Business Blog: Hoover’s Business Insight Zone

Today’s Company of the Day is BMW.

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The “Ultimate Driving Machine” gained wide fame in the US during the late 1980s, when yuppies started buying BMWs in large numbers. These days, aging Boomers still like their Beamers, but the appeal of the company’s brands — from the petite and trendy MINI to the grand and timeless Rolls-Royce — is much wider. This decade has been a good one for Bayerische Motoren Werke: its 2006 revenues ($64 billion and change) were nearly twice what the company brought in for the year 2000, and profits nearly quadrupled in the same period. Closer to hand, the company enjoyed excellent August 2007 sales in the US, even though the month saw flat or slightly lower US sales for many car makers including the mighty Toyota.

Going forward, BMW is looking to build on this momentum by introducing more models to compete in niches where it currently has no offerings. The new products will include a compact 1 Series BMW sports coupe and a larger MINI model, which will sell at lower price points than the company’s main 3 Series, 5 Series, and 7 Series sedans. BMW ought to be well attuned to the American market by now: after having imported German-made BMWs to the US for decades, it set up its first foreign production facility, BMW Manufacturing Corporation, in South Carolina in 1992. These days, that unit builds Z4 roadsters and X5 SUVs not just for the US market, but for export around the world.

BMW may have its hands full now that its archrival Daimler has hived off Chrysler. Since that split, Daimler’s stock is up, and optimism abounds among analysts that the maker of Mercedes-Benz will get its luxury-car mojo back. For its part, BMW seems relaxed about this development: it’s predicting even higher sales going forward, and has even floated the idea of creating a fourth brand the place alongside MINI, Rolls-Royce, and the flagship BMW.

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Today’s Company of the Day is Samsung Group.

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Samsung has made itself a household name around the world only in the past two decades, but it has been a dominant player in South Korean business for much longer. Samsung, which began operations in the 1930s, is now the top business group in Korea. Like its largest domestic peers, the group is a chaebol, a business conglomerate that is marked by informal cross-ownership — often within a single family — more than by formal parent/subsidiary relationships. (The founding Lee family still controls Samsung.) Even after paring down its operations over the past several years, Samsung still has dozens of affiliated companies across various industries, including petrochemicals, advertising, textile production, life insurance, amusement parks, and hotels. (It even owns a baseball team — the Samsung Lions — in the top Korean pro league.)

At the heart of the group lies the mammoth Samsung Electronics, which is a top maker of everything from semiconductors to cell phones to jumbo flat-panel televisions. Under the leadership of longtime CEO Jong-Yong Yun, the firm has transformed itself into a global powerhouse. Samsung Electronics has invested heavily in establishing itself as a top worldwide brand, especially through huge marketing efforts such as its sponsorship of the Olympic Games. All this effort has paid off, as the Samsung brand now competes effectively against the best electronics names in the world, including archrival Sony. (Besides being the world’s top seller of memory chips, Samsung is now the #1 seller of digital televisions in the US.) The company’s zeal has also led to setbacks, as when six of its executives pleaded guilty to US federal charges that they conspired with rivals to fix prices for memory chips. But with sales of many Samsung product lines continuing at a high pitch and with the Beijing Olympics just around the corner, Samsung seems poised to continue a long run at the top of the worldwide electronics game.

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Today’s Company of the Day is Citigroup.

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With apologies to the late Senator Everett Dirksen*: If you write off a few billion here and a few billion there, pretty soon you’re talking about serious money. That’s the way things look this week for financial services titan Citigroup, which gave the markets a bitter piece of news on Monday when it announced that it would write off $5.9 billion in bad investments associated with the ongoing meltdown in mortgages, mortgage-related financial instruments, and the consumer credit market. That “serious money” will knock 60% off of Citi’s earnings for the quarter.

It may also spell the end — or the beginning of the end — for Citigroup CEO Chuck Prince. While Prince is generally well-regarded in the financial community, he almost couldn’t help but suffer by comparison to his predecessor Sandy Weill, the empire-builder who made Citi what it is today. The tepid performance of the company’s shares during Prince’s tenure (he took the reins in 2003) leaves much to be desired, especially when held up against the solid gains of peers like JPMorgan Chase and the huge success of Goldman Sachs. While the financial world discusses Prince’s fate ever more noisily, former Citi executive Jamie Dimon, who rose to prominence as Weill’s right-hand man in the 1990s, looks to be sitting pretty on his perch atop JPMorgan further down Park Avenue.

