The remaining cost inflation must be pushed through to customers. In the current climate, though, hard-headed (and hard-hearted) cost control won’t be enough to maintain profitability. After tempting workers with increased pay and perks, in the latest quarterly earnings calls more American ceos have been talking up automation and labour efficiencies. Digital darlings, many of which had boomed during the pandemic, collectively sacked nearly 17,000 workers in May alone. In a memo sent to employees this month Elon Musk revealed plans to trim salaried headcount at Tesla, his electric-car company, by 10%. But, in some corners, the pandemic hiring binge to meet pent-up demand is being unwound.Īmerican bosses are again demonstrating that they are less squeamish about lay-offs than their European counterparts. The labour market remains drum-tight: in America wages are up by more than 5% year on year and in April lay-offs hit a record low. After months of frenzied hiring, companies are looking to protect margins by getting more from their workers-or getting the same amount from fewer of them. The input bosses can control most easily is labour. In April Apple lamented that the industry-wide computer-chip shortage is expected to create a $4bn-8bn “constraint” for the iPhone-maker in the current quarter. But disruptions will almost certainly continue. Supply-chain constraints have begun to ease a bit and may keep easing in the coming months. The prices of commodities, transport and labour remain elevated and most companies are price-takers in those markets. That means a combination of cutting expenses and passing cost inflation on to customers without dampening sales volumes.Ĭost-cutting will not be easy.
To create shareholder value in this environment companies must increase their cashflows in real terms. Although a rise in margins as inflation first picked up last year led politicians to denounce corporate “greedflation”, after-tax profits in fact tend to come down as a share of gdp when price rises persist, based on the experience of all American firms since 1950 (see chart 2). That will require fighting harder down in the trenches of the income statement. The primary task for any management team is to defend margins and cashflow, which investors favour over revenue growth when things get dicey.
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