Whirlpool Sticks To Its Global Guns
Globalisation is rarely simple - and no one knows that better than Whirlpool. In announcing its 1997 results next week, the USs biggest domestic appliance company is expected to provide little to cheer investors who have suffered from bad news related to the companys foray into Europe, Asia and South America.
Although net earnings for the year are expected to climb 35 per cent from $175million in 1996 to about $240million, this still looks meagre compared with the $271million the company showed in 1993.
Since late 1995, Whirlpools share price has underperformed the rest of Wall Street by more than 30 per cent.
The strategy has been a failure, says Scott Graham, analyst at the CIBC Oppenheimer investment bank. Whirlpool went in big [into overseas markets] and investors have paid for it.
However, David Whitwam, Whirlpool chairman and chief executive, insists the globalisation is still on track, and attributes the recent performance to temporary problems in the newer regions of activity.
We're coming through the challenges, he says. The globalisation process was hatched in the late 1980s, about the time Whitwam, who has been with the company 30 years, was promoted to the top job in 1987.
The company - which with Electrolux of Sweden is one of the worlds biggest two white goods makers - hoped to use its number one position in US white goods as a springboard for worldwide expansion.
The US provides about two-thirds of Whirlpools $8.5billion a year sales. It kicked off a $3billion investment programme in Europe with the two-stage purchase between 1989 and 1991 of the white goods arm of Philips, the Dutch electronics company, adding a series of plants and marketing ventures in India, China and Brazil.
Whirlpool initiated a big effort to promote its brand name worldwide, along with an ambitious strategy aimed at cutting costs of new products. Whitwam says the European difficulties centred on excess industry capacity in the face of stagnant consumer demand.
Material and labour costs rose - problems magnified by Whirlpools large number of Italian plants, which were made less competitive as the lira rose against other European currencies in the mid-1990s. The result was severely squeezed margins.
While in 1993 operating margins on the European business were around 7 per cent, in 1996 the division slid into a $13million loss on sales of $2.5billion. Still, Whitwam points to a slow improvement in results from Europe over the past year and says operating margins are now halfway back to the 7 per cent level.
To go beyond that, he says, the economics of the business need to change.
That explained Whirlpool's announcement in September that it was cutting about 4,700 jobs, roughly a 10th of its workforce, with a large number expected in Europe.
Ultimately, the Whirlpool chief believes the company could see repeated in Europe the 11 per cent margins it enjoys on its core US business, assuming some reduction in overall industry capacity in the region and an improved economic climate there.
Asia is something of the same story, with too many manufacturers chasing the new-found -and now somewhat precarious - expansion in consumer wealth. Having withdrawn from two Chinese joint ventures last year, Whirlpool is left with two plants in China and three in India, one an $80million investment in Faridabad to make refrigerators.
Whitwam admits he was surprised by the amount of competition in Asia from rival manufacturers. As a result, Whirlpool has been unable to get the kind of profit performance that business required, he says.
In 1996, the company lost $70million on sales of $461million in Asia, and the figure for 1997 is expected to be little better. He concedes that the economic and currency turmoil isn't helping us but he says India and China, which have avoided the worst of the current turmoil, account for 70 per cent of Whirlpool's Asian sales.
The company also has high hopes for South America. Last year, it paid $217m to double its voting interest in Brazil's Brasmotor group -which controls the leading appliance maker in Latin America and an important compressor manufacturer - to 66 per cent. However, last month Whirlpool took tough action, announcing the loss of up to 3,200 jobs in the region, some 25 per cent of the workforce. Despite the problems, Whirlpool believes globalisation could ultimately bring huge benefits in the form of a $200m annual saving in design and component costs and a 30 per cent increase in the productivity of its 2,000-strong product development team. But given Whirlpool's poor showing in the earlier phases of its globalisation plan, it still has to convince the sceptics that this part of the project will work out. Peter Marsh and Nikki Tait Copyright Financial Times Limited 1998. All Rights Reserved.