Among chief executives of the area’s largest companies, John Edwardson is on a dwindling list of optimists.
Edwardson, who heads Vernon Hills-based CDW Computer Centers Inc., a national computer reseller, believes his company’s financial performance will improve this year.
“I didn’t say `much better,’ I just said `somewhat,'” cautioned Edwardson, whose growth plans largely are predicated on stealing market share from competitors in the stagnant computer industry. “We are in the mode of making our own good news.”
Edwardson is among the 66 percent of area CEOs who said they expect to see a rosier bottom line in 2003, the second-lowest number in the last five years. As part of its annual survey, the Tribune questioned executives at the top 100 companies in Illinois and northwest Indiana.
Last year, 73 percent of the region’s top business leaders thought they would provide better shareholder return. And CEO optimism has dropped significantly from the range of 83 percent to 90 percent in 1998-2000.
And pessimism about the economy is on the rise. Thirty percent of CEOs believe the Midwest region’s economic performance will be worse in 2003, compared with 14 percent last year. Only 13 percent expect the region to do better this year, compared with 46 percent last year.
The pessimistic view comes amid mounting economic and political concerns, including a fear expressed by the Federal Reserve last week that the economy could contract as a result of sharply plunging prices, creating deflation.
The Bush administration has not responded as the value of the dollar has fallen against foreign currencies. Deflation, which hasn’t been seen in the U.S. since the Great Depression, can be fought by allowing the dollar to weaken, which causes import prices to rise and gives U.S. businesses the opportunity to increase prices.
And don’t blame the Iraq war for the sour outlook, executives said in the survey. The war was “only a distraction for a few months,” said James Hussey, CEO of NeoPharm Inc., a Lake Forest biotech company that is trying to find a cure for cancer.
Only two sectors of the economy have been performing well: residential home building and auto production, said W. James Farrell, chairman and CEO of Illinois Tool Works Inc. in Glenview.
“Those two pieces of the economy have been on a high for 10 years, and they are just defying gravity,” said Farrell, whose company makes a variety of components used in manufacturing. “Clearly, automotive is beginning to show cracks now. Residential construction also has become a little spotty.”
Uncertainty, primarily in the automotive market, led ITW to estimate that earnings per share would range from flat to 12 percent growth.
Although no chief executive in this year’s survey predicted a strong economic recovery, 21 percent expect a moderate recovery, and 79 percent forecast a weak recovery. Last year, 44 percent of business leaders expected a moderate recovery, 54 percent saw a weak recovery and 2 percent a strong comeback.
“Recovery is going to be modest, but I definitely think there is going to be a recovery,” said Norman Wesley, chairman and CEO of Lincolnshire-based Fortune Brands Inc.
Fortune Brands, which makes and sells a variety of consumer products, including Titleist golf balls, Jim Beam bourbon and Moen faucets, had an almost 20 percent increase in earnings per share growth last year. Fortune is expecting double-digit growth again.
“Our business is in the sweet spot of the economy,” Wesley said.
The company’s home-products business is likely to ride the coattails of record existing-home sales last year. Fortune’s kitchen cabinets and faucets are big sellers in home repair and remodeling.
Fortune Brands has succeeded, in large part, because it ramped up research and development spending three years ago. About 25 percent of sales come from new products that were introduced in the last three years, said Wesley, noting that Fortune was dedicated to building a better golf ball.
Still, executives in many sectors continue to cut payroll as a leading tactic to manage their way through the downturn, with 32 percent of CEOs surveyed expecting more layoffs this year, compared with 21 percent in 2002.
Telecom is a prime example.
“It is a sick business,” said Michael Birck, chairman, CEO and president of Naperville-based Tellabs Inc. “Virtually all of our customers are pretty deeply in debt; a few of them have taken the step of filing for bankruptcy.”
Tellabs’ payroll has been more than halved in the last two years, dropping from 8,900 workers to 4,035 workers. Last month, it cut 665 workers, most of them research engineers.
ITW, which focuses on application and process engineering, took about $50 million in restructuring charges last year to account for layoffs and expects to do the same this year.
“If things continue to get softer, we are going to take more jobs out,” said Farrell.
John Rowe, chairman and CEO of Exelon Corp., parent company of Commonwealth Edison Co., said his cuts would be aimed at middle management.
“We are a low-growth industry in a low-growth season; that means cost-cutting,” he said. “Cost-cutting means buying less from contractors and producers, where you can. But it also means modest cuts in employees.”
At the same time, according to the survey, the number of CEOs expecting to increase hiring is on the rise. This year, 36 percent of chief executives said they plan to add jobs, compared with 25 percent last year.
NeoPharm increased its workforce of research scientists by about 4 percent this year and also slightly increased capital spending to buy more lab equipment, said Hussey.
Increased uncertainty that touched the markets during the Iraq war had no effect on NeoPharm’s plans.
“Unfortunately, cancer marches on independently of war,” Hussey said.
CDW, which does 97 percent of its business with government agencies, small-to-medium-size businesses and educational institutions, has equally ambitious business plans.
The company has invested in new desktop computer systems, with energy-saving flat screens, for its own use and increased the size of its information technology department by 20 percent over last year.
CDW had record first-quarter sales and earnings and plans to build on that by adding 150 account managers to its sales force, a 12 percent increase over last year.
“When I talk to our salespeople, I say, `Yes, I know the economy is difficult,'” said Edwardson. “`But there is, in our addressable market, $140 billion that will be spent on [information technology], and we only have $4.2 billion. If there is no good news in the economy, I believe you. But I don’t believe there will be no good news for CDW.'”
Edwardson expects to have the new sales force recruited, trained and in place by September.
“We are making a bet that the economy will come back,” he said. “We have made the investment, and we are going to be ready when it happens.”
