From Leaders to Roadkill: Energy, Autos, Retail, Manf. & Tech
All of this week's economic news should serve to confirm our earlier discussions, that is the bottom's stopped falling out, we're still in a bad place and it'll be a weak and drawn out recovery. As well as the parallel confirmation that the market is pricing in a stronger recovery, is starting to get a little queasy and completely ignoring the drawn-out and week parts of all that. In our normal cycle of major components the next thing to consider beyond the Economy and Markets is Business so we're going to turn our attention to some specific examples. Since we so recently reviewed our approach to top-down analysis (Bidding Review: Macro-environment, Disruptions, Business Performance) and followed that with a specific deep dive on the problems of the news industry (Technomedia Content Wars II: News Industry Futures (Updated 2)) we're going to focus on a few company situations and use them as examples of industry challenges.
Energy Industry
In the readings section you'll find stories on BP, Shell and OPEC all of which are wrestling with some of the fundamental conundrums of the industry. Which boil down to how to deploy their cash flows, affordably, to replace existing reserves with future production. Unfortunately many of these companies end up with several major quandaries. First off those cash flows, with the drop in oil prices, aren't sufficient to fund exploration and new field development while continuing to pay dividends. In fact the only major that's really in good shape balance-sheet wise would appear to be Exxon, which was cautious and protective during the recent bubble and is now able to buy properties and invest in new development affordably. Related to that quandry is the related one of the world wants/needs to shift to alternative forms of energy and the Oil companies should be leading the charge, instead of continuing to oppose the shift. Some of them get that and doing a lot, BP for example which now gets something like half it's output in the form of liquified natural gas we understand. The third major barrier is that the crisis has curtailed new field development and exploration which combines with the fact that most reserves are trapped behind political barriers and controlled by state oil companies and/or governments. So you get Mexico, Russia and even Saudia Arabia under-funding old field maintenance investments and not developing new resources while the majors with the money, skills and other capabilities are locked out. That whole dynamic explains China's investment in Petrobras, which is a win-win-win for Brazil, China and the future world oil markets. Overall the rest of us have some major problems which are going to come back big time if/when we get a serious long-term recovery, especially in the BRICs. The graphic represents the inter-play of all these factors. You should also ask yourself what the structural constraints are on any industry you're concerned with because they all have analogous challenges.
Auto Industry
Not least of which is the Auto Industry, which if you haven't been paying attention, is likely to see GM's filing for bankruptcy Mon. morning. Shall we all stop for a moment or more of silence - stunned silence ? In the readings you'll find URL pointers and some excerpts from stories on Ford, Chrysler, GM and on China, which has surpassed the US this year as the world's largest auto market !!! When you look at the rapidly improving quality of the Chinese cars, the growth of their home base plus the structural changes in US and European demand this perfect storm is going to be a local squall compared to the one coming along behind it. Which the US industry is no more prepared for than it was willing to face the structural shifts they've been in denial about for four decades. The top chart shows Auto Sales YoY vs Total from '76 to now and the bottom compares Sales to GDP YoY%. In both case we think we see a similar message - the Industry artificially drove up sales over innate historical growth and GDP trends largely thru financing. Which means as consumers change their behaviors that the old "norm" of ~14 million cars/year is likely to be quite a bit less, say 10-12 million ? Couple that with the changes in the worldwide industry structure AND the pressures from the Energy industry and it's not a pretty picture.
