Ichiro Suzuki
General Electric is a company that Thomas Edison founded in the late 19th century. It was natural progression that Edison’s GE, from its light bulbs origin, expanded into a variety of businesses that included heavy machinery, chemicals, aviation, medical equipments, etc. Expansion of business lines culminated in GE Capital through acquisition of investment bank Kidder Peabody, by Jack Welch when he rose to the helm in 1981. While expanding into financial services business, Welch embarked on streamlining of sprawling divisions, deciding to hold onto businesses that were No.1 or 2 in their segment, whereas divesting those that were No.3 or below. In addition to radical restructuring of the company, GE Capital changed the company dramatically with its profitability that dwarfed other divisions. Later, GE Capital was ultimately responsible for disintegration of the company, as tightened financial regulations that followed the global financial crisis radically altered its profit potential to the downside. While General Electric is a venerable name, general something is witnessed also in other industries, roo.
General Motors is an amalgamation of many car makers that existed in the early 20th century. GM divisions, current and discontinued ones, are traced back to the companies that were acquired in that process: Cadillac, Chevrolet, Buick, Pontiac, Oldsmobile, etc. President Alfred P. Sloan ran a complex car maker with his management skill that culminated into a science, establishing a modern management theory. There used to be a company called General Foods that had a collection of a number of packaged food brands. Philip Morris bought the company and later spun it off. Today Kraft-Heinz is essentially GF’s descendant.
Then, expansion of business lines beyond particular industry boomed in the 1960s with the rise of conglomerates. The business community and the financial markets foresaw the future of management in them. Litton Industry’s Tex Thornton and ITT’s Harold Geneen were worshipped as management rock stars, as Jack Welch would be toward the end of the 20th century. Conglomerates’ business lines sprawled into a variety of totally unrelated businesses. Under a holding company, Geneen’s ITT had 350 companies around the world. Thornton once boasted that he could run all the companies without knowing what they are doing, by only looking at financial statements.
Not surprisingly in retrospect, debt-financed fast-growing conglomerates were brought down by high interest rates in the 1970s. After spectacular growth, it naturally became tougher for them to grow further due to the sheer weight of size. Slower growth rates hit their valuations, too. Higher interest rates gave them double whammies on valuations. The market later discovered that smaller businesses could be run more nimbly and efficiently under the management with depth of knowledge in the industry and the segment, and that would lead to greater shareholder value. On the other hand, markets valued conglomerates at a discount that gave them far smaller equity market capitalization than the sum of their parts. In the 1980s, conglomerates were dismantled and many general something compares went through streamlining of their business lines. Divested companies were taken to the market as stand alone public companies or sold to others. These moves contributed to stock markets boom in the late 20th century.
In the world of Corporate Japan, ‘zaibatsu’ (conglomerates) emerged in the late 19th century in the wave of modernization of the country. Under an umbrella of a holding company, a variety of heavy and light industry companies, in addition to a bank and a trading house, operated. While the zaibatsu structure was broken up immediately after WWII by the U.S. Occupation Forces, it was soon brought back to life under a slightly different format. Companies in a post-war Zaibatsu, or a business group, became independently publicly listed, and they held shares each other of group companies, into an infamous mutual shareholding system. In the 1990s, this system hurt Corporate Japan through chronically falling share prices.
Outside of traditional Zaibatsu structures, it was not uncommon for companies expanded their business lines into sprawling structures during the time of hyper growth period in the 1950s and the 1960s. Hitachi has been one of the largest Japanese companies for much of its history, and is Japan’s General Electric though Hitachi never went into financial businesses. Hitachi does almost everything that is related to electric: from home appliances to nuclear engineering. On top of business lines directly under Hitachi Ltd., Hitachi under its wings had a number of independently listed companies in the Tokyo Stock Exchange. At one point, there were 19 independently listed companies named Hitachi something and 3 others without being called Hitachi but was partially owned by Hitachi Ltd.
With such structure having been long out of vogue in the U.S. for some time and the rise of shareholder capitalism, overly diversified corporations’ lack of appeal to shareholders finally came to be understood in Japan and by Hitachi management in early years of the 21st century. Hitachi started to simplify the structure of the group about 15 years ago. Many of those companies were divested and sold to other companies or to an investment fund, while some others were taken into Hitachi Ltd. This strategic move has made Hitachi much more focused, though still diversified. The market is responding to the company’s strategic move favorably, doubling its share price since the outbreak of the coronavirus at the outset of the 2020s..
Japan’s over-diversified general electric companies left a major damage to the country’s competitiveness. It is a much weakened semiconductor industry. In the 1980s, Toshiba and Mitsubishi Electric, along with Hitachi led the world in designing and manufacturing of semiconductors. When their overall business slumped in the 1980s along with the Japanese economy, they were forced to cut costs aggressively. At that time, investments required for semiconductors ballooned as circuit designs on chips shrank fiercely. Worse, semiconductor is a very volatile and cyclical business. Such industry characteristics were not received well by these companies’ management, that were a group of salaried men who came up through the corporate ladder. To them more stable divisions such as heavy machineries with clearer earnings prospects looked more appealing. Without sufficient investments, Japan’s semiconductor manufacturing began to fall behind Korean and Taiwanese competitors, for whom founder CEOs made audacious investment decisions. The case of semiconductors taught Corporate Japan a very hard lesson on the drawbacks of hyper-diversified companies and the way Corporate Japan has been run.
About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.
