Break With Past : Businesses Adapting to New Climate

CORNING, N.Y. —  Just after dawn on a Sunday in September, 100 years of American industrial history crumbled to dust in six seconds.

On Sept. 22, Corning Glass Works dynamited its 135-foot silica mixing tower, the anchor of a century-old manufacturing complex built to mass produce the world’s first incandescent light bulbs. The antiquated facility, which had produced hundreds of millions of light bulbs and tens of millions of dollars in profits for Corning, was being leveled as the company moved its bulb production to Brazil.

“The demolition out there is the site of where Corning Glass Works started in 1868,” said Chairman James R. Houghton, great-great-grandson of Corning founder Amory Houghton, indicating the scene outside the window of his glass-walled office. “There’s an awful lot of emotion over there, but we just had to get out of it.”

Unprecedented Strains

The brief explosion was at once Corning’s admission that it could no longer make money on light bulbs made here and a symbol of transformation in corporate America.

Corning and hundreds of other American firms are being compelled to make a radical break with the past to survive in a business world unlike any they have ever seen. Despite one of the most vigorous postwar economic recoveries, American business is showing signs of unprecedented strains.

Unemployment remains stubbornly high, and more than 1.6 million manufacturing jobs have disappeared since 1979. Firms, farms and banks are failing at Depression-era rates. Unrelenting foreign competition and low inflation are driving prices down, straining corporate treasuries and demanding drastic cost-cutting measures. Deregulation is forcing previously protected industries to compete in a global marketplace.

Dealing With Survival

Firms in nearly every industry are dealing with something even more basic than how to prosper: how to survive.

Managers are being forced to make critical corporate decisions with extraordinary speed. With the threat of takeovers, some companies’ strategies are being developed in a matter of weeks and months rather than years.

As bewildered American executives grope for answers, the choices they make today will have enduring effects on companies, workers and communities. Generations-old employment patterns are changing, and the very survival of entire U.S. industries such as steel, shoes and textiles is in jeopardy.

“The whole game has changed,” Houghton said. “It’s taken American industry too long to realize that, ourselves included.”

This baffling new business climate has forced managers to rethink every aspect of their operations, from how many workers they need to where they invest their profits. For the first time in decades, executives are questioning assumptions about what they do, and why--a process one business leader calls “forced strategic self-analysis.”

It’s an unsettling time for managers who grew smug about American economic superiority during the postwar boom and the inflation-fueled growth of the 1970s. Polls of business leaders today reveal disquiet about the present and anxiety about the future.

“Anyone expects and can tolerate some pain in a recession,” said Roger Kubarych, chief economist of the Conference Board, a business group. “But what these companies are seeing is prosperity with pain.”

While a majority of economists predict steady economic growth and stable prices over the next year, business leaders appear to hold an opposite view. A Conference Board poll of chief executives at large corporations, conducted in August, revealed that only one in three expected business conditions to improve over the next six months.

Optimism Low

In another recent survey, leaders of small firms were reported to be less optimistic about business and the economy than at any other time in the last five years. Executives polled by Dun & Bradstreet, the business information firm, cited a recurring theme in American business today: Low inflation and high borrowing costs are eroding profits.

The way companies have reacted to the new conditions reflects both the diversity of the problems American business is facing and the lack of a consensus on how to deal with them. The actions display a deep uncertainty about the economy and stand in marked contrast to business moves in previous periods of growth.

In other recoveries, profits have been invested in expanding facilities and building new ones, branching into new lines and buying other businesses. Expanding firms hired additional workers and paid them more. They built inventories and boosted production in anticipation of cost increases and passed on their higher labor and materials costs to their customers.

Today, however, many American companies are shrinking, not expanding. Managers are dumping unprofitable businesses, laying off workers and cutting costs mercilessly. They are holding the line on prices and, in some cases, lowering them. Manufacturers are investing in automation and spending heavily on research and development to regain lost competitiveness, even at the cost of short-term profits. They are locating new facilities overseas. They are forming joint ventures with competitors here and abroad.

Although these sometimes-contradictory moves may appear to paint a picture of crisis and confusion in American board rooms, there is reason to be hopeful as well. This period of re-examination could lead to a corporate America that is more rational, more efficient and more competitive, business observers say.

‘Blocking and Tackling’

“Periodically, every company ought to look at themselves and get rid of the fat,” said investment banker Bowen H. McCoy of Morgan Stanley & Co. “We’re now seeing a lot more emphasis on blocking and tackling, hard-nosed management. And that’s a positive development.”

