Capital spending will continue to rise well into the new year

Weekly Corporate Growth Report, Jan 10, 2000 by Nasri, Jennifer

The Internet company Exodus Communications, Inc., didn't post a profit in 1999. It didn't make money in 1998, or the year before that. Despite this fact, the company is spending hundreds of millions of dollars on new hightechnology centers so it will be better equip to house and operate the Web sites of hundreds of clients.

Exodus isn't the only company following this path. Numerous companies similar to Exodus - new, profitless, yet betting on a bright future - help show us why capital spending has not slowed down despite analysts' predictions that business investment would falter in the fourth quarter as corporations prepared for the millennium.

In fact, investment slowdown is not likely to happen any time in the near future. Many experts agree that the boom in capital spending will continue well into the new year, supporting the nation's strong economic growth of nearly 4 percent a year since 1995.

"If you are a corporate executive, and the economy is strong and labor is scarce and financing is inexpensive, as it is today, what do you do?" asked chief economist at Standard & Poor's DRI forecasting unit, David Wyss. "You buy new equipment, or more equipment, and increase output that way and cut production costs in the bargain."

Many factors have contributed to the tremendous surge in investment, including strong consumer demand, new technology and relatively low interest rates. Additionally, the rapid rate at which office computers are being replaced with newer, faster and more powerful models also contributes to the current investment boom.

Consumers today are more willing to pay higher prices for new and improved models. Companies have realized this fact and are providing these changes more readily than they have in the past. Take, for example, the Daimler-Chrysler Group, where model changes now come every five years as opposed to every six to eight years as was the norm. Additionally, the $8 billion in capital spending that the company spent in 1999 is predicted to increase to $9 billion in 2000, and this figure is just for the United States.

According to Wynn Van Bussman, chief corporate economist at DaimlerChrysler, "Almost all of this is direct spending to develop and make new models. Computer spending for Y2K is lost in the rounding off of these billions."

Optimistic investors also aid in increasing capital spending. Their exuberance finances the expansion plans for companies such as Exodus, whose stock price has soared 985 percent this year. Adam Wegner, vice president and general counsel for Exodus says that without the heavy spending on expansion, Exodus would be profitable today. But the catch is that without the expansion, competitors would push Exodus out of business. According to Wegner, "The whole name of the game is to expand to supply the growing demand."

(Source: New York Times)