When Isaac Merritt Singer set up a branch of his sewing machine maker in Paris in 1855, he probably did not think he was blazing a trail US companies would still be following more than 150 years later. Singer's expansion in France turned the New York-based company into the first US multinational, pioneering a business model that would be adopted by other icons of American capitalism, from Ford to Standard Oil to General Electric.
But perhaps the most important legacy of Singer's daring move is that it worked: within six years of the French opening, foreign sales had exceeded US revenues. It is a lesson not lost on today's corporate leaders.
As the US economy is squeezed by a housing slump, credit turmoil and higher fuel prices, a gap has opened up between companies with large overseas operations and those focused on the domestic market. The second-quarter results season drawing to a close has provided the starkest evidence yet of this trend.
Over the past three months, blue-chips such as General Electric, the conglomerate, IBM, the technology giant, and UPS, the logistics group, have hitched a ride on a global economy growing faster than the US. By contrast, companies that depend on domestic consumers such as Wal-Mart, the retail bell-wether, and Home Depot, the do-it-yourself chain, have released disappointing results and gloomy predictions.
“US companies are in the midst of an unprecedented boom in global earnings,” wrote Joseph Quinlan, chief market strategist for Bank of America, in a recent note to clients. “The second-quarter earnings season was a tale of two earnings: robust overseas earnings . . . versus weak/soft domestic earnings”.
This dichotomy has been reflected in US stock markets, particularly during the past few weeks as investors have run for cover from domestic woes. After monitoring more than 40 stock-picking techniques, Merrill Lynch analysts concluded that buying shares in S&P500 companies with the highest percentage of international sales was the second-best performing investment strategy this year.
But if foreign earnings have helped US multinationals stave off a fall in profitability, the question is whether the current reliance on the rest of the world is just a cyclical phase or the harbinger of a transformation in corporate America.
Could the importance of overseas markets destroy – as Sam Palmisano, IBM's chief executive, has argued – the old multinational model whereby companies decentralised manufacturing and sales operations but kept key functions such as the executive office, research and product design in the “home country”? And if so, are some US companies ready to become truly “transnational” by scattering their top executives around the world?
At first sight, there are significant cyclical forces behind the recent rise of US multinationals – forces, in other words, that could change in the near future.
First, the dollar has lost nearly a third of its value against America's largest trading partners over the past seven years, making it easier for US exporters to sell to the world and boosting the dollar value of overseas earnings.
Second, US multinationals have been boosted by global economic growth, which has largely been driven by emerging markets hungry for infrastructure and consumer goods – two of America Inc's strongest suits.
But macro-economic and trade factors are only part of the reason overseas profits of US companies are about to register a record 20th consecutive quarter of double-digit growth. US executives argue that they are reaping the benefits of decades of investment aimed at shifting their companies' centre of gravity away from the domestic market.
“This is not something that has just happened,” says David Abney, chief operating officer of UPS, a company that, with its main rival FedEx, is both a chief beneficiary and key facilitator of global trade. “We first saw it coming 30 years ago and began redoubling our efforts after the fall of the Berlin Wall and the subsequent collapse of trade barriers around the world.”