No Creativity Just Destruction

No Creativity, Just Destruction

March 2010 by Barry C. Lynn

How capitalism killed the soul of Motorola.

BARRY C. LYNN is director of the New America Foundation’s Markets, Enterprise, and Resiliency Initiative, and author of End of the Line: The Rise and Coming Fall of the Global Corporation. From Cornered: The New Monopoly Capitalism and the Economics of Destruction (Wiley). ©2010

A surreal painting still hangs in the entryway to Motorola’s old headquarters in Phoenix, and sprinklers still chatter over trim lawns and spatter the trunks of palm and orange trees. But outside the concrete and tinted glass building, the fountains no longer splash, the three aluminum flagpoles are bare, and where a sculpture once stood remains only a concrete base.

As I poke at an intercom box, a smiling security guard rolls up in a striped compact car, pleased someone has intruded into her midmorning quiet, eager to tell me what she knows, which is mainly that the For Sale sign out front attracts few potential buyers. The day is clear and crisp, and sprays of red and white ocotillo flowers bounce in the breeze. Behind the guard, a parking lot built to hold a couple hundred cars stretches to a white perimeter wall. A perfect place to spin donut after donut after donut.

Instead, I wheel south on Galvin Parkway to continue my tour of closed Motorola facilities. My next stop is an industrial building on South Diablo where the Motorola sign is covered with a fresh white canvas cloth that reads Emerson Network Power. Then I wind through Arizona State University’s lushly landscaped Research Park, where the buildings once occupied by Motorola Labs and Motorola University now house a training center for a financial-services firm.

Some miles farther south, in Chandler, I pull up next to Motorola’s old semiconductor plant at the intersection of Price and Queen Creek roads, where I watch a dust devil twist and hop through the brush behind the building. Then I speed north to the “Hayden Campus” in Scottsdale. This was Motorola’s first big facility in the area, an almost elegant building with hints of midcentury Vegas. The name on this sign? General Dynamics. By now I am exhausted, even though I bypassed many other sites, like the buildings that once housed the Semiconductor Components Group, the Semiconductor Products Sector, and Motorola’s Iridium satellite-phone system.

Less than a decade ago, Motorola was the biggest private employer in Arizona, with more than twenty thousand workers. The company was also the star of a classic midcentury American high tech industrial-development story.

Founded in Chicago by Paul Galvin in 1928, Motorola carved out a comfortable niche manufacturing radios for roadsters. Then, just before World War II, a Motorola scientist invented the world’s first handheld walkie-talkie, and the company became a major supplier of gear and ideas to the U.S. military. When the U.S. government began to plan for potential atomic war in the late 1940s, Motorola was one of the firms pressured to move its researchers and workers safely outside the range of Soviet bombers. A Motorola scientist who liked to vacation among the saguaro chose Phoenix, and companies such as GE and Sperry Rand soon followed. As local universities staffed their math and science departments, the Phoenix area became one of the country’s most important centers for the electronics, space, and defense industries.

The speed of Motorola’s collapse was stunning. By 2007, the company’s Arizona payroll was down to fifteen hundred, and Wal-Mart had long since replaced Motorola as the state’s top employer. Yet for the nation as a whole, the issue is not merely the loss of good jobs. Nor is it all the commercial real estate and ranch homes dumped on a depressed market. The issue is how we protect the systems, sciences, and industrial arts on which our lives depend—or rather, how we don’t.

It’s Not About Globalization
Until a few years ago, Motorola was also one of the world’s most advanced manufacturers of many of the basic elements of our modern life, including semiconductors, satellites, lighting systems, failure-proof computers, airborne radars, and mobile phones, as well as a developer of advanced manufacturing and management techniques such as Six Sigma. Many of these activities were sold off or transferred to other firms, but many were lost. Understanding why and how these vital activities were disrupted—sometimes destroyed—is crucial to our well-being, even our survival.

One factor we can largely rule out is “globalization.” Motorola was one of the first U.S. manufacturers to establish plants in China. In much the same way that the Truman administration forced Paul Galvin to diversify from Chicago into Arizona, the Reagan administration twisted the arm of Galvin’s son and successor, Robert, to “encourage” him to invest in China. This time, the strategic reason was to head off similar investments by Japanese or European concerns.

Motorola cooperated, and, in typical fashion, the firm’s investment in the city of Tianjin proved to be one of the first highly successful foreign ventures in China. This means that Motorola was long insulated from any sudden assault by another company with access to cheaper labor. To the extent that foreign competition did play a role in weakening Motorola, it came not from China but from mercantilist states such as Taiwan and South Korea, where trade protections and generous state subsidies enabled Motorola competitors such as the Taiwan Semiconductor Manufacturing Company and Samsung to undersell Motorola semiconductors and mobile phones.

What shattered Motorola was domestic competition. But this was not “horizontal” competition with firms that made the same or similar products. Rather, it was two forms of “vertical” competition. The first was with the companies that retailed Motorola’s mobile phones, once one of the company’s main sources of profit. Until the latest round of consolidation among mobile providers, Motorola still had a lot of control over the pricing of its products. Not anymore—today Motorola may manufacture the phones, but in the United States it is AT&T and Verizon that decide which phones to sell and what to charge subscribers; hence, they also decide how much profit, if any, Motorola will earn.

