From the Boston Review:
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.
Urging Timken shareholders to vote for the split, Relational Investors argued that they should want “pure-play” companies, focused on a single industrial activity. Investors would then be free to balance their portfolios by selecting businesses in industrial sectors with varying degrees of risk and sensitivity to different phases of economic cycles. A firm such as Timken—about one-third a steel company (a materials play) and about two-thirds a bearings and power transmission business (an industrial components play)—would lock investors into a mix that, Relational Investors claimed, leads to a discount on share price.
Timken management argued that making both materials and products enabled them to bring to market higher-quality goods that met customers’ needs: for example, their ultra-large bearings for windmill towers, which measure two meters in diameter, weigh four tons, and have to stand up to extreme wind and temperature conditions. Controlling the entire value chain, they said, allowed them to fine-tune the attributes of the steel in order to make superior products. Nonetheless, the financial calculation about how to maximize quarterly returns won out.
Timken’s story is not only about stock prices and product quality. Since the 1980s financial market pressures have transformed U.S. corporate structure itself. The system was once dominated by a few dozen very large, vertically integrated firms in which most or all of the functions needed to take a new idea about a product or a service to market—from R&D, design, manufacturing, testing, and logistics through sales and after-market services—were contained within the four walls of a single corporation. Now even the big firms are smaller, leaner, and centered on “core competencies,” with much of their production outsourced and overseas. Those pressures have driven companies such as Timken to hive off activities that involve heavy capital outlays, require large workforces, or promise less profitability in the short term.
The contribution of this decades-long trend to the rapid decline in American manufacturing has not been fully acknowledged. But understanding its role is essential to a revival of American manufacturing that will create jobs and promote long-term economic health. Both private and public sectors are taking constructive steps. Will American finance get in the way?
Timken was one of hundreds of manufacturing companies in a sample of firms interviewed by an MIT research team about their experiences in bringing novel ideas, products, and processes to market. I was a principal investigator in that project. The aim of the project—Production in the Innovation Economy—was to discover whether we really need manufacturing to gain the benefits of innovation: economic growth, new companies, new profits, and good new jobs in this country. After all, Apple and other companies like it—which do R&D, design, and distribution but little or no production in the United States—reap the lion’s share of their profits here. To explore these issues, the MIT researchers collected data on the efforts to scale innovation up to market by startup firms, Main Street small and mid-sized manufacturers, and Fortune 500 companies. When we learned about the Timken shareholders’ vote, we realized that we were seeing up close and in real time the forces that over the past thirty years have transformed and shrunken manufacturing in the United States.
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.
In the case of productivity gains, there have clearly been major advances over the long term. The periods of advance, however, do not correlate neatly with the years of greatest job losses. Some periods of rapid productivity growth also saw employment growth, or at least of stability in the manufacturing workforce. Research by economist Susan Houseman and her colleagues on the past decade—when manufacturing employment has fallen off the cliff in the United States—suggests productivity growth in manufacturing was actually modest, but national statistics fail to account for the rising volume and value of imported components and thus systematically overstate productivity. The corrected numbers indicate that productivity growth over the past decade took place primarily within one manufacturing industry: computers and electronics. So productivity gains alone can hardly explain the shrinking of U.S. manufacturing employment....MORE