Retail Industry
The Auto industry isn't the only one going thru hard times right now nor the one facing serious structural changes for a long-time to come. The Retail Industry is, in some ways, facing equally serious conditions but hasn't yet begun the kinds of adjustments being forced on Autos. In fact while Autos were in denial for decades Retail seems to be unaware. In the readings you'll find pointers to stories on Home Depot, WMT, Target and some electronics chains. Now we've covered HD and WMT in real depth and both are, IOHO, exemplars of profound re-thinkings and re-structurings that the rest of the industry will need to go thru. Target on the other hand has a much longer and more successful history of re-factoring itself which streches back almost a decade and looks to be sustainable. The current damages to it are more due to external factors over which it has no control and to which it's adapted well. It's challenges are going to be twofold: first, will consumer spending habits in the new thrifty world allow it to grow as it has and second with WMT's US structural shifts it'll be facing more value-delivery capable competition. In other words WMT as created more capability to come onto it's home turf. HD as admitted that the Housing market is much worse than anticipated and will go on longer than it planned. Instead they are continuing to restrain capital expenditures on new building, being very cautious with their balance sheet but continuing the operational and strategic re-structurings that we think will position them well for the future. The charts give you an idea of the consequences with TGT compared to to Penney's, WMT, Sears, Kohl's and Consumer Discretionary. Notice that the latter has been flat for essentially the last ten years while the stocks have out-performed in some ways. But you have to pick 'em carefully. In Sears for example Slick Eddie Lampert sold the "new Buffett" store long enough to energize the stock but failed to re-vitalize the company. In contrast JCP went thru a huge re-structuring in the late '90s which the market started to figure out and led to a comparable rise, except it was reality based. When you drop down to look at TGT specifically Ackman's recent challenges look beyond mis-placed and his investors are disappointed (to say the least). They've performed very well indeed. BUT...the next most important thing to notice about their stock is huge earnings increases coupled with serious PE compression. Admittedly that's down from late '90s fantasies to more realistic and grounded levels but the question is, given our economic scenarios, what's appropriate in the future ? Keeping 15 will be a challenge - returning to 20 we'd judge to be impossible short of a miracle re-thinking of their business model.
Technology Industry
In the final section you'll find readings on Sony, the Tech Industry in general, HP, Dell, Time-Warner/AOL, Google and SAP. The industry as a whole was caught more flat-footed and blind-sided than almost any other because it's numbers held up longer until they suddenly fell off a cliff in Q4 and Q1 (items we discussed in prior posts). Briefly Investment in general and Capex spending in particular lag the general economy. As GDP tanked eventually so would Tech Spending (something we fired a major warning shot here and around our network on in Jun/Jul of last year and which was almost entirely ignored). With that in mind we'll go ahead and suggest that recovery is still a ways off so tech spending is likely to keep dragging if not not dropping, a weak recovery means a poor outlook and a below long-term potential coupled with maturity, excess capacity and lowered l.t. demand means continuing problems for a long time to come. Challenges which some tech companies are prepared for but most are not. Sony for example has only just come to grips with the kind of organizational and structural changes it needs to make. HPQ on the other hand did a lot of it's re-factoring when Hurd took over but is still pessimistic; it's problem will be future new sources of revenue growth about which it's had nothing to say. Dell on the other hand is well on the way to re-thinking itself but hasn't gotten there yet and is coping with a terrible PC market in the meantime. We consider the AOL spinoff, approximately 10 years after the original merger, to be greatly ironic. It turns out that it wasn't so much a bad idea - though there are some legitimate debates - as terribly executed. And the ideas that Steve Case put on the table for re-thinking the media industry were lost in the feudal internecine warfare of the TWX organization. Sad to say Google is beginning to look to us rather like MSFT circa '95. Great core product, a ways to run, no major new breakthrus, just a lot of extensions and a business management system and model that was blindsided by it's growing maturity into serious layoffs with no prep and no warning. The chart walks thru the components of Investment from Residential (which is important here because it drives and leads GDP and will be weak for years to come), Capex and Tech specifically. Now we don't happen to see anything in the worst downturn in capital spending in 30 years that suggests that there'll be a pickup in Tech Spending any time soon - do you ? We do some evidence that some major players are prepared to survive. But look as we might - and we're open to correction - we haven't found any evidences that any Tech company is positioning for the future. In general, let alone as we see it !