The other form of vertical competition was even more devastating. This was competition between Motorola’s scientists, engineers, skilled workers, and professional managers on one side of the corporation (and, of course, the citizens who depend on their work), and financiers armed with concentrated capital on the other.

Finance vs. the Corporation
A generation ago, many vertically integrated corporations functioned as communities of sorts, with everyone sharing more or less fairly in the work and the profits. If a company put out a better product and won a bigger share of sales, everyone could expect some portion of the winnings. If the members of the team delivered shoddy products or services, everyone took a hit.

Competition among members of the team did not vanish, of course. The industrial history of the mid-twentieth-century United States is replete with great battles between workers and managers for the exact same slice of the profit pie. Nevertheless, there was also a far greater sense of interdependence among the interest groups within the enterprise than is usually the case today. So it was for many decades at Motorola, where long-serving “Motorolans” were said to be “Galvinized,” which meant they were guaranteed lifetime employment.

The financiers began to take apart the vertical integration model that dominated industry in the United States almost as soon as the Chicago School operators in the Reagan administration eliminated the basic laws we had long used to regulate competition in the U.S. economy. As the financiers extended the horizontal reach of these corporations and cut loose their vertical operations, competition between the interest groups within the “classic” corporation grew much more extreme.

When companies like GM began to spin off certain production activities in the 1980s, a key goal was to weaken unions and drive down wages. Although the managers often said that such changes were necessary to compete with Japanese manufacturers, in actuality much of the cash that was saved went straight to the financiers. In this breaking up of the old industrial community, Jack Welch of GE was again one of the pioneers. In the early 1980s, he earned the nickname Neutron Jack for eliminating workers while leaving the buildings intact. He did so not to plow money into R&D but to fill the coffers of GE shareholders.

The trouble is that when the managers at one firm take such an approach, investors expect the managers at other firms to do so as well. Thus, eventually, the pressure began to grow on Motorola’s managers to follow Welch’s lead.

One of the best ways to make sense of the shattering and shuttering of Motorola is precisely by considering the company’s recent history in relation to GE. Both were long-established conglomerates that combined consumer lines of business with defense work, and both dominated certain technologies and products. But whereas Welch chose to keep his shareholders happy, even when it meant cutting into his treasured R&D, the Galvin family refused time and again to do so, preferring instead to try to empower Motorola’s scientists and engineers to invent their way to profits. GE’s industrial capabilities have, overall, declined in the years since Reagan took office, in some cases precipitously. Yet Welch and his successor, Jeffrey Immelt, managed—until 2008—to protect most of the firm’s core business lines and capabilities.

The Galvins, in contrast, dramatically built up Motorola’s capabilities on the strength of years of smart investments. Then, when a single round of R&D disappointed, they found themselves unable to recover their equilibrium, which left the Wall Street jackals free to tear their firm to pieces.

The turning point came in the mid-1990s. Motorola had become one of the world’s hottest manufacturers. It had beaten back a Japanese invasion on pagers, was rolling out an advanced line of cell phones, and was winning kudos for its Six Sigma business-management system. It was also pouring big money into new ideas; in 1993, it invested $224 million more in R&D than the much larger GE did. For a while the strategy worked wonders, and Motorola reaped the rewards. From 1992 to 1994, the price of a share of Motorola stock rose by 62 percent, 77 percent, and 26 percent. The price of GE stock, meanwhile, rose only 15 percent and 23 percent, then fell 2.7 percent. Motorola also added tens of thousands of jobs while GE continued to trim.

Then in 1995, GE’s focus on cutting costs and grooming duopolies and monopolies began to pay off. Welch had by now beaten his R&D budget down to seventeenth place among big U.S. firms, yet GE now shot to the top position as the world’s most profitable big company. Thus it was GE’s shares that soared, by 41 percent. Motorola, which missed its profit target by a hair, saw its shares drop 2 percent.

To make matters worse, Motorola now found itself competing for funds with three newer business models, which were far more stripped-down than even the Welch model at GE. The first was the pure trading-company model, under which firms such as Dell and Tyco would largely forgo R&D and simply repackage and resell foreign-made products and components. The second was the “innovation through acquisition” model, now raised to a high art by the Internet-equipment monopolist Cisco. The third was the “Hydra” model, which spread swiftly through the electronics industry and resulted in the rise of highly concentrated and specialized powers—such as the semiconductor foundry-services firm TSMC—that were able to price their wares below those of integrated and complex operations like Motorola.

Smashed for Quick Cash
By 1998, Motorola was feeling real pain. When a financial crisis in Asia hit sales hard, the Galvins finally began to retreat. Over the next five years, they fired 60,000 of the company’s 150,000 workers and spun off a whole semiconductor division. Once again, however, the company—whose reins had now been passed to Robert Galvin’s son, Christopher—refused to share as much of this cash as the financiers demanded. Instead, the managers redoubled investment in new ideas and products, outpacing GE by more than $1 billion per year.

