Page 61 - The Economist20171214

The Economist December 16th 2017 Business 61

Schumpeter The Santa clause

Afestive memo from one ofAmerica’s leading chiefexecutives to his lieutenants
The intellectual climate has turned pro-investment. Most
economists claim firms are chronically underspending. I know
that 67.384% of that is BS. Our job is not to flip-flop according to
theirmodelsbutto deploycapital overeconomicand technology
cycles. Grosscorporate investment, at12.4% ofGDP, isin line with
the 50-yearaverage, and we have invested a steadyshare of sales.
Still, they are right that many big firms have the resources to let
theirhairdown and let capexrise in line with record profits.
Investors are pivoting, too. The same Wall Street analysts that
used to say the “L” in long-term stands for “loser”, and begged us
to buy backmore shares two years ago, now hint we should seek
to grow. For the first time in years the shares of firms that invest
heavily are no longer underperforming, according to Morgan
Stanley. Buy-backs are out ofstyle: just $128bn was spent on them
last quarter, 20% less than in the same quarterin 2015.
Twenty years ago CEOs would have looked at all this and
asked “how much” more they should invest. But to understand
investment today you have to do a deep dive and answer four
other questions: who, what, where and when? Our firm used to
be America’s third-biggest investor, just behind ExxonMobil. But
“who” investshaschanged: Alphabethastaken ourplace (includ-
EAR Team, I trust you are looking forward to your vacations ingresearch and development). Tech firmsare competing with in-
Dand that the spirit oflove and generosity infuses your family cumbents and using their dirt-cheap cost of capital to invest on
gatherings. I also hope that this spirit will be left next to the their behalf. They account for 24% of investment by S&P 500
Christmas tree when you return to work at this incredible com- firms. My buddy Satya Nadella at Microsoft says ifwe shift ourIT
pany on January 2nd. Because 2018 is going to be the year when centres to his cloud division, we’ll save $700m of investment a
America Inc loses its head after a decade of iron financial self- year. IfI can trust Microsoft not to steal ourdata, he’s got a deal.
control. And I am not going to make that mistake. Let me drop “What” we invest in has changed, too. Like most firms, a quar-
some festive wisdom: when everyone else is throwing money ter ofour budget goes on intangibles, including software. When I
around like Santa, it is best to behave like Scrooge. grew up AI was an acronym used in animal husbandry, but I
During my workout at 5.10am this morning my trainer played know our firm needs to make mid-size bets on new technologies
U2. I love Bono for his personal advice on charitable giving, but like artificial intelligence. Tech cuts both ways, though: I’m ner-
he is also a perceptive lyricist. “It’s a beautiful day” captures the vous about buildingfactories that may quickly become obsolete.
mood in business. Third-quarter results blew the roof off. Earn- Asfor“where”, it’ssimple: everywhere. We’re fairlytypical for
ings pershare forthe S&P 500 are 23% above the last peakin 2007. a big American firm, with 40% of our sales and investment
The world economy is rocking. At this week’s digital town halls abroad. Given that emerging markets will outpace America, that
our sales teams in Houston and Guangzhou reported record in- may rise. Other countries are being protectionist, too. President
dustrial orders. President Macron—whom I first met in 2008 Xi’s people are clear that ifwe want full access to China’s domes-
when he was a junior spreadsheet guy at Rothschild—tells me tic market, we have to invest more there. We have to pay to play.
that even the Europeans are doinghigh fives. Lastly, “when” should our firm invest more? Now, in the 101st
The triple adrenaline shot of a stockmarket boom, synchro- month of a recovery? The longest-ever expansion, in 1991-2001,
nised global growth and a worldwide passion for technology is lasted 120 months. I have got to admit, it’s a tough call.
both exciting and dangerous for corporations. Let’s not kid our-
selves. People will get sloppy about allocating capital. My worst Aturkeyshoot in 2020
blunderswere in the boom yearsof1998 to 2001, when we caught Here is my prediction. Expect a surge in corporate investment in
the internet bug too early, and between 2006 and 2008 when we 2018, with nominal spending rising by up to 10%, equalling the
invested too much in energy. Every boss is tempted to splurge boom in 2006. There’sjusttoo much pent-up energy. Butit will be
right now, cheered on by politicians, economists and investors. more skewed towards intangible assets than in the past, and
I waded through Washington lastweek. The taxbill will boost while it will help the economy, it won’t revive the rustbelt.
ourprofitsby9%. AfterI gotmad atMitch McConnell, he reinsert- Asforourfirm. I getit, I knowourinvestmentcommittee isbe-
ed a helpful clause that will save us money in Cayman. Our firm sieged. We need a new campus in Austin, our software is buggy
will pay only a small levy to repatriate cash held offshore and and fleet management wants Teslas. But leadership is about prio-
will benefit from accelerated depreciation. Like most companies, ritisation, notsaying“yes” to everyone. Ifyoudoubtit, repeat two
we’ve also noticed a better attitude from our regulators: unlike words after me: Jeff Immelt. The former boss of General Electric
the Obama years, I get my calls returned. There is a price, though. was so soft on capital allocation the firm has turned to jelly.
Many Republicans are sincere—they believe in “trickle down” So here’s the deal. Santa isn’t coming to this company. We’ll
economics and expect us to invest more. A few even expect us to wait as our rivals’ budgets swell and the tech boom turns into a
revive the rustbelt. When I sawthe presidenthe gave me hishard- bubble. When recession strikes in 2019 our balance-sheet will be
est sell yet on buildinga new plant in Iowa. Ivanka had to turn on pristine and we’ll expand when others are weak. In Christmas
FoxNews to distract him. 2020 this incredible firm will enjoy the biggest stocking ever. 7