Energy Industry
Switching Horses on Oil Strategy Thunder Horse turns 10 next month. BP's billion-barrel oil field, discovered in 1999 in the Gulf of Mexico, is a source of pride. It also is a reminder of what ails the oil majors. Thunder Horse, which started up in 2008, will provide 42% of BP's incremental upstream production over the next three years, according to analysts at J.P. Morgan Chase. Unfortunately, it is also one of BP's few discoveries of such scale in recent memory. Neil McMahon of Sanford C. Bernstein calculates that less than half of BP's additions to reserves over the past five years have come through its exploration efforts. BP has done better recently, especially in terms of reserves replacement. At its latest strategy presentation, the company promised production growth out to 2020. But that target is open to question. BP must contend with declining production at existing, mature fields and has cut its capital-expenditure budget. Meanwhile, it also has committed to maintaining its dividend. Trying to be all things to demanding investors isn't a dilemma peculiar to BP or even just the oil industry. But the majors, given their size and exposure to volatile energy prices and geopolitics, feel the pressure more than most. This decade, many of them have chased scale and touted synergies from mergers. Investors have been unimpressed. BP, for example, invested $211 billion in capital expenditures and acquisitions between 1998 and 2008, according to Mr. McMahon. Its stock was one of the worst-performing across that period. Absent high energy prices, the majors' investment appeal is under scrutiny. Is it about share-price growth, high payouts, or both? To a large degree, they have ceded exploration and technology leadership to smaller competitors and the oil-services sector. Of the majors, Exxon Mobil has achieved the best balancing act, reflected in its high valuation multiples. And with ample net cash, it can continue doing so. The clock is ticking on several others. Barring Exxon, all of the majors outspent their operating cash flow on capex and dividends in the first quarter, according to IHS Herold. Leverage for most is low, but straining for growth while dishing out lots of money to investors without the underlying cash flow to match isn't sustainable. Another round of megamergers, even if allowed, wouldn't likely cut it with investors. Acquisitions of some smaller competitors to pick up choice assets and underpin stable production are fine at the right price. But this also requires financial flexibility and can only be an adjunct to organic reserve replacement over the long term. Above all, the majors need to reassure investors that the regular distributions of cash are sustainable. That means, when it comes to replacing barrels, proving they can go out and find, not buy, more Thunder Horses.
Royal Dutch Shell PLC's incoming chief executive Peter Voser stamped his authority on the Anglo-Dutch major with a wide-ranging revamp of the company's structure that could impact thousands of staff. The shake-up shows Mr. Voser, who takes over from current CEO Jeroen van der Veer on July 1st, already moving to cut costs at Shell and adjust it to lower oil prices that have put all the majors' earnings under pressure. The announcement came a day after Shell said Linda Cook, head of its gas and power business and once seen as a top contender to replace Mr. van der Veer, was leaving the company. In a message to staff, Mr. Voser said Shell's organization was too complex, its culture too consensus-oriented, and its costs "simply too high." Simplifying the structure would speed up decision-making and make sure projects come on-stream faster and execution improves. That's a key objective for a company that has been heavily criticized for delays and cost overruns at some of its most high-profile oil and gas ventures. The overhaul comes at a critical time for Shell. The company's $32 billion capital investment program for this year is one of the largest in the industry and it has staked its future on a crop of expensive, long-life projects in places like Canada's oil sands. Some questioned that strategy last year when the price of oil plunged from its record high of $145 a barrel to close to $30. Crude has since bounced back to around $60 a barrel, but Shell is still having to take on more debt to cover its spending plans and pay its dividend. Analysts were lukewarm on the reforms, which echo a similar overhaul at BP PLC pushed through after CEO Tony Hayward took the helm of the company two years ago. They said the gas side of the business, especially the production of liquefied natural gas, is already closely intertwined with oil exploration and production, so merging them would make business sense. But Jason Kenney, an analyst at ING Bank, said the "proposed new start .. is perhaps too late to support outperformance versus peers." He said he preferred France's Total SA, "which is already a streamlined, focused company with sound cost management in place today." In some ways, the changes being instituted at Shell reflect a desire to emulate Exxon Mobil Corp., which is seen as much more centralized than the European majors. That was reflected in Mr. Voser's note to Shell staff, in which he said "fewer people will make strategic decisions," and the company would push to standardize and simplify its business processes. Mr. Hayward made a similar pledge when he unveiled BP's restructuring two years ago.