Christopher Galvin was not around to collect any winnings when this investment resulted in a final fit of engineering brilliance: the sleek RAZR flip phone. Long before that model hit stores, the financiers had engineered a putsch against Galvin, whom they faulted for being too “gentlemanly” and “academic.” They also ordered the surviving managers to spin off another semiconductor business (which has since been picked apart by vultures). Yet even without a Galvin in the CEO position, Motorola’s old spirit flared up one last time. When the RAZR proved to be a smash success and enabled Motorola to amass a huge stash of cash, Galvin’s successor, Ed Zander, did not hand this money over to the financiers, as instructed. Instead, he set it aside to, as BusinessWeek put it, “remake the company into a master of innovation.” By January 2007, Motorola’s total cash on hand hit $11.3 billion.

And so early in 2007, a man named Carl Icahn entered the scene to deliver the coup de grace to what was arguably the last classic R&D-focused conglomerate in the United States.

Icahn gained wide notoriety in the 1980s as a “corporate raider” after he grabbed and smashed Trans World Airlines. In recent years, Icahn’s targets have included Time Warner, Yahoo!, Medlmmune, and even Marvel Comics. Icahn’s basic modus operandi is to buy up shares of stock until he owns a small percentage of the total outstanding, then use this position as a perch from which to demand a payoff. In the case of Motorola, Icahn slowly accumulated 6.4 percent of the company’s shares. Then one day, he ordered Zander to spend the entire $11.3 billion in cash to “buy back” shares from other investors. This would drive up the price of Icahn’s holdings, which he could then sell at a big profit. The resulting battle lasted nearly a year. As is usually the case, Icahn got what he wanted, which was to have Zander fired, two buddies named to the board, and what was left of Motorola broken in two.

And what did the American citizen get from all this? One of the last remnants of our twentieth-century industrial system—a corporate system that we designed and funded to protect and develop the technologies, skills, and systems on which we depend—smashed for quick cash.

Barbarians or Vandals?
In the half-century after the Civil War, men used the institution of the corporation to enclose in their fences the people who actually make and invent the products and services on which we depend. Politicians outside the corporation and engineers inside it learned to use law and “management systems” to neutralize the power of the individual capitalist and slowly transform the giant industrial corporation into a semi-socialized institution of immense economic value that did not threaten any political balances in our republic.

The story of Motorola illustrates how radically our attitudes have changed. In the 1980s, after the election of Ronald Reagan brought the Chicago School operators to power, men like Carl Icahn suddenly found themselves free to break up airlines at will, and men like Ronald Perelman found themselves free to use Michael Milken’s “junk bonds” to grab healthy producers like Revlon and turn them into ruthless trading operations.

Yet the idea that any “barbarian”—as the new 1980s breed of financier was famously dubbed in a book about the takeover of RJR Nabisco—would be allowed to grab and smash a keystone industrial firm like Motorola was still unthinkable. Just as no speculator would be allowed to seize the cash in the coffers of such corporations as, say, the city of Boston or Stanford University, no speculator was allowed to assault any vital U.S. industrial firm. To this day, such attacks remain unheard of in Japan, Germany, France, and South Korea.

And yet in early 2007, when Icahn revealed that he was targeting Motorola, hardly anyone in the United States stood up to defend this industrial corporation to which we had entrusted so many vital activities and in which we had invested so many tax dollars. On the contrary, most “business” reporters on our newspapers and magazines applauded the assault and near destruction of this institution (and many of the skills, technologies, and techniques held within it) just as they applauded when Icahn brought his power to bear on Yahoo! The final destruction of this once-great industrial system was viewed as a healthy culling of a weak and sickly company. No matter how brutal, they said, the process was necessary to generate real wealth for the American people, in the form of cash.

There are many reasons today to believe that something is seriously awry with U.S. corporate capitalism, or even with capitalism per se. After the meltdown of 2008 came close to burning up the whole world financial system and gutted such titans as Citibank and AIG, even the most conservative newspapers were filled with articles wondering, as The Washington Post did, if this was “the end of American capitalism.”

The story of Motorola illustrates that even if we manage to devise better ways to regulate our financial systems, our market systems, and our trade systems, we st­­ill will not have reached the core of the matter. Nor will we get there even after we begin once again to enforce our classic antimonopoly laws, and outlaw outright the sort of plain-as-day plundering practiced by Carl Icahn and such copycat vandals as Daniel Loeb and Warren Lichtenstein.

From Menu Foods to Luxottica to Macy’s to General Motors and Toyota, the pressure from financiers to increase profits has resulted in an ever-swifter monopolization (and socialization) of the industrial systems on which we depend. Even when we are down to a single source of supply, the financiers keep stripping. This pressure derives not from some genetic flaw in the organic makeup of these firms but from the legal structure of American capitalism itself. The American model of capitalism—of corporate monopolies supposedly “owned” by financiers who direct all their power to maximizing the production only of cash—builds vandalism right into the system.