In addition, managers are attempting to foster a faster-reacting, more entrepreneurial culture within their organizations. They are decentralizing and rewarding innovation in an effort to keep pace with technology and rapidly changing market conditions.

Companies in nearly every type of business are trying one or more of these strategies.

Motorola has cut labor costs through layoffs and work-sharing programs, and is building most of its new plants abroad to take advantage of cheaper labor and materials. Pay to U.S. workers and executives has been trimmed by as much as 10%.

Laidlaw Corp. of Phoenix cut its salesmen’s travel allowances and reduced plant heating bills 60% by substituting infrared for forced-air heat.

The chemical giant Monsanto has let go 13,000 production workers since 1980, but has hired more than 500 Ph.D.-level scientists and invested $200 million in a new-product research laboratory.

Bank of America, the nation’s biggest bank, has closed 157 branches and cut employment more than 11% over four years, and is undergoing one of the most extensive corporate transformations in history in a belated response to deregulation of the money business.

General Battery of Reading, Pa., which has not been able to raise selling prices for almost two years, is making the same number of car batteries with 10% fewer workers.

Automated Plants

The U.S. auto industry, cash-rich and making record profits, is spending billions of dollars to automate plants and on high-technology, financial and real estate ventures.

Why are firms from so broad a spectrum of American industry putting themselves through such wrenching change?

“You’re experiencing a revolutionary era,” said Richard M. Cyert, an economist and president of Carnegie Mellon University in Pittsburgh. “We’re going to look back on this period and say, ‘That’s when America lost its manufacturing capability.’ Or, ‘That’s when American managers made the critical decisions that preserved the future of U.S. industry.’

“The companies that will survive are making crucial and painful decisions now.”

Motorola, for example, has adopted several strategies for coping with pressures on its various product lines, from mobile telephones to semiconductors. The Schaumburg, Ill.-based firm, once one of America’s premier consumer electronics companies, shed 30% of its business over a 15-year period and emerged as a virtually new company.

Motorola produced its last car radio in 1984 and now is one of the dominant players in semiconductors. The transformation has made the company more dependent on technology and less on human labor, particularly in the United States.

‘Asian Task Force’

Motorola is producing more and more of its products abroad, and has formed an “Asia task force” to design a new strategy for competing with the Japanese, Chinese and Koreans. At the same time, it is among the most vocal of American firms complaining about what it calls “predatory pricing” of goods--such as mobile telephones--from these countries. It has filed against Japan several complaints of patent infringement and unfair trade practice.

A linchpin of Motorola’s competitive strategy is to take advantage of its foreign competitors’ greatest advantage--lower labor costs abroad. Over the last 18 months, the company has built or expanded 10 plants. Three were in the United States; the other seven were in Hong Kong, Japan, Scotland, Singapore and Mexico. About 40% of the firm’s workers are at foreign facilities, and the proportion is rising.

Concern About Future

“The company has to be concerned about the future life of the institution,” said William J. Weisz, Motorola’s vice chairman and chief planner. “Unhappy as it may be, in this economy you find a disproportionate amount of building of new facilities outside of the United States. You can’t avoid it. You either make strategic adaptations or you go the way of all flesh.”

Weisz’s tone of alarm is echoed in board rooms and business classrooms around the nation, where the challenges of low inflation and competition from inexpensive imports are only now being confronted. Unable to raise prices and burdened with labor and production costs that grew uncontrollably in the 1970s, American firms are in a fix.

General Industries’ chief woe is disinflation. The Elyria, Ohio, maker of electric motors and plastic stampings has been forced to cut prices for some finished goods by as much as 50% since 1980. To adjust, the company is cutting costs 5% a year while increasing output by 6% to 7%. It has asked its employees’ unions for give-backs on pay and benefits.

Chief Executive Fred Ouweleen said the inflation of the 1970s helped to boost profits while creating unseen problems for his firm.

“A lot of companies in the 1970s were able to pass on their cost increases,” he said. “The market accepted it because everybody’s costs were going up. Now, resources are much more limited. You can’t raise prices, so you have to be more cautious in where you invest your money.”

Ouweleen’s answer is to spend heavily on more efficient facilities to bring down production costs that got out of hand in the 1970s. The firm spent $20 million on new plant and equipment between 1981 and 1984, more than its combined profits for the period.

General Industries is one of countless companies that rode the wave of double-digit inflation to record sales and profits in the 1970s, only to crash in a period of 3% inflation and flat sales.

