America’s giant corporations are decaying

by Fabius Maximus

Summary: America’s institutions are falling like a row of dominoes. That includes our major corporations. Once world leaders, now they are slowly decaying – and taking America down with them.

Crashing of an airplane made of a dollar bill
ID 7115676 © Alexkalina | Dreamstime.

In March I said that America’s institutions are falling like dominoes as we enter the Crazy Years (as predicted by Robert Heinline in 1940). The State Department was one of the first to fold (during the Who Lost China madness of the 1950s). The Roman Catholic Church is a wreck, as seen in its response to rampant pedophilia among its priests. Our military can’t win wars. Our police wage a mad war on drugs, looting citizens through civil asset forfeiture. Many of our grade schools can’t teach their students the three R’s. Science is gripped by the replication crisis, a rot whose dimensions are far larger than most believe (some key fields, such as climate science, are broken). Professional associations abandon their standards and obligation to protect us. Congress will do anything except govern. The President is the tweeter-in-chief. Our political campaigns are better described by Jefferson Airplane’s song “White Rabbit” than anything in the New York Times.

“When the men on the chessboard
Get up and tell you where to go …
And the white knight is talking backwards
And the red queen’s lost her head.”

This is ClownWorld. Rule One is “nothing makes sense.” This post discusses Rule Two: “it is always worse than you think.” Let’s look at one of America’s strengths: its vibrant business sector, our engine of economic growth. But this too is broken. In good MBA fashion, here are a few case studies. These were all failures conducted by managers from America’s best universities using state-of-the-art methods.

Failing from financial excellence: GE

Raytheon invented the microwave oven and sold the first commercial version in 1947. In 1967 Litton sold the first countertop microwave oven. See this history. America’s idiotic but lavishly paid management gave the market away to Japan and Korea. In the last phase of the competition, GE saved pennies in outsourcing production while losing everything. America’s competitors worked hard and earned their success.

See how it happened in “Fast Heat: How Korea Won the Microwave War” by Ira C. Magaziner and Mark Patinkin in the Harvard Business Review, January–February 1989. My favorite section …

“A few weeks later, Roger Schipke, the head of GE Appliances, decided to go to Korea. He was walking down a Samsung corridor with his hosts when a crowd of white coats came bustling the other way. He had to stand against the wall to let them by. There were dozens of them, all very young. When they’d passed, he asked who they were. ‘Those are our new microwave-oven engineers,’ his host told him. There were more of them than Schipke had working in his whole microwave division, and these were just Samsung’s newest hires. Louisville, he realized, was probably outengineered ten to one. He asked where the new hirees were trained. The answer came back: Purdue, the University of Southern California, the University of Washington. …

“The company has hundreds, all working the same 68 hours a week. …In most companies, only the sales force travels. Samsung, like many foreign companies, sends engineers abroad to learn buyers’ habits too. That’s why Jang, head of production, was sent on regular marketing trips to the United States. …

“General Electric began shifting more of its orders to Samsung. Soon, GE’s Korean models were selling as well as those GE itself made in the United States, and at a much higher profit. Some in Louisville began to wonder whether it was time to source everything. …In May 1985, GE publicly announced it would stop U.S. production of microwave ovens. From now on, GE would be doing the sales and service side of the product; Samsung, the manufacturing. Soon, the people in Suwon would be the biggest makers of microwave ovens in the world.”

This is the story of the decades-long fall of GE. “Neutron Jack” Welch fired the people who were the foundation of GE and shifted it into increasingly speculative financial services. When those bubbles popped, one by one, only a shell was left. GE’s stock price peaked at $60 in 2000 (equivalent to $90 now); it is $12 today.

GM works very hard to fail.

General Motors once was the largest and greatest automobile company in the world, by a large margin. Today it is a weakling in the industry, with neither prestigious nor high-quality brands. It was long run by financial experts, who slowly ran it into the ground. On 1 June 2009 it filed for bankruptcy (chapter 11 reorganization).

In her 1989 book Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors, auto analyst Maryann Keller tells GM’s story of management incompetence. One telling vignette describes a 1986 conference of GM’s leaders.

“Executive Vice President F. Alan Smith noted that GM’s capital investment over the previous five years had totaled $45 billion. For that money, Smith reminded his audience, the company could have purchased Toyota and Honda.

“Then GM President Jim McDonald lamented the automaker’s lack of progress on quality. …Ever since he had been named president in 1981, McDonald had preached the need for better quality. At one meeting of senior executives, he had handed out small pocket mirrors, then asked each manager to peer into the mirror to see who was responsible for the quality of GM cars. …McDonald lamented the company’s heavy capital expenditures. ‘Improvements are important,’ he said. ‘But unless we interrupt the alarming rise in fixed costs, we could be improving ourselves right out of the ballpark.’ …McDonald added a startling coda: ‘We don’t need more capital investments. We don’t need any more mission statements.’” {From Auto News, which also lists some of GM’s other long list of serious errors.}

Roger Smith was GM’s CEO from 1981 to 1990. Under his leadership, GM had gone from the lowest cost producer in Detroit to its highest cost producer – with massive gaps in quality and productivity to the top Japanese manufacturers. It gained little or no productivity gains from the massive capital investments he made.

Another great book about the fall of this core American industry is David Halberstam’s The Reckoning. Powerful, enlightening, and fun to read – like all of his books.

IBM: lost excellence in a key industry.

IBM was a colossus of the information technology industry for generations. In the 1980s it lost its way, with leaders blind to the revolution that had begun. Its revenue has stalled since the early 1990s (see graphs here and here) while the industry skyrocketed. Since then, IBM abandoned attempting to stay on the cutting edge. Instead it pursued what its MBA financial experts thought were of easy profits in services. Instead of growth, it pretended to be vibrant through financial engineering (especially stock buybacks).

Boeing.

Enough said. People warned of the coming disaster, but – just as in the above disasters – the key people did not listen. Now all we get post-mortems. But I doubt that many other corporate managers have learned anything, and the Wall Street managers who control the shares of these megacorps do not care. Failure to Learn and Failure to Care are lethal aliments for a nation.

Crash Course: how Boeings Managerial Revolution Created the 737 Max Disaster” by Maureen Tkacik in The New Republic.

Why Did The Boeing 737 Max Crash?” by David Perell – Because management steered Boeing into the ground.

The Long-Forgotten Flight That Sent Boeing Off Course” by Jerry Useem in The Atlantic – “A company once driven by engineers became driven by finance.

The new era: fortunes for management, no profits.

The new era of American business is building giant companies that make little or no money. Amazon is the model of eventual success, although it became moderately profitable due to a fluke (from cloud services, not retailing). Uber, Netflix, Tesla, etc. The 2019 class of IPOs is equally unprofitable. But fear not! Their executives are rich and getting richer! This is the grifter economy in action.

Conclusions

“Nothing is written.”
— Lawrence of Arabia, said in the 1962 film.

This need not be our future. We can take a different path, if we have the wit and will to do so. But the nature and scope of the problem is typical of the challenges presented by ClownWorld, complex, with no easy solutions.

There are ample historical precedents. In the 1840s, Britain face a host of problems – just as America does today. But Britain’s people elected representatives, led by Benjamin Disraeli and William Gladstone, whose wise policies brought them through those difficult times. Britain’s Victorian boom brought it unprecedented prosperity and social harmony. See the story here. The same can happen in America.

“Choice. The problem is choice.”
— Neo in The Matrix Reloaded.