Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity (11 page)

That’s the predicament in which corporations have found themselves after a pretty good run of global value extraction. Each time they ran into a wall, such as colonial resistance, they wrote new laws or fought new wars. Even great corporate losses, like the American Revolution, eventually became wins when laws were relaxed and corporatism was permitted to flourish once again. Over centuries of enterprise and expansion, it must have seemed like this could go on forever. There were always new continents of riches to conquer and new peoples to enslave. Even today, there are many who believe we just have to wait out this digital thing long enough to find out where the new territory for expansion awaits. We made it through disruptive technologies from steam engines and mass production to automobiles and television. Why should this time be any different?

Because, in reality, the limits of corporate expansion began to reveal themselves back in the 1950s. By the mid-twentieth century, corporations had already run out of new places to conquer, while people in places like India and Africa were beginning to push back. Even in America, consumers were finding themselves overwhelmed with purchasing choices, mortgage payments, and the other trappings of a consumer society. That’s why Eisenhower and his successors turned to technology. They hoped it could become a new frontier. In essence, they were asking: could the virtual spaces of the electronic realms—TV and computers—provide new areas for corporate growth?

So far, anyway, the numbers are telling us no. Since the mid-1960s
and the explosion of electronics, telephony, and the computer chip, corporate profit over net worth has been declining. This doesn’t mean that corporations have stopped making money. Profits in many sectors are still going up. But the most apparently successful companies are also sitting on more cash—real and borrowed—than ever before. Corporations have been great at extracting money from all corners of the world, but they don’t really have great ways of spending or investing it. The cash does nothing but collect, like waste in a vacuum cleaner bag, almost more a liability than an asset. That’s not what was supposed to happen, but it was an inevitable outcome of corporatism’s unrelenting spread.

In 2009, a study initiated by economic futurists at the Deloitte Center for the Edge dubbed this “the Big Shift.”
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They anticipated the conclusion to which macroeconomists are now reluctantly coming—that an economy dominated by large corporations must eventually undergo a systemwide stagnation. As the ongoing study has discovered, although some digital technology firms, such as Apple and Amazon, are doing well in the new business landscape, “they are still only a relatively small part of the overall economy,” which is losing steam over the long term.
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The study, which has been updated each year, researches detailed financial, productivity, and economic data on twenty thousand U.S. firms from 1965 to the present. In 2013, it found that while new technologies are giving companies the ability to do things better and more efficiently, the vast majority have been incapable of capturing the value from these new potentials. In other words, while per capita labor productivity is steadily improving, the core performance of the corporations themselves has been deteriorating for decades.

Note that the study does not evaluate firms in terms of return on investment, or ROI. It’s not looking at how well investors do buying the company’s stock. The metric of interest to Deloitte’s business analysts is ROA—the return on
assets
, or everything the company owns and owes, from cash and real estate to debt and taxes. As John Hagel, one of the authors of the study, explained in his book
Shift Happens
, “The return on assets for U.S. companies has steadily fallen to almost one quarter of 1965
levels.”
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This means that for the past fifty years, corporate return on assets has been declining. Corporations may still be delivering more income to shareholders, but they are not doing so by making more profits.

The economists at Deloitte blame this on corporations’ inability to capitalize on the windfall of efficiency and productivity bestowed on them by new technology. In their view, “the conclusion is inescapable: big hierarchical bureaucracies with legacy structures and managerial practices and short-term mindsets have not yet found a way to flourish in this new world.”
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But the “new world” they’re talking about is more than a half century old now and includes successive leaps in technology from transistors and solid-state through mainframes and integrated circuits to laptop computers, smartphones, and cloud computing. This is the world in which we all grew up. If corporations were going to find a way to flourish as they once did, shouldn’t they have found it already?

What we’re witnessing may be less the failure of corporations to thrive in a digital environment than the limits of the corporate model in any environment—and the acceleration of this decline with each new technological leap. Corporations have successfully captured the value that exists out there and converted it into static cash. They just don’t know where to put this new money to work. Under the conditions of a free market, small businesses and individuals would then pick up the slack, creating new value. They might even be bought by big corporations, which would then grow even more. But the soil for such economic activity has itself been rendered fallow by aggressive corporate activity and regulation.

Incapable of raising the top line through organic growth, corporations turn to managerial and financial tricks to please shareholders. More often than not, this means that the corporation must cannibalize itself to deliver higher share prices or dividends. Boards incentivize CEOs to increase short-term profits by any means necessary, even if this means defunding research and development labs and personnel whose value creation may be a few years off.

It works, putting more cash on the positive side of the balance sheet
temporarily. But that only makes the ROA problem worse; companies end up burdened with more unspent cash and a bigger block of dead, unproductive assets. Incapable of stoking innovation from the remaining employees, they go on a shopping spree for acquisitions—buying the growth they can’t create themselves. Big pharmaceutical companies now depend almost entirely on tiny upstarts for new drugs.
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Even digital companies that have grown too wealthy and unwieldy, such as Facebook and Google, now innovate through acquisition of startups—for which they pay a king’s ransom. Google has turned itself into a holding company, Alphabet, as if to better reflect its new role as the purchaser of other firms’ ideas. Standard accounting practice encourages it, because acquisitions are treated as capital expenditures, while real R & D counts as an expense against earnings. Once the new acquisition is absorbed, however, it is subjected to the same sorts of cost cutting that befell the parent. The expected “synergies” never quite pan out, which is why 80 percent of mergers and acquisitions end up reducing profit on both sides of the deal.
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Other companies attempt to lower expenses by outsourcing core competencies. Offshoring allows corporations to utilize workforces as they did back in the good old days of colonial exploitation. Finding employees overseas to work for almost nothing is easy. Indebted nations make the easiest targets. Forced to service their loans by exporting their local crops and resources, such countries can no longer offer subsistence farming opportunities to their citizens. So foreign multinational corporations end up with monopolies on employment and trade very similar to the kinds they enjoyed back in the 1600s. In newly industrializing nations, such as China and Singapore, former peasants migrate to the cities to become part of the manufacturing middle class—the low cost of their wages on the global market almost entirely dependent on artificially devalued currency.

