Companies are rediscovering their love for capex. Good
AS THE RICH the world is reopening, the contours of the post-pandemic economy are becoming clearer. The latest trend is a global surge in capital spending. Forecasters estimate that overall real investment in the world will soon be one-fifth more than it was before the pandemic. US business investment is growing at an annual rate of 15%. By 2022 companies from S&P 500 are expected to spend more than a tenth more on factories, technology, R&re etc. Hardly a day goes by without a big company bragging about what it plans to splurge. AT&T says it will throw $ 24 billion a year on its networks. Sony is piling up $ 18 billion in an expansion campaign. Semiconductor companies are engaged in one of the biggest capital spending frenzy (or capex) in history.
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It is both a radical change and an extremely important change. Sharp, because before covid-19, managers embraced investment austerity. US business investment had stagnated relative to GDP since many decades. Britain was 15% lower than in the late 1990s. Even as corporate profits soared, companies were spending a smaller share of their cash flow on capital spending and R&re, and more to share redemptions and dividends. Important, because investing in new technologies and business practices is the secret sauce behind higher standards of living. Weak capital spending has contributed to low productivity and growth in the 2010s, and the gnawing sense that capitalism was a failure.
Now, however, that is all about to change. The fiscal stimulus put money in people’s pockets. In America, real disposable income per person is 27% higher than it was in February 2020. And with economies reopening, people are in the mood to spend. Companies can therefore be more confident that there will be a demand for their goods in the next few years – as good an incentive as any to increase their capacity. Some companies, especially in consumer industries, are low on inventory and are desperately trying to catch up.
Yet capital spending is increasing not just because the business cycle is on the rise. Businesses are also adapting to the permanent changes brought about by the pandemic, moving from an emerging standard of “hybrid work” to an increase in online shopping. The big tech companies, whose products are so important to this change, have led the investment load. In 2020, they represented a third of the total R&re spending in the S&P 500; this year, they are increasing their investments by 30% compared to 2019.
Other companies are now recognizing that they have to pull up their socks. Large-scale retailers are finally investing heavily in online offers to compete with Amazon. Restaurants continue to improve their home catering service even when the home catering service reopens, allowing them to derive more sales from food preparation. Consultants find ways to keep their staff connected when they are out of the office. Growth in global business computer shipments will be even faster this year than last year. All of this promises a world in which people get more done in less time.
Companies in certain sectors are still respecting the rules of the 2010s. Mining companies seem cautious in the face of bombings in order to relieve supply bottlenecks in the commodity markets. The big hotel chains don’t seem to plan on installing rainforest showers in every room. And it remains to be seen whether the post-pandemic norm will be one of structurally higher capital spending, or whether companies fall back into their old ways. For now, however, take a step back and appreciate the global surge in capex. It promises a more dynamic form of capitalism. ■
This article appeared in the Leaders section of the print edition under the title “Innovation nations”