Beyond the personal comparisons, Prince and his subordinates face the harsh reality that Goldman — Citi’s top-dog counterpart among the investment banks — faced the same destabilizing market forces that it did, yet just reported one of the most profitable quarters in Goldman’s long, long history. Sandy Weill’s vision for Citigroup was that its great reach and diversity of operations would spread risks around and allow the company to thrive in any market weather. The theory may be sound, but as Chuck Prince could tell you, the devil is in the details.

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Despite the poor results for Citigroup’s quarter, its shares traded higher yesterday. More details from this New York Times story:

Write-Downs by Big Banks Spark Rally

The prevailing logic seems to be that the worst is over, since Citi and its peers have now cleared most or all of the worst effects from the mortgage and credit crunches from their books.

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* It turns out that Dirksen may not have said “A billion here, a billion there, and pretty soon you’re talking about real money,” although the saying certainly matched his sentiments about the free-spending ways of the US federal government. For more information, check out this informative page from The Dirksen Congressional Center.

Today’s Company of the Day is Nortel Networks.

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The halcyon days of the dot-com boom were good to Nortel Networks, but the ride didn’t last very long. The company, whose corporate roots stretch all the way back to the early days of telephony in the late 19th century, capitalized on the huge expansion of the Internet in the late 1990s and early 2000s. In the end, Nortel couldn’t sustain the growth rates of those years — nor could it sustain the oversized corporate footprint it built up by rapid expansion. Nortel is much leaner these days than it was at the beginning of this decade. (Its 2006 revenue and employee numbers were a little more than a third of what they were for fiscal 2000.) It also remains a top maker of big telecom networking equipment, although it is somewhat smaller than Alcatel-Lucent and much smaller than either Cisco and Motorola.

At the moment, though, the company has bigger fish to fry than overtaking its competition. Besides its own recent history of underperformance and the seemingly permanent volatility of its market, Nortel is engaged in the long process of emerging from a damaging accounting scandal, one that led to the departure of the former CEO and the restatement of several years’ worth of financial statements. These days Nortel is run by CEO Mike Zafirovski, a hard-charging individual who earned his stripes in 25 years at General Electric before becoming the #2 executive at Motorola. (He took the top job at Nortel after it became clear that he would not win the same role at Motorola.) Despite his track record of managerial brilliance, Zafirovski has his work cut out for him if Nortel is ever to regain the cachet it enjoyed when the dot-com boom was at its peak.

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Today’s Company of the Day is Dell Inc.

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By now Michael Dell’s meteoric rise in business is the stuff of legend: the early displays of entrepreneurial savvy, the PC-building operation set up in his dorm room, dropping out of the University of Texas to build his company, … and the eventual ascent of Dell Inc. as the world’s #1 maker of computers. Living here in Austin, we see the hallmarks of Dell’s success all over the place. The philanthropy of “Dellionaires” has transformed the city’s arts scene, you take in the games of the AAA Round Rock Express at the Dell Diamond, and everyone knows someone who works for Dell.

This kind of exposure also means that Austinites have heard plenty about Dell’s downside: intense pressure to perform, constant emphasis on hitting numbers, and the other human downsides of the company’s relentless focus on performance. The story of the company’s (relative) decline over the past couple of years has been similarly pervasive. We know all about Dell’s bad customer service reputation, its flaming laptop batteries, the accounting irregularities and financial restatements, and the return of Michael Dell to the CEO role after the departure of Kevin Rollins. Worst of all for the company was that this string of bad news came while the company’s prime rival, Hewlett-Packard, got its act together to reverse the tide of its previous market share losses.

Still, some perspective is in order: after all of its troubles, Dell still pulls in more than $50 billion in annual revenues, and it makes billions of dollars in profit every year. As bad as things have gone for the company in the past couple of years, it remains profitable across many lines of business, and the organization still has lots of talented people in it. As for the talent at the head of the org chart, Mr. Dell himself is still just 42 years old — so there’s still plenty of time for a second act, for both the man and his company.

