Companies’ Investment Plans: From Diggers to Data Centers  

6 January 2016:

There have been three great waves of corporate investment in the past two decades. First came the dotcom splurge of 1997-2001, when cash was poured into building mobile-phone networks and the internet’s backbone. Then there was the emerging-market frenzy of 2003-10. Western firms threw about $2 trillion into factories and other facilities in places like China and India. In 2005-13 there was a craze for commodities, partly driven by insatiable Chinese demand. Global energy and metals firms spent $6 trillion digging in the Australian outback and drilling for oil in North Dakota and deep beneath Brazil’s coastal waters.

The dotcom boom turned to bust, emerging markets are now in poor shape and commodity prices have slumped in the past year (costing some firms’ bosses their jobs). So where are companies looking to invest now? A new study by Hugo Scott-Gall, of Goldman Sachs, a bank, crunches the numbers for capital investment at more than 2,500 firms worldwide, forecasting how things will look in 2017 compared with 2014. It finds a startling divergence across industries (see chart 1, below).

Energy, mining and chemicals firms are expected to slash their capital-investment budgets by 20% to 50%. Property firms are cutting back too, in part reflecting the end of China’s building boom. This has a knock-on effect on those capital-goods firms that supply equipment to these industries. For example, Caterpillar, which makes diggers used by mining and construction firms, expects its capital investment in 2016 to be half the level of 2012.

In contrast, internet, software and other tech firms are on a high, with their budgets expected to expand by a quarter or more. Though some tech firms have gone asset-light, renting their processing power and data storage in the online “cloud,” others — including cloud-providers themselves — are splurging on hardware. In 2016 the combined capital spending of Google and Apple will be $24 billion, almost equal to Exxon’s $28 billion budget.

Measured in dollars, the overall picture is of a 15% fall in corporate capital spending by 2017. Allowing for the greenback’s big rise since 2014, the fall will be just 5% or so in local-currency terms. And the figures exclude research-and-development (R&D) spending. That is rising quickly. America’s national accounts, for example, show an economy-wide decline in investment in physical plant being offset by a rise in R&D and software spending.

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Source: CFO

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