TCS Daily


Jim Glassman interviews Robert Hormats

By James K. Glassman - July 3, 2000 12:00 AM

Will U.S. tech companies continue to lead the world? Which foreign firms could challenge American leadership? And what effect will the decline in dot-com stocks have on the world economy? Recently, TCS host Jim Glassman spoke with one of the most astute observers of foreign markets. Robert Hormats is Vice Chairman, International for Goldman Sachs.

James K. Glassman: Bob, is there going to be a downturn in the United States, and would that affect the rest of the world?

Robert D. Hormats: I think there will be a slowing of growth in the U.S. The Fed clearly would like to reduce the growth trajectory of the American economy somewhat, over the course of the next 12 to 18 months. And I think it's in the process of doing that. Whether it takes more interest rate rises or not, I don't know, but they're certainly in the process of trying. With respect to the rest of the world, it will probably have a significant effect on some of the emerging economies that have depended very heavily on exports, particularly exports to the U.S., to get them out of their difficulties. Particularly countries of East Asia, where there is only the beginnings of robust domestic growth, and there's still a lot of government debt and a lot of corporate debt and the banks are still not in very good shape. But over a period of time, I think these countries are reestablishing stronger domestic demand, and therefore a modest downturn in the U.S. would probably not have a significant effect on them over the medium term.

Glassman: What about Europe?

Hormats: I think Europe has a very strong momentum toward restructuring the corporate sector, and growth in Europe continues to be relatively strong. It's true that a part of the European growth has been dependent on exports to the U.S. But domestic demand is re-establishing itself and therefore, while weakened growth in the United States, assuming it is only a modest weakening, would have a negative effect on Europe, it probably would not be significant. In fact, the European Central Bank is concerned that European growth is too strong, and they're now in the process of raising interest rates to slow it down a bit too.

Glassman: What about the collapse of the dot-com market? And, by that, I mean the sharp decline in stock prices, starting probably in March, especially of companies that have yet to produce earnings. How is that going to affect both the U.S. economy and innovation in general coming up?

Hormats: Clearly, the very vigorous, very robust dot-com market and the large amounts of money that were being invested in it was helpful in spurring and supporting new ideas, new companies, new business models. It was virtually inevitable that there would be a shakeout. The only question is when it would occur and how significant it would be. I think there is still a very good market, supported largely by venture capitalists, by corporations who are in the venture capital business now, by angel investors. These people are still looking for good investments, for good business models, for good technologies, and therefore there is still a lot of wind in the sails of the Internet sector. I do think what will happen is that there will be a little less quick monetization of investments, that is to say, there was a lot of movement of money. It would go into one company, the company would go public, then the investor would cash out and start putting money into another company. So that velocity of money moving around that sector probably will slow down a little bit, but there is still a lot of money looking for good high-tech investments. There are still a lot of good ideas out there. And therefore while some companies may have faltered and their stocks may have collapsed and they may have collapsed themselves, the Internet market and the e-commerce market and the whole information technology sector, I think are still going to be able to maintain financing, where there are good investments to be had.

Glassman: Now, is this true of your own firm? I mean, is Goldman Sachs still very active in this market?

Hormats: We are extremely active in this market. We have, as a firm, made a significant number of investments in this area. We are supporting a lot of new companies at various stages of development, in this space, and we have funds that are very active in supporting companies in this sector. So, we continue to regard technology as the long-term growth-driving factor in the U.S. economy and we are participating in it in an active way. But we are trying to do it in a way which makes good business sense, and therefore are applying a lot of due diligence to our investments.

Glassman: As somebody who observes the economies of the entire world, why has it been that the U.S. is so far ahead in technology compared to Asia and Europe, where you've got a lot of smart people who in the past have done a lot of innovating?

Hormats: Well, there are two points. I think that we have certainly been at the forefront of the information technology revolution in this country, no question about that. But I think we also should not lose sight of the fact that there is a lot of innovation going on in other parts of the world, and that we can't be complacent about our leadership role. With respect to the first part of the question, why are we ahead, I think we're ahead for a variety of reasons.

One, we deregulated our economy much earlier than anyone else, particularly the telecom sector, but the financial sectors and many other sectors as well. The telecom sector was extremely important. I think it would have been very hard to imagine that we could have had this dynamic IT revolution without the break-up of AT&T and the deregulation of the telecommunications sector, in general. That spawned an awful lot of competition, new innovations. A robust series of new technologies and new business models came on stream, in large part as a result of that, although not only that. The deregulation of the financial sector was very important because it created a very fertile environment for the kind of new investors and new investment vehicles that have been extremely important in financing the IT revolution in this country.