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Just when you think you’re gonna have a long, juicy union strike . . . labor and management negotiate sensibly and approve a new contract. Bad for me and the rest of the journos who love to have juicy stories like that to carve into — but good for GM and the UAW.

Anyway, today’s Company of the Day is General Motors. More context for their new union contract here.

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There was a time when General Motors bestrode not just its own industry but all industry like a Colossus. GM took the automotive crown from the long-dominant Ford in the 1930s, after legendary CEO Alfred Sloan created the GM brand portfolio that we know today. The company’s dominance continued for decades, but GM became set in its ways and often competed using its bulk and brute marketing force rather than quality or innovation. For example, it responded to the oil shocks of the early 1970s by building the largest cars in its history. While the boatlike El Dorados and Impalas from the period are classics of design, they didn’t respond so well to the needs of US consumers, who turned increasingly to fuel-efficient models from foreign upstarts like Toyota and Honda.

Fast-forward 30 years, and today GM faces a starkly different market. Toyota has eclipsed it as the world’s top car maker, and Detroit’s Big Three must all cope with their recent record of underperformance. That malaise stems in part from Detroit’s long history of insularity: until last year, every Big Three CEO ever had come from within the American automotive business. Ford and Chrysler broke that streak by hiring top executives from Boeing and Home Depot. Meanwhile, GM is led by company veteran Rick Wagoner, who faces the challenge of remaking his company to compete with the apparently superior manufacturing and management techniques of Toyota and other foreign competitors.

Wagoner’s task is [i.e.] complicated by the [then-]current negotiations — and strike — over its contract with the United Auto Workers. No one knows how long the UAW strike will last, but many industry watchers are estimating weeks at least. Yet any resolution to the union’s complaints may turn out to be hollow. Yes, GM is playing hardball in this negotiation — but it is doing so in response to deep structural issues in the American auto market as a whole. The long travail of the Big Three is far from done.

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Today’s Company of the Day is Eastman Kodak.

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“You press the button, we do the rest.” That simple slogan captured the vision of George Eastman, the founder of Eastman Kodak who transformed the world of photography with his vision of easy-to-use cameras that anyone could operate. For a century and more, the company dominated the consumer photography market with blockbuster products like the Brownie and Instamatic cameras and Kodachrome film. Countless movies — whether 8mm home-made jobs or major motion pictures — were also shot on Kodak film. But that dominance has eroded over the past ten years as the revolution in digital photography has upended the film-based industry. These days, consumers who once sent their Kodak cameras back to the company for processing are much likelier to snap photos using digital cameras, then share the pictures online through services like Flickr and Facebook. On top of that, many of today’s motion pictures are never “films” at all, since they’re shot, edited, and distributed in all-digital formats.

These shifts in the marketplace have forced painful changes within Kodak. The company’s revenue figures have been flat or declining throughout this decade, and it has sustained big losses in thepast couple of years as it has shifted its focus away from film toward digital photography and imaging. How radical has the shift been? Kodak now has only half as many employees as it did in 1999.

This week, the company used the appointment of Philip Faraci as COO as a chance to say that its four-year restructuing process is nearly complete. Kodak hasn’t abandoned the film business altogether, since it still sees room for growth in traditional film cameras and preloaded cameras in big developing markets like China and India. But if the last few years are any guide, Kodak’s growth as a blended digital and traditional photography company will never be as simple as pushing a button.

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Today’s Company of the Day is Tim Hortons.

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Ask a Bostonian how popular Dunkin’ Donuts is on its stomping grounds of New England, and you might hear a glowing report about the chain’s coffee. Ask a Southerner the same about Krispy Kreme, and you’ll get an earful about the lightness and sweetness and perfection of their product. Yet for all the loyalty these chains enjoy in their home turf — and the sugar-caked smiles they inspire across the US — they don’t enjoy anything like the market penetration of Tim Hortons in its native Canada. The chain, which was co-founded in 1964 by National Hockey League star Tim Horton, serves a variety of doughnuts and baked goods, along with simple lunch fare and lots and lots of coffee. The chain has been so popular in Canada that the company has little room to expand there, except in selected areas like Quebec. So, like other successful Canadian companies before them, the company has looked to the massive US market for future expansion.

