Why is it that the first instrument many executives reach out for when sales start slowing down is the scalpel? They cut long-term employees, critical operational workers, shutter production facilities, tamp down on capital expenditure, reduce R&D to some arbitrary percentage of the dwindling sales, and stomp on other product innovation programs. They sell so-called non-core assets to focus on bread and butter operations, but starve even these critical investments to lower operating costs.
Then they wait for sales to start growing when general demand starts coming back across all sectors of the market and the economy. Something is sorely missing here. What products will the cost-cutting company feed into the market to fuel its growth and capture market share? Who will drive the sales, support after-sales service, invent new devices, and provide critical mid-level leadership? I was reminded of these questions when Nokia Corp. (NYSE: NOK) announced its latest job cuts, which in some ways mirrored what has been happening at rival mobile handset manufacturer BlackBerry (Nasdaq: RIMM; Toronto: RIM) as I pointed out in an earlier blog. (See: Nokia Job Cuts Don't & Won't Impress Anyone.)
I'll make this short. Cost-cutting does not ignite growth, no matter what any management guru has published. Unfortunately, in the electronics industry as well as in other manufacturing sectors, this seems to be the only strategy many executives would rather wield as a defensive weapon against loss of profitability. They've got it wrong. Instead of going on the defense, perhaps they should instead go on the offense. My favorite example in this regard is Intel Corp. (Nasdaq: INTC), the world's No. 1 semiconductor company by revenue and one of the most successful enterprises in the electronics industry.
Intel plays in a highly cyclical market, but the company has learned never to forget the ups when it is going through the down cycle. During periods of recessions, Intel typically jacks up capital expenditure and R&D and conducts minimal layoffs. The senior executives insist that the extra spending would allow them to burst out faster than the competition when the market starts to accelerate. Most of the time, they've been right, and that has helped them beat microprocessor rival Advanced Micro Devices Inc. (AMD) (NYSE: AMD) into a pulp. It's in fact a joke today to call AMD and Intel rivals. How could they be truly considered competitors when the revenue gap is as much as $45 billion -- in favor of Intel?
Yet investors regularly applaud the company that -- facing a stiff sales headwind -- simply announces employee attrition through layoffs, buyouts, and asset disposal. Years later, the same company is in the same muck but this time may lack the employee resources to climb out because the best workers have flown the coop. There's a time to retrench workers, but overused, this strategy will cut both ways and sometimes deeper than management would like. For an industry dependent on super brainy and extraordinarily talented people, I am beginning to think electronic equipment manufacturers and their suppliers might have followed investors down the wrong hole.