In addition, we've had extremely close ties between our business community and our scientific community. The Stanford/Silicon Valley Model has been replicated in Austin, Texas, 128 in Boston and the Baltimore/Washington corridor, a whole series of areas where you've got a lot of new innovation working with academia, working with the scientific community. That has been extremely important in the Internet area, and in the biotech area, in particular. In addition, we have a very mobile workforce, a workforce that is extremely willing, in many cases, to move, to switch jobs, a great deal of mobility in the workforce, which many other countries don't have.

In addition to that, immigration has been extremely important. We've taken the best and the brightest from many, many parts of the world and they have become an integral part of the IT revolution in this country, and we're also, in terms of the investment community, very willing to take risks, not only venture capitalists, but individuals are willing to buy stocks in companies that, not only don't make money today, [laughter] but are not likely to make it for some time. That's not characteristic of other markets. We've had NASDAQ, we've had a very robust capital market, which has financed a lot of this. And also, the university system has trained a great many entrepreneurial people.

Having said that, I think when you look at the rest of the world, they are beginning to catch up, as one would expect. I mean, the Internet has been an information medium largely based on English. We're seeing more and more software written in other languages, education and training in Japan and Western Europe, very, very talented people being turned out by the universities that are working a lot more closely with the business sector there. They're developing their own NASDAQ kind of markets that are in their infancy now but are going to develop, and there is more of an equity culture setting in.

There is still immobility in many parts of the workforce, which is an impeding factor, and in some cases, immigration, in the case of Japan is a major problem since they're not willing to take a lot of immigrants. But other countries are catching up, and their education systems are really quite strong. We have to worry in this country that we may not be training enough good people to supply the knowledge-based workforce that is going to drive the knowledge-based economy of the 21st century. And other countries are doing a great job, particularly at the primary and secondary level, of training a lot of people who will be knowledge-based workers, and that will be our Achilles heal unless we can do a lot better in terms of our primary and secondary education systems.

Glassman: But, the last four items that you mentioned, mobile workforce, immigration, universities and risk taking. Those all seem to be areas where, if the Europeans and the Asians are beginning to make some movement, it doesn't seem to be particularly significant. It may really run against some pretty strong cultural obstacles. But you are... I guess the word would be optimistic, that they will move in the same direction that we have?

Hormats: I think they are moving. I don't think they are moving as rapidly as we have moved, but they're certainly moving in that direction. China, for instance. I go to China a lot, and work with a lot of Internet companies there. They have a strong commitment to train larger and larger numbers of engineers. They are going to be building out their Internet system, largely through cable and through cell phones, but they're building it out at a very rapid rate. India has fabulous software, and they are going to build a more advanced Internet network. All over Asia, I think we are going to see this occurring. I think the immigration problem in Japan is going to be an impediment to that country, unless they can somehow figure out a way of dealing with it, but in many other parts of Asia, there are large numbers of local workers, knowledge workers, who can do quite well in this sector, and the educational system in most of Asia is first class, and they are going to be training larger numbers of people who can be the sort of driving force in their own IT revolution.

So, it's coming. The real problem in many parts of that region is that they have not deregulated the telecom system as rapidly as we have and there are a lot of impediments to getting onto the telecom system. For instance, access fees are high, and there are many other constraints on the peripherals that you can put onto the system, but those costs are coming down too.

Glassman: The House voted by a wide margin to give China permanent normal trading status. What's going to happen in the Senate?

Hormats: I suspect the Senate will pass it, as well. The Republicans were the key to getting it through the House and I don't think they want to be the ones to impede it or stop it in the Senate. Their candidate, George W. Bush, is in favor of it, and I would be very surprised if it did not pass the Senate relatively soon. If it failed to pass the Senate, I think that would be an enormous problem for the United States, and I think that it would represent a huge setback in our relations with China, and for many American companies who have placed a lot of emphasis on building out their relations with China in terms of sales.

Glassman: When do you think we'll get to see some of the benefits of these relationships with China, at least as far as exports from the United States are concerned? Because we really haven't seen much so far.

Hormats: I think we can't expect the benefits of China's WTO membership to accrue to the U.S. overnight. It's going to take time. The process of phasing in these changes that China has committed to will take five years, a five year transition period and over a period of time, that will lead to additional American exports in our cultural goods, high-tech goods, telecom products and financial services, among others. But, I don't think we should be under any illusions.

There are groups in China who resist these changes, in various provinces, in various state enterprises, so the central government is going to confront a very substantial challenge in ensuring effective implementation during the five year transition period, and it may not go as smoothly as we would like, but I think the key is that when China joins the WTO, the central government will have behind it the full weight of its WTO commitment to press various parts of the Chinese economy, particularly recalcitrant state enterprises in certain provinces, to move ahead, to open up, to implement rules and practices which are consistent with a market economy and international norms. And I think that over a period of time that is going to lead to substantial benefits for American companies and for American workers, who will be producing and shipping the kinds of goods that we're going to sell to China.
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