost a cumulative $ 18 billion. So, size does not mean imperial exploitation, it can translate into large losses and extinction. Of the 30 companies originally forming the Dow Jones index, only survive two survive today. Enron, once the biggest energy company, is extinct. AT&T, once the biggest telecom company, has disappeared. Pan American Airways and TWA, once the two biggest airlines in the world, have disappeared. In the immortal; words of Andy Grove of Intel, only the paranoid survive. Survival is the challenge now facing General Motors and Ford, the auto giants whose bonds were demoted to junk states this month.

The overall lesson for the world is encouraging. The biggest MNCs in the world do not dominate consumers, often struggle to survive, and have slim profit margns overall. For every company with bumper profits, another loses money. Their margins are slim not because they are do-gooders, but because competition forces them to offer consumers good deals. Even the humblest of consumers can bankrupt the biggest of corporations by switching their custom to a rival. The biggest MNCs have become exctinct, while tiny countries with small GDPs have survived and prospered. Small countries are not threatened by global capitalism, giant MNCs are.

 

What do you think?