In May 2013 shareholders voted to break up the Timken Company—a $5 billion Ohio manufacturer of tapered bearings, power transmissions, gears, and specialty steel—into two separate businesses. Their goal was to raise stock prices. The company, which makes complex and difficult products that cannot be easily outsourced, employs 20,000 people in the United States, China, and Romania. Ward “Tim” Timken, Jr., the Timken chairman whose family founded the business more than a hundred years ago, and James Griffith, Timken’s CEO, opposed the move.
The shareholders who supported the breakup hardly looked like the “barbarians at the gate” who forced the 1988 leveraged buyout of RJR Nabisco. This time the attack came from the California State Teachers Retirement System pension fund, the second-largest public pension fund in the United States, together with Relational Investors LLC, an asset management firm. And Tim Timken was not, like the RJR Nabisco CEO, eagerly pursuing the breakup to raise his own take. But beneath these differences are the same financial pressures that have shaped corporate structure for thirty years. (...)
The shareholders who supported the breakup hardly looked like the “barbarians at the gate” who forced the 1988 leveraged buyout of RJR Nabisco. This time the attack came from the California State Teachers Retirement System pension fund, the second-largest public pension fund in the United States, together with Relational Investors LLC, an asset management firm. And Tim Timken was not, like the RJR Nabisco CEO, eagerly pursuing the breakup to raise his own take. But beneath these differences are the same financial pressures that have shaped corporate structure for thirty years. (...)
In the radical downsizing of American manufacturing, changes in corporate structures since the 1980s have been a powerful driver, though not one that is generally recognized. Over the first decade of the twenty-first century, about 5.8 million U.S. manufacturing jobs disappeared. The most frequent explanations for this decline are productivity gains and increased trade with low-wage economies. Both of these factors have been important, but they explain far less of the picture than is usually claimed. (...)
To better understand the decline of American manufacturing, we need to go back well before the last decade to see how changes in corporate structures made it more difficult to scale up innovation through production to market.
In the 1980s about two-dozen large, vertically integrated companies such as Motorola, DuPont, and IBM dominated the American scene. With some notable exceptions (for example, GE), large vertically integrated companies today have pared off activities and become not only smaller but also more narrowly focused on core competencies. Under pressure from financial markets, they have shed activities that investors deemed peripheral—such as Timken’s steel.
This process has been fostered by great technological advances in digitization, which have allowed companies to outsource and offshore many of the functions they previously had to carry out themselves. In the 1970s a Hewlett-Packard engineer who designed circuits for a new semiconductor chip had to work together with a technician with a razor blade to cut a mask to place on silicon. Now the engineer can send a complete file of digital instructions over the Internet to a cutting machine. The mask and the chip fabrication can take place in different companies, anywhere in the world. A senior executive of Cisco told MIT researchers:
The breakup of vertically integrated corporations and their recomposition into globally linked value chains of designers, researchers, manufacturers, and distributors has had some enormous benefits both for the United States and for developing economies. It has meant lower costs for consumers, new pathways for building businesses, and a chance for poor countries to create new industries and raise incomes.
But the changes in corporate structures that brought about these new opportunities also left big holes in the American industrial ecosystem. These holes are market failures. Functions once performed by big companies are now carried out by no one.
To better understand the decline of American manufacturing, we need to go back well before the last decade to see how changes in corporate structures made it more difficult to scale up innovation through production to market.
In the 1980s about two-dozen large, vertically integrated companies such as Motorola, DuPont, and IBM dominated the American scene. With some notable exceptions (for example, GE), large vertically integrated companies today have pared off activities and become not only smaller but also more narrowly focused on core competencies. Under pressure from financial markets, they have shed activities that investors deemed peripheral—such as Timken’s steel.
This process has been fostered by great technological advances in digitization, which have allowed companies to outsource and offshore many of the functions they previously had to carry out themselves. In the 1970s a Hewlett-Packard engineer who designed circuits for a new semiconductor chip had to work together with a technician with a razor blade to cut a mask to place on silicon. Now the engineer can send a complete file of digital instructions over the Internet to a cutting machine. The mask and the chip fabrication can take place in different companies, anywhere in the world. A senior executive of Cisco told MIT researchers:
The separation of R&D and manufacturing has today become possible at a level not even conceivable five years ago. Progress in technology allows us to have people working anywhere collaborating. We no longer need to have them located in clusters or centers of excellence. We now have the ability to sense and monitor what’s going on in our suppliers at any place and any time. Most of this is based on sensors deployed locally, distributed control systems, and new middleware and encryption schemes that allow this to be done securely over the open Internet. . . . In other words, not only do we monitor and control what’s happening inside a factory, but we’re also deeply into the supply chain feeding in and feeding out of the factory.Digitization and the Internet continue in multiple ways to enable the fragmentation of corporate structures that financial markets demand.
The breakup of vertically integrated corporations and their recomposition into globally linked value chains of designers, researchers, manufacturers, and distributors has had some enormous benefits both for the United States and for developing economies. It has meant lower costs for consumers, new pathways for building businesses, and a chance for poor countries to create new industries and raise incomes.
But the changes in corporate structures that brought about these new opportunities also left big holes in the American industrial ecosystem. These holes are market failures. Functions once performed by big companies are now carried out by no one.
by Suzanne Berger, Boston Review | Read more:
Image: Timken Company