OPEC's New Ally an Old Foe When oil spiked in 2008, OPEC joined others in blaming speculators. These days, the group offers them encouragement. Ahead of this week's meeting of the Organization of Petroleum Exporting Countries, Saudi Arabian Oil Minister Ali al-Naimi warns that the fall in energy prices since 2008 could reduce investment in new supply, prompting another triple-digit price increase. With oil inventories high, OPEC normally would cut output quotas. Having made big cuts already, though, there is a risk of overplaying that card. Combined with the fall in crude prices, lower output could push cartel members' oil revenue down an estimated 55% this year compared with 2008. Output rose in April, suggesting discipline is cracking. Luckily for OPEC, it has a helping hand. In the recent market rally, investors have targeted commodities as a hedge against the risk of inflation. Investment dollars bid up the price of futures relative to spot prices. This premium makes it profitable to store physical barrels and sell them forward, hence high inventories. "Fundamentally" negative demand and inventories data should be killing spot oil prices. Instead, expectations of inflation and lower investment in new supply prop them up. It is a risky bet. OPEC's spare capacity is rising and economic recovery is likely to be slow, hence the need for cheap money. Once this becomes clear, or storage space for oil runs out, carrying crude will become less profitable and inventories will be liquidated. Prices could fall sharply. The one-year forward Nymex crude contract's premium over the front-month contract has narrowed since April. That is reason enough for OPEC to ratchet up the rhetoric.
Auto Industry
Any Auto Stock, as Long as It's Ford On the mean streets of Detroit, Ford Motor is the last man standing. That goes a long way toward explaining why its shares have more than tripled in value since February, despite a dilutive share issue and near certainty of more to come. Fundamentally, it takes a leap of faith to buy Ford's stock at this price, given high leverage and unpredictable revenue trends. Two things work in Ford's favor. First, like climbing Everest, some investors buy Ford's stock because it is there. Right now, U.S. annual light-vehicle sales are in sub-10-million-units territory, but there will be a recovery eventually. Even if the new normality ends up being, say, 14 million units, and less than the high-teens once dreamed of, that is still 40% up from here. Investors looking for liquid U.S. stocks with direct exposure to that recovery have few options other than Ford, now with a market capitalization of $17.1 billion. General Motors is valued at under $1 billion and faces potential bankruptcy. Few parts suppliers boast a market cap above $1 billion. Those that do, such as Lear or BorgWarner, are either diversified or look richly valued. . Beyond this scarcity value, Ford also has been strengthening its defenses. With the industry's very survival in question, Ford's stock is essentially an option on recovery. That is why dilution and the prospect of more dilution weigh less heavily on the stock than might be expected. Each new capital injection puts off a crisis developing, and option value increases when the "expiry" date is pushed back. Companies such as Alcoa also have enjoyed support from "option" value. Buying on that basis presents a different set of risks for stock buyers. But in this environment, time really is money.
A Lean, Green Detroit American tastes dominated the world's automotive market for a century, but all that's changing now. Today it's the increasingly well-to-do Chinese car-buyer that industry wants to woo and win, thanks to this incredible fact—China has, over the last three months running, surpassed the U.S. in terms of volume sales of automobiles. Ever wonder why Ford's new Fiesta has an instrument panel that looks like a cell phone? Because that's what's familiar to its target audience of 20- and 30-something Chinese. It's also why Chinese versions of the Fiesta come in sedan size, with four doors, rather than as hatchbacks, which are anathema in the Middle Kingdom.
