Monday, April 25, 2011

The Death of the Conglomerate?

President Obama looks on with feigned interest at a technological thingie at GE.
Note the huge dents in the blades in the foreground, upper right.

In the last Century, we saw the rise of the multi-national conglomerate Corporation.  These were companies that had a hand in a number of businesses and were very profitable and successful, usually because they could afford to put their competitors out of business.

And they were good places to work for, too, as they paid handsomely and had great benefits.  And I worked for two of them - General Motors Corporation and United Technologies.  While you were doing bong hits in your freshman dorm room, I was wearing a suit and tie and working as a salaried employee of GM, suckling at the corporate teat at an early age.  And yes, we did bong hits in our dorm room, too.  Later, I went to work for UTC, who also paid me well and paid for me to go to college.  It was a great system, while it lasted.

But even then, the amount of staggering waste at these conglomerate companies was troubling.  We hired tons of people and many of them, particularly the bloated middle-manager class, did little work, or in fact, worked against the company's interests.  We were told that we would make it all up on volume - that the high profit margins on our products offset the inherit bloat of the multi-national conglomerate.

But of course, like in any other imbalanced system, when there is opportunity, someone steps in to fill it.  Boyle's Law - gas expands to fill a space.  And today, conglomerate companies like these are shedding employees and selling off divisions.  It is cheaper, it turns out, to buy components than to make them, as the component maker can then concentrate on the lowest possible price.  And it is cheaper to "farm out" work, often to independent contractors, than to hire people as employees.

Part of this is due to the fact that the Government has made hiring an employee (and more importantly, firing) such a difficult thing.  When you hire someone in-house, you have to coddle them and sooth them, and be kind to them, lest they sue you for harassment, discrimination, or carpal-tunnel syndrome.  and you have to make sure they are documented, and that you collect their taxes, fund their retirement, pay their medical care - all before you even get a first hour of work out of them!    Most employees today subscribe to the victim mentality, and it is only a matter of time before they decide that they are being oppressed, and then go after their employer, with the aid of a helpful lawyer who advertises on a billboard.  Today, we do not go to work, we go to something called the "workplace" and that has made all the difference in the world.

The other half of the equation, though, is the sheer size of these companies.  When I was at GM, we sold six brands of cars, medium and heavy-duty trucks, city buses, construction equipment, railroad engines, and even refrigerators.  And GM manufactured nearly all the parts for all of these products in a staggering number of parts divisions.  Everything from the spark plugs to the oil filters was made in-house. The only thing they didn't make were the tires and the raw steel.  It was a lot of disparate businesses tied together, and when you try to do everything, oftentimes you end up not doing any of it very well.

In the 30 years since then (has it been that long?  Am I that OLD?  Scary.) GM has morphed again and again.  It shed off Terex, Electromotive, and Frigidaire fairly quickly, realizing that these businesses were just a distraction and moreover losing money.  It took a while, but by the 1990's they were shedding the parts divisions - AC/Delco, New Departure, Guide Lamp, and the like.  And most of these parts divisions were closed down and demolished, or, when spun off as independent entities, quickly went bankrupt - illustrating how inefficient and bloated these parts divisions were.

But even then, these retrenching actions were not enough.  GM, as we all know, went though bankruptcy, and scaled back yet again, shedding more brands and closing more plants, and "downsizing" yet again.  Perhaps today they can flourish as a focused car company.  Perhaps - time will tell.

GM still has at least two brands too many.  While the Japanese make do with two brands (e.g., Toyoyta/Lexus, Nissan/Infiniti, Honda/Acura), GM seems to think it needs four.   Chevy was saved as an "icon" while Buick was perpetuated on the grounds that "they sell well in China".  GMC, the weakest of the lot, selling clones of Chevies, was kept on, using the logic that the "professional grade" advertising campaign set the products apart from the Chevies they are based on - the same cars, coming off the same assembly lines, the only difference being a chrome doo-dad or a badge.

While GM shed brands in the last two years, it unwisely had added brands at a time when its market share was shrinking.  So, dumping Oldsmobile, Pontiac, Saturn, Hummer and Saab might seem like a step in the right direction, adding Saturn, Hummer, and Saab were steps in the wrong direction just a few years before.

Today, it seems that GE is in the same shape as GM - perhaps the 1930's naming convention of companies (e.g., using "General" in the name, how Randian) is today a curse.

GE is worse off than GM in terms of diversity, as they are into everything from jet engines, to electrical supplies, to generating equipment, to medical equipment, to owning a network (NBC), to defense contracts, to coffee makers and toasters, to refrigerators and stoves, to, well, just about everything except cars.  They leave that to the "other" General.

Oh yea, they make light bulbs.

And like GM they have a lot of legacy businesses and old plants and high-priced union labor, as well as bloated management.  And as a result, their stock has been in the tank for the last few years and they have struggled to maintain a profit.  Like GM, they have been shedding divisions, or at least selling off stakes in them.  There is, or was, talk of spinning off the appliance division, but it appears that did not come to pass.  51% of NBCUniversal was sold to Comcast in January of this year.  Presumably, Comcast will have a better idea of how to run a network - although I think a lot of people, such as myself, are just turning away from that drivel entirely.  The whole concept of "seeing what's on" and watching 1 minute of commercial for every 2 minutes of programming is, well, outdated.

Will GE turn things around?  Let's hope so, because not only do I own stock in them, I am also a corporate bondholder.  And you may be too, even if you don't own shares or bonds directly - if you have money in a mutual fund.

