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Tuesday, 27 February 2018

The disappearance of the big conglomerates and their large research laboratories marks the current Age of Pennywise, Poundfoolish…

In the age of shareholder value and pennywise, poundfoolish corporate behaviour…, the disappearance of the so-called ACME companies and their large laboratories for fundamental and targeted research will have a negative influence on human development. Many of their inventions in the fifties and sixties of last century colour our daily lives in the 21st Century. Now that those laboratories have gone foregood under pressure of spoilt shareholders, there will probably be an “invention gap” in the second half of this century.

ACME (i.e. A(merican) Company Manufacturing Everything) was the universal all-purpose company from the Looney Tunes cartoons that supplied eternal anti-heroes like Elmer Fudd and Wile E. Coyote with an endless flow of fireworks and explosives, building material, electronics and whatever you could think of, to help them catch their drawn adversaries: you name it, they got it.

In real life, there were also a number of such ACME companies in the last Century: ITT, AT&T, General Electric, Siemens, Philips, Hitachi and Sony were companies that sold almost everything electronic and non-electronic to the whole world. Their products ranged from airplane motors to computers, telephones, batteries, cassette tapes, generators, trains, CD players and draglines.

Almost all these large companies had large laboratories where not only targeted, but also fundamental physical and chemical research was done. All this research led to countless inventions and new developments. The unbelieveable standard of life in the 21st Century would not have been possible without the efforts and achievements of these laboratories of these and other multinational companies.

However, as of the Nineties of last century, the urge for higher profits and elevated shareholder value forced many multinational companies to abolish their big laboratories, as they were “not efficient enough, not visible in the short-term annual results and much too expensive to be maintained”.

This happened to Philips that largely abandoned their worldfamous NatLab in the Nineties and Zeroes: initially under pressure of a threatening bankruptcy, a.o. as a result of the excessive expenditure of the laboratory and a series of costly flops and blunders that squandered the company's profits. Later as the consequence of a series of cutbacks by subsequent CEO's. 

It also happened to many other companies, like for instance AkzoNobel that sold their top-notch pharmacy branch Organon.

Fashionable expression like focus (i.e. focussing on one or two successful core activities while abandoning the other, less important or profitable activities of the companies) and shareholder value (i.e. maximization of the profit and dividend payments towards the shareholders) got hold of the boardrooms of the large companies, driven by  aggressive, gung ho shareholders

These shareholders made the executives focus on the (easy) short term profits and revenues, instead of on the long-term where the harder to get, but really interesting profits and revenues lie.

A few weeks ago, the Dutch, Nobelprize-winning professor Ben Feringa spoke about this phenomenon in Davos, while pondering about the start of his career at the Shell Laboratories in The Netherlands.

He noted with sadness that many of the large corporate laboratories had been closed in the meantime, “as companies had shifted their interest towards the short term”. Even the research centres of large universities had often been victimized by the omnipresent desire for targeted research and short-term gains, under pressure of the government and the corporate principals of such research. Budgets for fundamental research have been cut on behalf of targeted research.

Feringa argued that fundamental research pays off, even if the results of such research seem to be disappointing or even totally useless in the short term. 
According to him the latter does not mean that it is wasted money, as intermediate results may give imput to new and more successful research or to new applications of used techniques and methods.

In Davos, Feringa stated that almost everything in for instance nowadays’ iPhones had been invented in such research laboratories during the Fourties, Fifties and Sixties of last century: LCD screens, transistors and many other electronic components that are now part of numerous high-tech electronic devices. 

What companies have forgotten, according to Feringa, is that it sometimes takes more than half a century to turn the fruits of fundamental research into viable products that can be brought to the market.

It is 2018 now: when we apply Feringa’s logic to the present day, it means that the fundamental research and the inventions being done today would create the solutions and commercial products of 2050 and much, much later.

The fact that such fundamental research is NOT performed anymore these days (i.e. to a much lesser degree than in the Fifties – Eighties of the last century), could mean that the large companies will probably run on empty in the end. 

They simply miss the fundamental research, innovative solutions and inventions that they all require in order to develop new, groundbreaking products in the future. You could call this the ultimate form of Pennywise, Poundfoolish: taking a rain check on the future by saving money today. 

And so, as a matter of fact, we are all living in the Age of Pennywise, Poundfoolish. Of course, you could argue that Elon Musk of Tesla has fired a Tesla car into outer space, using one of his own innovative rockets  the Falcon Heavy rocket – as a proof of his own innovative force.  

Isn’t that exciting?!

But please explain me then how much Musk’s rocket technology differs from the groundbreaking Saturn 5 Rocket that Freiherr Wernher von Braun developed and built in the Fifties and Sixties of last century. I think you will know the answer. 

The only great difference between the Saturn and Musk’s Falcon Heavy rocket is the fact that parts of the latter could land on earth again, thus reducing the costs of a launch considerably. However, when this is the only technological breakthrough in fifty years of rocket science since the Apollo launches, than it is quite disappointing, isn’t it?!

And it is the same with the self-driving car. The (computer and telematica) technology behind it is both innovative and exciting, but the majority of the foundations for it has been invented in the sixties and seventies of the previous century.

This proves that good inventions go a long way, but also take a long time to turn into something profitable. When the fundamental research – leading to such inventions – is not performed anymore, the innovation might stop eventually. 

And to make things worse: virtually the only companies that ARE heavily investing in (fundamental) research are information-driven companies, like Amazon, Facebook, Uber, AirBnB, Google and Apple. Companies that mainly sell and exploit information and customer data, but hardly sell tangible products (i.e. except for Apple of course). 