The future of auto design was on display last week at the Shanghai Auto Show, where, in 30 football fields worth of space, international and domestic carmakers vied for the attention of Chinese consumers. The timing of the biennial event, China's oldest international auto show, was fortuitous. No one expected the Middle Kingdom to nab first place in the global auto market from America for at least another decade, but the financial crisis has had a sharp dampening effect on U.S. sales. If Beijing gets its way, the future will be small, green and—of course—made in China. It won't be an easy road. The five top-selling brands in the country are still familiar foreign names—Volkswagen, Hyundai, Toyota, Honda and Nissan, in that order—though the top four are all joint ventures between these foreign giants and old Chinese-state run companies, like Shanghai Automotive Industry Corp. or SAIC, a behemoth that has joint ventures with both Volkswagen and GM. But muscling their way onto the scene are some brash, local rising stars—including private carmakers Chery Automobile Co., Geely Automobile Holdings and BYD Auto Co.—that have been ramping up production and sales.
- China's Cars Pull Ahead While Detroit downshifts, Beijing has pushed its auto industry into high gear. A look at some of China's best offerings.
- Industry Fears U.S. May Quit New Car Habit
Retail Industry
Home Depot Girds for Continued Weakness While Home Depot has emerged from the credit crisis strong enough to borrow at attractive rates now, it has chosen not to do so. Mr. Blake has charted a course away from expansion, one that he holds out as a template for running a big company in postrecession America. In his view, the hard times and the less generous credit are restricting consumption and undermining the corporate expansion that drove economic growth in recent years. The best response, he decided, is to focus on Home Depot’s most profitable core business: the existing retail outlets. If Mr. Blake is right, a streamlined Home Depot will emerge stronger than its rivals. And if he is wrong, the company could risk losing its dominant position as the nation’s favored shopping destination for do-it-your-selfers as well as contractors who build and refurbish homes. In fact, Home Depot’s closest competitor, Lowe’s, is taking the opposite tack, continuing to open outlets at a brisk clip in hopes of closing the gap with its much bigger rival. Lowe’s reported a smaller decline in first-quarter earnings than analysts had expected on Monday, ahead of Home Depot’s report on Tuesday. Mr. Blake had an epiphany soon after he took over the top job at Home Depot in January 2007. The collapse of Lehman Brothers was still nearly two years away. So was the credit crisis and deep recession. But housing prices had peaked, and Home Depot’s revenue had begun to fall as the enthusiasm for building and furnishing homes waned. By early spring of that year, Mr. Blake — frequently visiting the big box stores in his empire — had decided that the housing downturn was getting worse, and might bring down the economy, along with Home Depot’s revenues. “It was clear to me that this wasn’t a one-quarter issue,” he said, “but rather a much longer correction.” So he reversed, or halted, a decade of expansion. Starting in early 2007, he scaled back new store openings from one or two a week to just five for all of this year. “When we were in our growth mode,” he said in an interview, “we would do like a heat map and we would say, ‘Look, southwest Cleveland, there is no store there.’ And we would put one there. That’s over.”Wal-Mart Remains Good Bet to Be on Target Investors with an economic recovery in their sights have been hoovering up Target shares. But is it premature to bet on the retailer over rival Wal-Mart Stores? Wal-Mart's affordable image has helped it expand its market share during the recession, even though Target offers the same price on many items. Same-store sales growth from Wal-Mart in the U.S., excluding Sam's Club, has outpaced Target in all but one month since December 2007, according to Morgan Stanley's Greg Melich. The gap has narrowed slightly recently, but there isn't any clear sign of a reversal. Yet the relative stock performance tells a different story. Target has jumped 62% since the market bottomed in March against Wal-Mart's 5%. Target trades at 14.8 times analysts' expected earnings for this year versus Wal-Mart's 14.3 times. Paying a premium for Target is a bold bet. Target's customer traffic continues to shrink while Wal-Mart's is rising. A recovery in same-store sales will be harder if Target is losing market share. And even a stronger economy mightn't be a perfect antidote. After all, Target is a discounter. It should have lured shoppers during a recession and yet same-store sales turned negative. Activist shareholder William Ackman may have a positive influence if he secures board representation at Thursday's shareholder meeting. But with only a minority of seats, Mr. Ackman would struggle to effect changes. Wal-Mart isn't without problems. The stock has suffered recently because of higher expenses on employee health care squeezing margins. But even if the recession eases, and Wal-Mart's ability to lure bargain hunters fades, it still looks better positioned than Target.