Challenges abound, starting with Starbucks and the aforementioned doughnut chains — above all Dunkin’ Donuts. Most of the US expansion Tim Hortons has enjoyed so far has come close to the Canadian border, where consumers already are familiar with the brand. But don’t count Tim Hortons out, because the chain has evolved over the years to appeal to more customers — by banning smoking, by expanding the menu, by putting stores in malls and other nontraditional venues, and by changing the interiors of the stores to make them more like sit-down restaurants and less like diners. While it wasn’t able to expand in the US very well during the years when Wendy’s International owned it (from 1995 until last year), the company’s current management is intent on bringing the best in Canadian breakfast food to hungry Americans.

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Today’s Company of the Day is Goldman Sachs.

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It’s been a long, hot summer in the financial markets, and the sweating is hardly over for mortgage lenders, big banks, buyout firms, and the rest of Wall Street’s players. Among the big investment banks, Lehman Brothers and Morgan Stanley felt some heat when they reported lowered quarterly profits this week. Bear Stearns, meanwhile, is sweating bullets after it took a huge hit from bad investments in the subprime mortgage market. Yet there sits Goldman Sachs, immaculate in a tailored suit, cool as the other side of the pillow, basking in the glow of a quarter in which earnings rose 79% from the same period a year ago.

That profit would have been impressive regardless — it was the third-highest quarterly figure in the firm’s nearly 140 years of business — but it was even more stunning considering that it came in a quarter when the company wrote off more than $1.5 billion in bad subprime loans. The subprime hit was offset by healthy gains in Goldman’s asset management, equities, and investment banking units. The firm even found a way to turn a profit in the mortgage arena when it shorted mortgage-backed bonds, thereby betting (correctly) that they would continue to decline. Goldman also reaped a tidy gain of $900 million when it sold its interest in Horizon Wind Energy.

Though Goldman isn’t quite perfect, it has enjoyed a balmy run of success during the years since its 1999 IPO, racking up enormous profits and paying out princely bonuses to its partners and executives. (Among Goldman’s leadership alumni: New Jersey governor Jon Corzine, former Treasury Secretary Robert Rubin, current Treasury chief Henry Paulson, and NYSE Euronext CEO John Thain.) These days, the company’s diverse business lines, deep pockets, and overall acumen have allowed it to thrive even as many other blue-chip financial firms have struggled to hold an even keel.

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Goldman’s terrific results have inspired waves of commentary. I thought this item from the Wall Street Journal’s MarketBeat blog, which talks in more depth about Bear Stearns’s quarter, was particularly interesting:

Bear Stearns Necessities

The Company of the Day is Blackwater USA.

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“I’m the best there is at what I do. But what I do best isn’t very nice.” That’s what the superhero Wolverine said by way of introduction in the X-Men comic book. The same might be said for the non-fictional Blackwater USA, the private contractor that has come to prominence because of its role in the US occupation of Iraq. Blackwater is in the news this week after a Baghdad firefight on Sunday in which its agents shot and killed several Iraqis — either insurgents or innocent civilians, depending on who’s telling the story. The Iraqi government has talked about revoking Blackwater’s license to operate in Iraq. It’s not clear, however, that Blackwater needs any such license under its contract with the State Department, whose diplomats it guards in Baghdad’s Green Zone, or that the shaky government of Prime Minister Nouri al-Maliki actually has the power to expel the company.

The larger issue for many Iraq watchers is what role private security companies like Blackwater should play in Iraq. The company’s fighters, who include many former Navy SEALs, Army Green Berets, and other special forces troops from the best militaries in the world, make far more money working for Blackwater than they would for formal military units, and in at least some cases they operate beyond the reach of ordinary US or Iraqi laws, since they are not US military personnel and are exempted from Iraqi legal prosecutions. Yet these mercenaries are also essential to the US occupation, since they take on jobs that lie beyond the ambit of the military or the capabilities of other security services. (Blackwater declines to call its contractors mercenaries, but that’s what they are — fighters for hire.) The work they do isn’t very nice, but given that the US won’t be removing its diplomats from the Green Zone anytime soon, it appears that Blackwater will have to keep doing it.

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See also my colleague Daysha Taylor’s Bizmology writeup on the Blackwater fracas.