The research of these companies is probably mainly aimed at slicing up the human mind in order to see what makes us all tick. The results of this research will make people more sensitive for the products and services of these companies, as well as for the targeted adverts of (now) Facebook and Google. I dare to state that such research will make us all more addicted to usage of information technology and social media in general; something that does not make us more happy per sé.

In other words: this is not the group of companies that would take us to the stars in another galaxy; rather the contrary, I would say!

The disappearance of the large laboratories is a symptom of a much bigger problem in the Age of Pennywise, Poundfoolish. Another important symptom is the slow, but definitive disappearance of the large conglomerates like Philips, Sony, Siemens and General Electric.

Even though the companies and their names remain on the market (mostly), they have often changed beyond recognization. Many of their former subsidiaries and divisions have been sold or turned into independent companies, under pressure of modern executive managers and aggressive shareholders.

In case of Philips, the Dutch multinational electronics company, this has happened to for instant the divisions Lighting (now Philips Lighting which has an independent quotation and is cut loose from the mother company), semiconductors (now NXP), lithographic semiconductor technology (split into ASML and ASMI) and televisions/flat screens (sold to the Chinese TP Vision).

This de facto split up of the former Dutch ACME company Philips is very much regretted by former CEO Jan “Hurricane Gilbert” Timmer. 

Timmer was responsible for the largest rescue operation in the history of Philips, in which 45,000 people lost their job, but his efforts kept the company afloat and made it turn back to prosperity. 

Due to his past, Jan Timmer is an unsuspected, but nevertheless influential advocate of the large conglomerates that Philips once was and a very important one.

In spite of his high age of 86 years, Hurricane Gilbert still has a sharp vision on the current multinational companies that are much more monolithic than their peers in the last century, as the following snippets of an interview of Jan Timmer with Het Financieele Dagblad prove:  

The most important reason for Timmer to write his book discloses itself at the end of it. There he starts a ‘personal quest’ to find the causes for the massive shrinkage of the multinational. From a conglomerate that is active in the production of telephones, computers, lighting, semiconductors and chip machines, Philips turned into a producer of medical equipment alone. Especially the executive move to abandon the origin of the company – the Light division – was the reason for Timmer to express his thoughts on paper.

“In Africa I saw how large South-African companies were organized. They were set up as conglomerates, in which the separate parts had a quotation at the stock exchange. The mother company kept the majority of the shares, but the subsidiaries had an independent management team and an own Profits & Losses account. Such a set up had been my ultimate goal for Philips, instead of the large firesale that took place during the last decades.”

“Should Philips have kept a majority share in Lighting?”

“Yeah. With Philips as majority shareholder, Lighting would have been better protected. Otherwise it becomes a bitesize chunk. That is the biggest drawback and risk of mono companies [i.e. companies with one single range of products – EL]. You can’t warrant continuity with that.

After I left the mindset took a wrong turn. At the beginning of this century the company came in the grasp of American ‘corporate fashions’ like focus and share buybacks. After the sale of Polygram Philips was financially healthy again and thus the company should have made plans for the future. 

We sold Semiconductors in 2006. But then what?! We should have made a blueprint for what to do with the money. Unfortunately, I don’t have the idea that there was a plan. All that focussing that Philips did only makes a company vulnerable.”.

I agree so much with what Jan Timmer stated in that interview. Roughly three years ago, I expressed similar doubts in Philips’ current strategy in one of my articles:

Philips was an opaque company with an opaque geographical structure, opaque profit centres, an opaque production and marketing structure, opaque cash flows and opaque profits. There were just simply too many products, too many plants, too many departments, too many geographical profit centres and too many management layers and managers, leading to numerous ‘islands in the stream’ doing their own things, irrespective of what the executive management wanted.

But yet, it always seemed to work after all…

That is, until the company fell in the hands of a series of managers with less passion for engineering than for shareholder value, short-term economics and commercial management.

After a few extremely expensive inventions and developments went awry, because they were ill-thought through, poorly marketed, superfluous or simply too far ahead of their time, the subsequent CEO’s have torn the company slowly, but surely apart.

Factory after factory in The Netherlands and other Western European countries has been shut down, while the production moved to the Eastern European and Asian low wage countries. The head-office left its century-old roots in the city of its founders Eindhoven, in exchange for a new establishment in the more ‘mondain’ Amsterdam, which was close to international airport Schiphol.

And the number of subsidiaries, production lines and business units of Philips that were either merged with other companies through joint ventures, have been turned into independent companies or have been sold to other companies, has been long and growing: ASML, NXP, Polygram, Whirlpool, UPC and LG Philips LCD to name only a few.

After yet another strategic turnaround in the past decade, that should change the company into a leading developer of healthcare equipment, the company existed only of three main divisions: Consumer Lifestyle, Healthcare and Lighting. And since last year, Philips Lighting is also tagged with a “For Sale” sign.

This was definitely a shock for the avid endorsers of Philips, as Lighting was the oldest branch of the company. On top of that, during the last, very turbulent decades it has often been the last straw for the company to clutch at, when all else failed. The lighting branch has traditionally been a very stable cash cow over the years and Philips did more than its share of inventions, on their way towards effective and extremely energy-efficient lighting solutions.

The only thing that we all can do is hoping that the classic conglomerate companies, that have been responsible for so many inventions and so many cool products, can wrestle themselves loose from these disturbing trends of 'focusing' and  ‘shareholder value’, in order to get away from the Age of Pennywise, Poundfoolish.

There should be a future for innovative conglomerates that think about their long-term interests, their personnel and their customers, rather than thinking about the immediate needs of their shareholders alone.

And there should be a future too for the large physical and chemical laboratories that brought the world so many scientific breakthroughs and cool inventions. 

The human race is now more than ever dependent on that, in the age of climate change and global heating, leading to worse global droughts and higher sea levels than ever.

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