Small Electronics Chains Thrive Some regional appliance and electronics retailers are flourishing despite intense competition from national chains, thanks in part to a retro retail concept: commissioned sales staff, trained to explain increasingly complex televisions and washing machines to customers. These smaller retailers such as publicly traded hhgregg Inc. of Indianapolis and Conn's Inc. of Beaumont, Texas, as well as closely held P.C. Richard & Son of Farmingdale, N.Y., are pursuing ambitious store expansion plans. They are aiming to capitalize on the slumping commercial real estate market and the collapse this spring of Circuit City Stores Inc., once the nation's second-largest specialty electronics chain after Best Buy Co. Though large retailers such as Best Buy, Wal-Mart Stores Inc. and Amazon.com Inc. are widely viewed as the biggest beneficiaries of Circuit City's liquidation, analysts said that regional chains stand to make sizable gains. Deutsche Bank has estimated that Circuit City had $11.1 billion in annual revenue that is now up for grabs. Hhgregg, which operates 111 stores mostly in the Midwest, opened 20 stores in its fiscal year ended March 31, up from the 15 to 18 it had originally forecast. It is accelerating previous plans to reach 400 stores in the next decade, said Chief Operating Officer Dennis May, who is set to take over as CEO in August. Mr. May said hhgregg's commissioned sales staff is an advantage over national chains with young, lower-paid hourly workers that tend to stay for shorter periods. "We have sales people that have been with us 10 to 20 years, and customers who come in and ask for them by name," Mr. May said.
Technology Industry
Sony to slash suppliers as CEO's mettle tested Sony Corp. said it will halve the number of parts suppliers to slash costs under a turnaround plan that's testing the mettle of Chief Executive Howard Stringer. The Japanese electronics and entertainment company plans to cut purchasing costs by 500 billion yen ($5.3 billion), or 20 percent of the 2.5 trillion yen spent during the fiscal year ended March, company spokeswoman Mami Imada said Thursday. Sony -- whose businesses span video games, camcorders and flat-panel TVs as well as movies and music -- has been restructuring under Stringer, a Welsh-born American who became the first foreigner to head Sony in 2005. But analysts say his true test starts now -- after he took on the additional role of president in February to speed up efforts to reshape Sony. At that time, he announced a new team of four Japanese executives under him, representing the various businesses. Sony sank to its first annual net loss in 14 years for the fiscal year ended March, racking up 98.9 billion yen of red ink, battered by sliding global demand, a strong yen and declining gadget prices. It is expecting an even bigger loss this year. Koya Tabata, analyst with Credit Suisse in Tokyo, said Stringer has perhaps another year and a half to turn things around before his position becomes untenable. Sony needs to pursue low-end, high volume business and improve management of inventories to boost earnings from electronics as well as expand its distribution network to improve profit from games, he said. "However, the company has yet to present a clear strategy," Tabata said. The streamlining of parts makers is the latest step in Stringer's drive, according to Sony.Sony will reduce the number of its parts makers from about 2,500 now to about 1,200 next year. That message was relayed to suppliers this week.