United Technologies seems to be soldiering on and I am pleased to report that the value of my shares has increased 70% since I bought them just a few years back.  UTC has its hands in a number of pies, too - everything from aircraft engines (Pratt & Whitney) to elevators (Otis), HVAC (Carrier) and of course, aircraft (Sikorsky, military contracts, etc.).

Why is UTC stock doing well, while GE remains in the tank?  I think better management might be part of the picture.   While I saw a lot of bloat while working at Carrier, UTC was aggressive about cutting out that bloat.  Since my days there, the ancient plants in Syracuse have been cut back, and much production moved South - some across the border.  The HVAC business is pretty brutal, and you can't be paying people $40 an hour to drive fork lifts and expect to make a profit.

Also, while UTC is diversified amount a number of different technologies, they are focused on technologies, not on re-runs of "30 Rock".  Diversification may be a survival skill for the multinational conglomerate - it allows different industries to piggyback off each other, and also spreads risk, so that one business may be prospering while another is slack.  However, too much diversification can kill.  There is no cross-pollination between NBC and GE.  You can't sell jet engines on "Saturday Night Live" and people aren't going to buy light bulbs because Matt Laur works for the same company.  And the management skills needed in the volatile Entertainment Industry are far different than that needed to make steam turbines.

And in a similar manner, when GM got into refrigerators, there was not a lot of cross-pollination, either.  Car air conditioning and household refrigerators share little in common, in terms of technology.  And tellingly, GM's A/C was made by Delco, not Frigidaire.

And while Locomotives, giant off-road dump trucks, and city buses might all fall under the rubric of "things with wheels on them", so do grocery carts.  As it turns out, the manufacture of consumer-grade transportation - automobiles - has nothing in common with building a Terex Titan, the world's largest truck.  Perhaps you could re-use a steering wheel, a door knob, or a seat.  But that's about it.

Or take the example of IBM.  At one time, they made everything from typewriters to computers, to weapons, to Real Estate.  And perhaps that diffusion of focus is one reason the largest computer company in the world is, well, no longer the largest computer company in the world.  Today, they are once again profitable, after going through a near-death experience.  Large, cantankerous companies like this, can end up blindsided when the products they make are no longer competitive.

So what conclusion do I reach about all of this?  Well, I think, long-term, that the old-style 20th Century "vertical integration" conglomerate is dead.  In the 1930's, it made sense, if you wanted a "captive supplier" to just buy the supplier and make it part of your conglomerate.  The idea was, though efficient Engineering and Management, you could make the supplier more profitable and lower your parts costs - and also deny your competitors a parts source.  But today, it makes more sense to buy parts from captive, but independent, suppliers, as it allows you to be more agile and focus on your primary business.

And therein lies another distinction between GM and UTC. When I was at GM, we made all the parts for the cars - paying UAW wages to do so.  When I was at UTC, we assembled air conditioners and HVAC products using parts from suppliers - fans, controls, motors, compressors, coils, etc.  We didn't try to "make it all" and become experts in the parts business.  And over time, that latter model was more successful, as we were not tied to existing technology.  We could buy our compressors from the manufacturer who made them the cheapest and them most efficient - and when that was the Japanese, so be it.  If we made our own compressors, we would have been chasing our tails.

And I wonder, if these lessons could be applied to more modern companies, such as Microsoft.  Microsoft, like GM and GE used to be, has its fingers in a number of pies, which are at least nominally related to the company's primary business of operating systems.  And most of these ancillary businesses are losing money.  Their X-Box line has yet to dominate the market, much less make a profit, losing share embarrassingly to the primitive Nintendo Wii.    Like most Microsoft products, it is bloated and overwrought with technology, while it neglects the basic user interface and functionality.

The Zune media player was such an outright flop that it finally died a quiet death, unnoticed by anyone.  While Apple printed its own money with the iPod, Microsoft struggled to even come up with a "me too!" product.  Pretty pathetic, when you think about it.

Microsoft has tried, with some success, to get into cell phones, and perhaps they may flourish there.  Their problem is, like IBM before it, is that people buy Microsoft products not because they want them but because they are basically forced to by the marketplace.  No one love Windows, in any of its incarnations.  No one loves Microsoft.  And everyone looks forward to the day that something else hits the market that breaks the monopoly/compatibility issue that keeps Microsoft in business.

Perhaps if Microsoft scaled back and focused on making a really good operating system and got out of ancillary businesses,  it might do better.  Perhaps not - perhaps the era of the "operating system" dominance of the computer is gone for good, to be replaced by something else entirely - a thin, agnostic system and cheap, inexpensive and purpose-built computers.

And I suspect the latter may be true.  Computers are so cheap today - mere pennies for a microprocessor - that it makes little sense to build a single machine for e-mail, surfing the web, playing movies, playing video games, playing music, running spreadsheets, etc.  Individual machines, linked wirelessly, could do each of these functions better and faster, without all the compatibility issues and frail, unstable, operating systems.

And if Microsoft, like GE, GM, and IBM before it, is hide-bound to one mode of operation - the O/S, then it could find its conglomerate come crashing to the ground if the fundamental market shifts, and they are not nimble enough to shift with it.

Perhaps this may seem far-fetched.  But at one time in my life, the idea that GM could go bankrupt was just as far-fetched - or that IBM would not be largest computer maker.

Things change over time, and this is a good thing.  Dinosaurs go extinct.  And if they didn't, we wouldn't have all that nice petrol to burn today.  Right?