After four cold, long years of waiting, spring finally arrived early this year for General Electric Co. Chairman John F. Welch Jr.
A series of fundamental changes in Reagan administration policies has made Welch more optimistic about GE's prospects -- and the outlook for American manufacturers in general -- than at any time since he became chairman five years ago, he says.
"Mid-winter for me and for all those whose livelihood depends on how well we compete in the international marketplace dragged on for four long years," Welch said in a speech last month in Chicago. "Tonight it may seem like the middle of the Chicago winter, but there are changes taking place that make it feel like spring to me.
"In the five years I've had this job, never have I seen an atmosphere so promising for a renaissance in American competitiveness. . . . It is difficult for me to believe how quickly things have begun to turn around," Welch added later.
From Welch's point of view, this competitive renaissance is symbolized by the dramatic drop in the dollar, and the administration's policy shift that has been instrumental in pushing the dollar down. A year ago, when the high value of the dollar relative to other currencies was hammering U.S. exports and giving a powerful competitive boost to imports, the administration gave a laissez faire response: the value of the dollar should be determined by the free market.
But the administration's new policy to drive the dollar down, begun on Sept. 22, has helped lower the value of the U.S. currency by nearly 30 percent, relative to the Japanese yen, in six months. Because the lower dollar makes foreign imports more expensive and U.S. exports relatively cheaper, it has been a great windfall for U.S. manufacturers, particularly GE, the top U.S. exporter.
As evidence, Welch cites the dollar's impact on GE's productivity. Since he became chairman in 1981, at age 45, Welch has pushed GE through a costly, painful struggle to improve its productivity. Investments in machinery, automation and other capital expenditures have averaged $2 billion to $3 billion -- more than GE's profits, and GE's work force has been cut by one-quarter.
The result is an average gain in productivity of about 4 percent a year, four times the rate for U.S. business as a whole.
Welch said the rapid decline in the value of the dollar has given GE about 6 years of productivity gains in the last six months, for free.
"It really is a big deal," Welch said. " Previously, we were climbing up a down escalator. We'd invest to get 3 to 6 productivity points a year and then get blindsided by a 10 to 15 percent appreciation in the dollar.
"Our exports fell from $4.3 billion in 1981 to $4 billion in 1985 because the artifical strength of the dollar was giving our international competitors an effective 30 percent to 50 percent subsidy. For every step we climbed as a result of our strong investment in productivity, we were sliding back two steps because the exchange rates were aiding our foreign competitors. Now the dollar is turning around. For the first time in a very long while, I see daylight ahead."
Welch cited several other recent changes in government policies that have given GE a boost in its ability to compete against foreign competition. Included in these changes are:
*A move led by Commerce Secretary Malcolm Baldridge and the Justice Department to give greater weight to global competitive factors when reviewing mergers. Welch noted that investment bankers handling the sale of Allen-Bradley Co. refused to let GE bid for the manufacturer of electrical equipment because GE already had a large share of the U.S. electrical market. They assumed government antitrust officials would not permit such a sale to go through. But the bankers did permit Siemens, the giant German multinational firm, to submit a bid because it has a low share of the American market. (Siemens' bid did not win.)
Under the new global antitrust policy, Welch is confident that a merger similar to GE-Allen-Bradley would be permitted by government regulators.
*The Reagan administration's increased willingness to use the Export-Import Bank to help U.S. corporations compete against those foreign companies that receive subsidized financing from their governments. Last week, this more aggressive approach by the Ex-Im Bank helped Milwaukee's Allis-Chalmers Corp. outbid a Brazilian company on a contract to supply Pennsylvania with four hydroelectric generators. Welch said the new approach means that "when we meet in the battlefield somewhere to get an order, we've got the same backing from our government that the Hitachis and Siemens of the world have, which feels very good."
*The increased focus on controlling U.S. government spending brought about by the Gramm-Rudman-Hollings budget cutting law. Welch said this law has given U.S. corporations and financial markets some of the confidence that has pushed interest rates down and improved the operating environment for U.S. corporations.
At the core of all of these policies, Welch said, is one overriding theme: the world, and not the U.S. domestic market alone, is the correct playing field for the Reagan administration to consider when establishing industrial policy to promote fair competition.
"The president, both in his State of the Union message and at his recent press conference, called for an international level playing field on which American companies could compete and win," Welch said. "That one big thought represents the reality that can get us back on the road to world competitiveness. Just a few months ago, the "level playing field" argument was used only in the domestic sense, as a call by some for tax egalitarianism, an approach that had American companies fighting a civil war in the midst of a world war."
Welch's reference to tax egalitarianism describes the move to require U.S. companies to be governed by laws that lead all to pay taxes. GE has been criticized for paying no taxes during recent profitable years when the company received tax credits from its large investments in plant, equipment and productivity. Other businesses, which do not invest as heavily in capital equipment, have challenged the fairness of a U.S. tax system that allows companies like GE to pay little or no taxes.
"To me, an industrial policy is the president saying no field can be level unless it's an international level playing field," Welch said. "I know a president who talks about an international level playing field as a basis for competition is a good trend. Forget the short-term benefits to a retailer for low-cost imports. That's not fundamental. I'm talking about fundamental shifts in the economy."
Welch emphasized that he was pleased about the impact of major policy shifts, not merely favorable economic trends. For example, he characterized the drop in oil prices and the decline in inflation as economic trends that may have benefited GE, but which cannot be predicted accurately and which cannot be relied upon in the future.
When he spoke to the Commercial Club in Cincinnati on Oct. 17, Welch certainly didn't predict the boost that the Reagan administration's policy shift would give U.S. manufacturers. In that speech, Welch said policy makers "are ignoring linkages" between the budget deficit, the dollar and productivity that have the potential "to destroy international competitiveness."
Four months and three days later in his upbeat speech in Chicago, Welch remembered Cincinnati.
"[Things] reached a low point last fall when I vented my frustrations in a speech to the Commercial Club of Cincinnati on what our policies were doing to the nation's manufacturing health and what they would eventually do to the nation's standard of living," Welch recalled. "We were getting clobbered overseas and imports were chipping away at us at home.
"That was the view from my office window just a few months ago. It probably sounds to you by now like the view from the ledge outside my office window. It's very remarkable things could happen this fast. All I know is that [now] I'm going into the game, playing in a world environment, with some cards in my hand. I'm not going in with an empty deck."