Another problem caused by the rapid run-up of prices was the corporate borrowing binge of the 1970s. Firms mortgaged increasing shares of their business at high interest rates, assuming that they would be repaying the debt in diluted dollars during the next business upturn. Instead, inflation slowed dramatically in 1981, interest rates have remained high in comparison to inflation, and companies have continued to borrow at record high rates.

E. Gerald Corrigan, president of the Federal Reserve Bank of New York, warned the nation’s commercial bankers in September that the ratio of private debt to gross national product is at an unprecedented level and continuing to grow. He said American business is asking for trouble.

Corporate debt grew by 14.3% in 1984, a greater rate than at any time since World War II and more than 50% faster than the average of the preceding 25 years, according to the findings of a New York Stock Exchange study.

Corrigan said this trend is especially troubling because business generally repays debt during periods of economic expansion and relatively high interest rates. The current spate of borrowing foretells serious problems when conditions worsen.

“Since it does not seem at all prudent to assume that the business cycle is a thing of the past, servicing even existing levels of debt in a less favorable economic and interest rate environment could prove very difficult,” Corrigan said.

Business Failures on Rise

Business failures, as measured by Dun & Bradstreet, already are running at a pace not seen since 1931-35, in part because of an inability of firms to handle their debts. The failure rate in 1983 and 1984 was 30% higher than during the recession years of 1981-82, a figure that perplexes and troubles Mel Colchamiro, senior economist for the New York Stock Exchange.

“Things aren’t rebounding the way they typically do in a recovery. There are some disquieting undercurrents and we shouldn’t ignore them,” Colchamiro said.

He cited, in particular, the high proportion of bad bank loans, massive corporate borrowing and the retirement of equity in American businesses through stock buy-backs and the conversion of public firms to private through leveraged buy-outs.

Colchamiro predicted that because of these trends, the next recession will be unusually harsh.

“When it comes, you’ll have more plant closings, more layoffs, more business failures and more unemployment. Quality of life will deteriorate for everyone.”

Restructuring Efforts

Many of the firms call the changes they’re undergoing “restructuring,” but the term is misleading because it refers to everything from layoffs to fundamental corporate redefinition.

In some cases, restructurings are purely defensive moves, companies buying back stock or taking on heavy new debt to repel takeovers. In others, restructuring is a fancy way of describing a return to long-forgotten basics.

As Gerald Weiss, senior vice president for planning at Chase Manhattan Bank, put it: “It takes a calamity or threat of calamity for businesses to do what they ought to be doing naturally.”

Some observers see the current wave of restructurings as a fad, an example of corporate “me-tooism” similar to the conglomerate movement of the late 1960s and early 1970s. The urge to acquire unrelated businesses has abated greatly as corporate empire-builders have been shown to be less than the visionaries they once appeared. Today, divestiture is all the rage.

In 1984, about 900 units with a total value of $29.3 billion were sold, as companies emphasized efficiency, profitability and management control of individual operations, according to the Chicago merger specialist W. T. Grimm & Co.

Correcting Mismanagement

Other observers consider the restructurings a long-overdue correction of past mismanagement of facilities, capital and personnel. They say that managers finally realized that profits, after adjusting for inflation, have been flat for nearly two decades, and that American productivity has lagged far behind that of the nation’s chief competitors. Businessmen have come to understand the biological certainty that an organism evolves or it dies.

“Restructuring is a euphemism for struggling to adapt. This is business Darwinism--the dinosaurs didn’t survive because they couldn’t adapt,” said Irwin Kellner, chief economist at Manufacturers Hanover Bank.

This period in American corporate history reminds Walter Seipp, chairman of Germany’s Commerzbank, of a similar phase German industry went through in the late 1970s and early 1980s. Sales of German goods were depressed because of unfavorable exchange rates and a global recession. Profits were low because industrial facilities built just after World War II were outdated and inefficient.

German companies, however, rather than stressing immediate earnings to placate investors, spent heavily on automation and product development. And when international economic pressures eased and the deutschemark weakened in relation to other currencies, German business boomed. The profit break-even point had been reduced by new manufacturing efficiencies and new industrial and consumer products were ready for the export market just as foreign markets were ready to absorb them.

Seipp said he expects the same could happen to American industry if it heeds the lessons the Germans learned.

American observers agreed.

“The smart managers are redeploying assets and cutting their costs,” said Carl Shrawder, a management consultant for the accounting firm Coopers & Lybrand. “They’re taking advantage of emerging technologies. They’re thinking in longer terms, because they realize if they don’t plan and invest for the future, there won’t be one.”