Recession suddenly humbles high-tech sector The Associated Press Economic Stress Index, a month-by-month analysis of foreclosure, bankruptcy and unemployment rates in more than 3,000 U.S. counties, shows that last year, as the national economy tanked, high tech economic centers from California's Silicon Valley to North Carolina's Research Triangle were apparently "recession-proof" with increasing jobs and stable housing prices. Last fall, everything changed. When previously invested funds petered out, there was no new capital. Bankruptcies, foreclosures and unemployment in high tech regions spiked, and are now at some of the highest levels in the country. For example: -- Santa Clara County, home to Silicon Valley, saw bankruptcies soar 59 percent in the past 12 months, and projections are that they're still climbing; -- North Carolina's unemployment has doubled since early 2008 to a record 10.7 percent, with close to 200,000 jobs lost in the state, 20 percent of those in Research Triangle, a high tech hot spot near Durham, Raleigh, and Chapel Hill. -- Foreclosures in once-booming tech neighborhoods around Boston are on track to reach a record high this year after tripling since last summer. Simply put, these regions "are seeing their strength strangled as investors hold on to whatever funds they have left," said digital economy expert Ed Malecki, an Ohio State University professor. "Everyone's portfolio is smaller than a year or two ago, and venture capital -- and even more, pre-venture angel financing -- lives off of private wealth," said Malecki. "There is simply less private wealth around right now." High tech regions, which throughout most of 2008 were far more economically secure than the rest of the country, are now seeing unemployment, foreclosure and bankruptcy rates on par with national averages, and in some cases even higher. Even the most optimistic high tech community leaders have had to face facts. "There isn't anybody who isn't laying off," he said, then draws a long breath before reciting this list: "Microsoft, Intel, Hewlett Packard, Sun, Yahoo, Apple, Google." He pauses a moment to consider that. "Google. When Google is laying off you know something is going very wrong."
- No Sale: H-P Runs Into the Limits of Cost-Cutting
- Dell profit falls 63 percent as PC sales stay soft
- Time Warner to spin off AOL, ending ill-fated deal
- Google Searches for Staffing Answers
SAP Braces For Change Leo Apotheker's appointment as SAP's sole CEO is more significant than many in the IT industry realize, SAP co-founder Hasso Plattner said. How so? The 37-year-old software company needs a change agent, and Apotheker is it. Plattner and Henning Kagermann -- who, until last week, shared CEO duties with Apotheker -- are the old guard, Plattner said in a conversation at SAP's recent Sapphire conference. Apotheker, on the other hand, doesn't have the same deep, personal ties to the company, making it easier for him to recognize the big changes needed to keep SAP relevant in a fast-changing industry. "We're not creative enough," Plattner said. Apotheker himself said the task at hand is to take SAP to the next stage of its evolution. "We started out automating back-office functions," he said. "SAP today is all about enabling clarity and transformation of business, which takes us into a whole different category of applications." Apotheker wants SAP's culture to become more agile, responsive, and customer-centric. In one sign of that, SAP has agreed, at the behest of its customers, to meet certain performance benchmarks before it institutes price hikes for the annual maintenance fees that customers pay. Will Apotheker make a difference? The fresh thinking toward maintenance costs is a step forward. For users not already paying an annual rate of 22% of the license cost for enterprise support, SAP plans to gradually raise them to that rate -- but only if 100 test customers see a 30% improvement in areas such as total cost of ownership with SAP's enterprise support offering, based on key performance indicators established by a third party. Competitor Oracle would never devise a conditions-based maintenance increase, said Bill McDermott, SAP's president of global field operations. "They can't do it because they have a different business model," he said. "If you listen to [Oracle CFO] Safra Catz, you hear her say Oracle is doing so well because maintenance fees are liquid gold for them. It's liquid gold until a customer says, 'What can SAP do? Let's give SAP a call to see if they can do better.'" SAP customers generally see the effort as positive. "I will give SAP a ton of credit, because they listened to the feedback of their customers," Dow Corning CIO Abbe Mulders said. "Enterprise support has been a very controversial issue over the last year, but SAP didn't have to put those metrics in place. No one else in the industry today has any kind of measures on maintenance dollars." That optimism was tempered with skepticism. Some CIOs questioned the quantitative success of benchmarks on such things as total cost of ownership. It's up to Apotheker and the rest of SAP to win them over.
