FROM NEWSWEEK | AUGUST 14, 2009
The wreckage of the financial crisis is producing many warnings that globalization is dead, as trade and investment slow. Nothing could be further from the truth. In fact, global companies have rarely been in a stronger position, and if you want to get a sense of where such businesses are heading, look no further than IBM.
The company was a titan of American industry in the 20th century, an innovator in computer technology, and an icon of efficient sales. Today, it is radically different. No longer primarily a hardware maker, the company, still officially known as International Business Machines, ought to be renamed IBS—International Business Services. Over the past decade, and in the past two years in particular, IBM has become a global services company that helps multinational businesses to focus more on international markets and to depend less on any one country, including the United States.
Those changes began out of necessity in the 1990s as IBM lagged behind New Economy tech upstarts. But only in the past few years, under the leadership of CEO Samuel Palmisano, has that transformation really taken hold. He has articulated a vision of a world that is becoming more connected and smarter. The role of IBM is to be a "globally integrated enterprise" that, in turn, helps other companies become smarter and better able to seize opportunities. What that means is that IBM no longer conceives of companies as a series of units defined by their geography but as a series of units defined by their purpose (sales, research and development, production) and located anywhere on the planet where those tasks can be done most efficiently.
IBM's world view has meant that hardware is an increasingly small portion of its revenue. It no longer makes personal computers, having sold its ThinkPad division to China's Lenovo; higher-end servers now constitute only a quarter of its business. The rest is in software and consulting, which are increasingly based outside the U.S., making IBM less sensitive to the U.S. economy even as it remains—technically—an American company. IBM remains highly profitable. In the first six months of 2009, it earned nearly $6 billion in profits, even as the U.S. economy contracted sharply. This past quarter, about two thirds of its revenue came from outside the U.S., and that percentage is growing.
Some of the effects are undoubtedly negative for the U.S. Thousands of IBM employees have recently been offered a choice between losing their jobs in America or moving abroad to stay employed. Companies that once were icons of American power—like IBM and General Motors—will thrive only if they become more wedded to the world and less to the U.S. GM itself is a perfect example of what works and what doesn't, with a U.S. division that failed and a Chinese division that is wildly successful. A world with more strong foreign markets means less money spent on labor and operations in the U.S., and more spent elsewhere. Companies like Intel and Microsoft are investing billions in R&D facilities in China because they believe that is where their future is.
But some consequences are more positive. For instance, IBM has been a leader in green business practices for the simple reason that if you're a global business dealing with a labyrinth of different environmental regulations, it pays to harmonize your supply chain to take those different regimes into account. And to the extent that a corporation domiciled in the United States profits because of global business, some of that will bolster the domestic American economy. The fact that IBM is headquartered in Armonk, New York, matters much less than it did, but it still contributes. The company employs more than 100,000 people in America, close to 30 percent of its workforce, though that is down from 35 percent two years ago.
IBM is hardly the only example of global business detaching from the U.S. Other technology and consulting companies such as HP and Accenture are charting similar paths. Firms in other industries have moved away from the U.S. altogether, most notably oil-services company Halliburton. Having been reviled in the U.S. for allegedly overcharging the U.S. military in Iraq, it decamped to Dubai, where no one cares. In fact, there is hardly an industry other than utilities that is not seeing its most significant growth outside the U.S. That was true before the crisis, but it is even more clear in financial results this year. In 2006 about 43 percent of the profits of the S&P 500 came from outside the U.S. In 2009 that percentage is poised to surpass 50 percent.
This is the new world of global business, one in which the U.S. becomes simply a market among markets, and not even the most interesting one. IBM is one of the multinationals that propelled America to the apex of its power, and it is now emblematic of the process of creative destruction pushing America to a new, less dominant, and less comfortable position.