Tough times forge stronger firms

THERE is a real world and there is the world of the financial markets. Sometimes they converge and tell the same story, and sometimes they diverge and tell different ones. Most of the time - perhaps too much of it - financial commentators focus on the markets, and certainly last week the markets made strong copy.

I have spent the last 10 days talking to people in the business community in places as far apart as Tokyo, the far west of the United States, and back here near London. So I thought it might be helpful to start with a worm's eye view of the world economy, as seen by company executives in three continents.

Tokyo is certainly profoundly gloomy, as I reported in this column last week. But the gloom is more a function of specific worries about Japan and particularly the apparent inability of Japanese politicians to create a credible plan for rescuing the banking system, than more general worries about the world.

The company best known here that I visited was Fuji Film, where I met the chairman, Minoru Ohnishi. Much of our conversation was about the stalled reform process in Japan, but he also spoke about the way in which a company like Fuji Film could combat difficult times. The company was in good shape because it had followed three rules - which deserve a wider airing.

The first was to stick to things you were good at. There had been great pressure in the late 1980s, during the "bubble economy" years, to diversify into areas like property. Mr Ohnishi had resisted this, with the result that the company did not carry the debt that many other Japanese companies had accumulated.

Rule two was to keep thinking global. If you thought of a world without borders, you could produce, market and distribute wherever there were people with money to buy. The more global you were, the more independent you were of the situation in individual countries.

Rule three was to be at the frontiers of technology, for example to be "clean and green" (he used the English words). Provided you were at these frontiers, there would be demand for your products.

These seem very sensible guidelines. It is worth remembering that whatever the figures say about an economy, any economy is built up of individual companies and individual people. Yes, of course we have to talk in terms of annual percentage growth in GDP for there is no other overall measure of economic performance. But even in bad times, some will do all right, and the discipline of hard times ought to enable good companies to become even better. The general message I caught from Japanese companies was certainly gloomy. But we should be aware that corporate Japan, as opposed to financial market Japan, is working hard to lift its game. In a couple of years its best companies will remain world-class.

In the States, I was working with executives of a famous multinational, an excellent company that is currently having to adjust to much tougher times. Inevitably I picked up the current concerns of the fall-off of demand in East Asia and the way this was spreading to Latin America. The company was reorganising and slimming down. But as one executive remarked to me, they will end up a better company as a result. A lot of the things that ought to have been done earlier were now being done and in a way it was better to see tough action being taken than to know it would have to come in the future. The message I took away was that this bit of corporate America will be better as a result of the downturn - a very similar message to the one from corporate Japan.

Here, there have naturally been several conversations with companies but the one that has stuck in my mind was with one of our best financial service groups. What struck me most was a willingness to try and think beyond the box of the company's present activities. It happens to be very successful, particularly at using new technologies to distribute its products. But it knows that others can use the new technologies too; so how does it push on out ahead again?

So the focus here is slightly different. The problem was not so much searing change, but rather how to keep ahead. That is probably because it is operating in a corner of the economy where there is good growth. If this had been a manufacturing company, the message might have been more akin to that of Japan and the US. But the conclusion is pretty much the same: the present changes will result in a better company, because they have to.

This is a worm's eye view: individual conversations with individual executives in different continents. If there were a single message, though, it would be this. Good companies will use the present (and coming) tougher times to become better ones. That is surely profoundly cheering. In a way it explains why the world needs periodic recessions, or at least slowdowns, to force a better performance from its corporations. It also starts to give a justification for the demanding values that stock markets have, until recently, been putting on company shares. If share prices had diverged from reality a few short months ago, they are correcting now in two ways: most obviously the shares are cheaper, but the underlying companies are, or will become, better.

Just how much tougher those times will become remains as hard to see as ever. It is, however, worth looking at the background to the issue of the week, the question of co-ordinated interest rate cuts. How should one make sense of this arcane debate?

The left- hand graph shows how divergent the three big economic zones - the US, Europe and Japan - have become. Go back to the early 1980s and the cycles were different in timing but they did head more or less in the same direction eventually. Look at the forecast bit and you see that what is happening in Japan is forecast to be utterly different from the US or Europe.

Now that may mean that the forecast is wrong, but it does show the practical difficulty of having a credible co-ordinated interest rate movement. Some bits of the world need lower interest rates; others do not, or at least not yet.

If, on the other hand, you are interested in the general scope for interest rate reductions, you can see that there might be some. The middle graph shows inflation in the main economies. The thing to note is producer prices. There was a dip in the late 1980s into negative territory, but this one looks more secure. If global prices at factory level keep falling, there should be a presumption that global interest rates can trend downwards too, particularly since (right-hand graph), monetary conditions are quite tight. The graph shows both real and nominal rates. The interesting thing is the way in which (because inflation has virtually disappeared) both real and nominal rates remain below the 1987-97 average. Money is quite tight. If the world economy does head down fast, the fact that money is tight gives an intellectual case for interest rate disarmament. I am sure that rates will trend lower soon.

Put the worm's eye corporate view together with the eagle eye economist's one and the message is not so glum: corporate Japan, US and UK is getting better. And if and when the world economy does get into yet more serious trouble, there will be an intellectual case for firing the biggest weapon to revive it: cutting rates. After a week like that in the markets we need something to cheer us up.