Even if these inequities and manipulations could be sustained indefinitely, outsourcing is still not an enduring growth strategy. It’s a way to cut corners, repeatedly, until there’s nothing left at all.

Almost a decade ago, I got a call from the CEO of what he called “an American television brand,” asking me to help him make his marketing
more “transparent.” Problem is, there are no televisions manufactured in the United States. As he admitted to me, his manufacturing, design, marketing, and fulfillment were all accomplished “out of house.” So what would transparency reveal? His company was an administrative shell—a few accountants working spreadsheets of a bunch of outsourced activities. Following the corporate program may have cost less in the short run, but there was now no company left at all. The big new thing they needed to integrate into their corporate DNA was not Facebook, Twitter, or even big data but basic
competency
. They needed to find or hire some expertise, people who could innovate or who could add something to the product or brand that justified higher margins from consumers. What was the company’s value-added? Their competency was not being challenged by new technology at all but by the underlying bias of corporatism away from creating any value. Besides, actually doing something well pays off in a longer-term timescale than most CEOs are incentivized to consider. And it means creating value for someone else, in the form of a good job or product.

Instead, companies look to deliver returns by lowering their costs—no matter what it means for top-line growth or long-term profitability. The CFO of an American office equipment manufacturer once proudly told me that he was going to invest over $100 million to build a factory in Vietnam. The facility would save an estimated tens of millions per annum in labor. I tried to explain to him that his calculations were based on variable geopolitical relationships, commodities prices, and exchange rates over which his company had no control. But he could only see how lowering costs would make his share price go up. The company was considered a growth stock, after all.

Sadly but predictably, the project was an abject failure. Office equipment manufacturers are not as good at global exchange arbitrage as the investment bankers watching their every move. For every company that thinks it can outsmart global capitalism by leveraging exchange rates and commodities futures, there are traders who know these markets better—and are already discounting the currencies and commodities involved
(utilizing dark trading pools that office equipment manufacturers don’t even know about). In the case of the factory, hedge funds neutralized the arbitrage before construction was even finished. The plant was closed just a couple of years later—before it was fully functioning—and written off as nearly a billion-dollar loss.

Besides, the smartest companies in America are already bringing their manufacturing back home. Apple, GM, and even Frito-Lay are celebrating domestic production the way that homespun brands like L.L. Bean and Ben & Jerry’s used to. Beyond the halo it earns them from an employment-challenged population, it gives them an opportunity to build a culture from the inside out and to focus on core competencies for the long term rather than short-term balance-sheet maneuvers. Most of all, the reason to repatriate your competencies is to stay close to the products and processes that are the lifeblood of your work. That smell of the factory floor on your way up to the office reminds you not just of where you came from but of what is at the heart of your work and your culture. It’s what you
do
for a living.

Although it’s good for branding, company culture, and long-term innovation, repatriation is still understood by shareholders as a form of acquiescence to leftist grumbling for protectionist policies. What neither side gets is that no matter where a corporation is doing its business, it’s
always
a foreign entity. Unemployment hawks argue against outsourcing jobs and manufacturing to China, but these processes were already outsourced. Corporations were programmed not to be part of the local community fabric but to replace those bonds with allegiance to distant, abstract brands. They were built to extract value from employees and consumers alike. Without conscious reengineering by a strong CEO, they can’t bring long-term prosperity to the people and places where they operate. At best, they will create a false, temporary economy and total dependency—leaving no viable economic infrastructure once they shut down.

Corporate activity is less like a fan bringing in new air and promoting local respiration than like a vacuum sucking out the oxygen and taking it somewhere else. That’s why the current predicament has been all but
inevitable since the first monarch breathed synthetic life into a corporate charter. Technology may be involved with all this, but it’s a mistake to point to things digital as somehow causative. Digital processes, applied to the same old tactics, simply exacerbate the same old problems. Outsourcing to robots is just another form of outsourcing.

The digital landscape does serve to make the bankruptcy of the corporate model all the more apparent. The speed and scale at which this is occurring helps us recognize that we are not in a cyclical downturn as corporations attempt to compensate for the disruptive impact of digital technology. Rather, we are in a structural breakdown, as corporatism—enhanced by digital industrial mechanisms—runs out of places from which to extract value for growth. The corporate program has reached its limits. Its function is to grow companies by turning active economic activity into static bags of capital. And in doing so, it has taken a liquid medium necessary for our economy’s circulation and frozen it in corporate accounts. Farmers know to leave fields fallow or plant restorative crops so that they can repair and remineralize. Aggressive extraction leaves nothing.

From a traditional economics perspective, like that of a recent Standard & Poor’s report,
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the income disparity between people and corporations has gotten too wide. The logic used by the forecast is straightforward. The researchers broke down income into four main categories: labor, capital gains, capital income, and business income. In a healthy economy, there’s a balance among these forms of income, with most people making money through labor or small-business income while a wealthy minority makes money off stock as either dividends or capital gains. If corporations convert too many assets from the working and business economies into pure capital, then the whole system seizes up for lack of fuel.