The New York Times In America

January 27, 2004

Cisco Chief Calls Productivity New Engine of Wealth


DAVOS, Switzerland, Jan. 25 - Four years ago, John T. Chambers seemed to sit atop the highest peak at this Alpine ski resort, where the World Economic Forum convenes its annual meeting of government officials and corporate chiefs. Then, with the bursting of the Internet bubble, he fell to the bottom.

The other day, as Mr. Chambers, the chief executive of Cisco Systems, surveyed the view from a hotel overlooking Davos, he appeared to be on top again.

While Cisco no longer grows 50 percent a year, as it did in the supercharged 1990's, Mr. Chambers is sure he has found a new elixir for growth.

Cisco, which makes routers, switches and other networking equipment, is selling itself as an agent of productivity gains for its customers - whether they are companies or entire countries.

"The next big thing in technology is going to change dramatically our standard of living," Mr. Chambers said in an interview. "If productivity grows 1 percent per year, your standard of living doubles every 72 years. If it grows at 3 percent, which I think is probable, you're talking every 24 years."

This is the kind of vision that thrives in the thin air of Davos. For Mr. Chambers, who was a near-ubiquitous presence at this year's conference, it is a way to reclaim his place among the vanguard of technology executives.

"Three years ago, we were the pessimists," he said, recalling the crash of technology companies and their stocks. "We said this was a 100-year flood. Now, we're the optimists because of the productivity opportunity we see."

Not everyone here shares his enthusiasm. While economists agree that countries with a more productive labor force grow faster, the drive for productivity is spurring many Western companies to relocate jobs, increasingly white-collar ones, to cheaper markets including India and China.

The exodus of these jobs has become a potent political issue in the United States in an election year and amid an economic rebound that has not generated bountiful new employment.

The market research firm Gart- ner estimates that one of every 10 jobs at American technology vendors or service providers will move overseas by the end of this year. By 2008, one-quarter of all traditional information technology jobs will be in emerging market nations.

"These dislocations can be substantial," said Michael D. Fleisher, the chairman of Gartner. "Work can move offshore very quickly, and it remains to be seen how quickly we can innovate to replace those jobs."

In Western Europe, which has lagged behind the United States in productivity growth and has generally higher labor costs, the prospect of competing against Asia for jobs and investment is even more alarming.

"Those industries with low productivity growth will simply lose jobs," said Erkki Liikanen, the European commissioner for enterprise and the information society. "It's true that high productivity means fewer jobs per sector. But low productivity growth means no jobs."

Sir Martin Sorrell, chairman of the WPP Group, the London-based advertising conglomerate, said the trend was clear. "There is a massive shift in wealth from West to East," he argued, "and unless we make major structural changes, it will have damaging consequences for Europe.''

Mr. Chambers, an inveterate salesman, prefers to look on the bright side. At Cisco, where he is pushing for productivity gains of 10 to 15 percent a year over the next five years, his strategy is intended to restore momentum to a company that was once among the fastest growing in the computer industry, and then one of its spectacular casualties.

"We believe that to compete in this environment we're about to go into, with very good competitors from Asia, etc., that our productivity per employee needs to be $700,000," he said. It is currently around $490,000, a level that Mr. Chambers said was twice that of its nearest rival.

Cisco's productivity jumped 9 percent in the last quarter, Mr. Chambers said, contributing to an 87.5 percent increase in profit per share. While Cisco may never again see the dizzying growth brought by the Internet boom, he thinks it can achieve a more sustainable pace.

Moving jobs to lower-cost countries is part of that, Mr. Chambers said. Cisco, based in San Jose, Calif., has moved jobs to India and China, though he said he did not know the exact number.

"If you're talking about an engineering job in the U.S., or here in Europe, versus an engineering job in China or India, the price differential is 5 or 10 to 1," he said. "That's not going to change."

Mr. Chambers said, though, that the number of people Cisco employs in advanced economies had not decreased because it trains its displaced workers for new jobs. It is a prescription he offers for countries, as well.

"The jobs over time will go to the best-educated places with the best infrastructure and the most supportive governments," Mr. Chambers said. "How you create an environment where the jobs stay is going to be a key element."

At Davos, a conference devoted to the importance of free trade, it was hard to find anyone who was willing to call for governments to restrict the flow of jobs across borders. But people here were watching the campaigning leading up to Tuesday's primary in New Hampshire, where Senator John Kerry of Massachusetts, former Gov. Howard Dean of Vermont and other Democratic presidential aspirants have warned about the human costs of globalization.

And Michael K. Powell, a Bush appointee as chairman of the Federal Communications Commission, said, "It's one of those developments that if it happens too quickly, you'll inevitably get a political reaction."

The fears are intensified by the rise of China, one of the prime destinations for jobs moving out of the United States and Europe. Goldman, Sachs issued a study here predicting that China's economy would overtake that of Germany within a decade, and surpass the American economy by 2041.

Zhu Min, an economic adviser to the president of China, was met with silence at a dinner last week when he asked Americans at the conference how their country planned to finance its economy when both blue-collar manufacturing and white-collar service jobs were going elsewhere.

Trends, to be sure, have a way of being inflated in the Alpine air here. Mr. Fleisher of Gartner said companies would probably rethink the movement of jobs overseas after the first major failure or scandal involving an offshore operation, which he thinks is inevitable.

Likewise, although Mr. Chambers says that productivity is crucial to the future, he concedes that the most tangible economic fruits - jobs and growth - still hinge on old-fashioned things, like selling routers and switches. In the United States, he said, Cisco faces an uphill climb.

"C.E.O.'s are the most conservative I've ever seen," he said. "Nobody wants to be spending money if we have another downturn."

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