The End of Power (31 page)

Again, the statistical evidence is conclusive: whereas in 1980 a firm in the top fifth of its industry ran only a 10 percent risk of falling out of that tier five years later, by 1998 that risk was up to 25 percent.
¹¹
Among the top 100 companies in the Fortune 500 listing in 2010, 66 were survivors from the 2000 list. Thirty-six hadn't existed in 2000. On the basis of a detailed statistical analysis, Diego Comin of Harvard and Thomas Philippon at New York University found that in the last thirty years “the expected length of leadership by any particular firm has declined dramatically.” This, too, is a global trend. And it coincides with the growing geographic scope of competition. The Forbes 2012 ranking of the world's 2,500 biggest companies found 524 based in the United States—more than 200 fewer than five years prior and 14 fewer than the year before. More and more of the world's largest companies
have headquarters in China, India, Korea, Mexico, Brazil, Thailand, the Philippines, and the Gulf states. Mainland China is closing the gap between itself and the United States and Japan, the two countries with the largest number of top global companies, and is now the third-largest country in terms of membership, with 15 more companies than it had in 2011. New entrants like Ecopetrol of Colombia and China Pacific Insurance of China are coming in, while the likes of Lehman Brothers and Kodak (both dead), Wachovia (absorbed by Wells Fargo), Merrill Lynch (now owned by Bank of America), and Anheuser-Busch (taken over by a Belgian-based conglomerate with roots in a once-obscure Brazilian provincial brewing company) have fallen from consideration.
¹²

The disappearance of well-known companies and once-cherished brands does not mean that in many business sectors concentration isn't as high as ever and in some cases even higher than before. A pet-food recall in 2007 in the United States, for example, revealed that only one contract manufacturer actually made more than 150 products with various names. Two companies control 80 percent of the US beer market, two companies account for 70 percent of American toothpaste, and so on. In an example cited by author Barry Lynn, an Italian company, Luxottica, controls not only several big optical retail chains in the United States but also many of the brand-name lines of eyewear that they sell.
¹³
Leonardo del Vecchio, Luxottica's major shareholder, is one of the world's wealthiest people, ranking 74 in Forbes's list of the world's billionaires.

Globally, industry concentration levels vary a great deal by sector. The diamond industry remains tightly driven by the dominant player, De Beers, which asserts prices and governs the flow of rough diamonds to the enterprises that cut and finish them. De Beers's 60 percent of the rough-diamond market gives it an overwhelming lever on prices. In the computer chip business, one manufacturer, Intel, controls 80 percent of the market for CPU processors. Other industries in which concentration is high enough to rouse the attention of American or European antitrust agencies are crop seeds (where Monsanto and DuPont dominate), payment networks (where Visa and MasterCard reign), and of course Internet searches (where Google accounts for 63 percent of search activity in the United States—and 90 percent of search growth).

But other industries have become less concentrated despite years of apparently aggressive merger activity. In fact, as business professor and author Pankaj Ghemawat argues in
World 3.0
, “In most situations, globalization appears to promote more competition, not more concentration.”
¹⁴
A salient example is automobiles. Industry data show that the top five motor vehicle manufacturers worldwide accounted for 54 percent of production in 1998, and only 48 percent—a small but significant decrease—in 2008. Expanding the analysis to the top ten manufacturers still showed a decrease in concentration. The trend is long-standing. In the 1960s the top ten manufacturers accounted for 85 percent of the world's car production; that share is now down to about 70 percent. In part, the increased fragmentation of the market reflects the emergence or global spread of new players from countries like Korea, India, China, and elsewhere.
¹⁵
In 2011, for example, Hyundai was not only the world's fifth-biggest automaker but also its most profitable.
¹⁶
In looking at concentration among the top five companies across eleven industries from the 1980s to the 2000s, Ghemawat found that the average five-firm concentration ratio had fallen from 38 percent to 35 percent; that decline is even more pronounced if we reel the numbers backward to the 1950s.
¹⁷

Many long-cherished corporate names have performed sudden vanishing acts. Once-prestigious names in retail, banks, airlines, even technology—remember Compaq?—are receding into faint memories. On the other hand, some of the world's most ubiquitous brands barely existed a few years ago, such as Twitter, founded in 2006. As consumers, we have largely grown accustomed to such trends. Indeed, consumers have been the inadvertent agents of some of this turnover, which has been partly driven by an increase in the rate and impact of brand disasters—incidents that shake the reputation of a company and its products to the core, causing share prices to plummet and consumers to flee. A study conducted in 2010 found that whereas two decades ago companies faced an average 20 percent chance of encountering a “corporate disaster” for their reputation in a five-year period, that chance is now 82 percent.
¹⁸
Is this because oil spills, failing brakes, and impolitic statements are four times more common today than twenty years ago? No, but their diffusion and reach are faster and far greater, and their louder echo often portends grave consequences.

In this context it should come as no surprise that the most visceral indicator of economic power—individual wealth—is subject to quick changes as well. (Since 2012,
Bloomberg News
has provided a daily ranking of the world's top twenty billionaires, updated daily at 5:30 P.M. New York time.) The number of billionaires in the world has soared in recent years; it reached a record 1,226 in 2012.
¹⁹
A growing proportion are Russians, Asians, Middle Easterners, and Latin Americans. Interestingly, the billionaire who gained the most wealth between 2007 and 2008, Indian industrialist Anil Ambani, was also the one who lost the most the next year (though he still ranked 118 in 2012).
²⁰
According to a 2012 study by wealth intelligence firm Wealth-X, between mid-2011 and mid-2012 Chinese billionaires lost almost a third of their combined wealth.
²¹

No one is shedding any tears for the plight of the mega-rich. But the turbulence in the world's wealth rankings rounds out a picture of insecurity at the top of the business world—whether of bosses, corporations, or brands—that is heightened relative to any time in recent memory, in a business arena that is more global and diverse than at any time in the past.

The turmoil at the top makes an odd contrast with the widely prevailing idea that we live now in an era of unprecedented corporate power. The boom of the 1990s doubtless brought fresh glamour and prestige to corporate careers, and the rise of the high-tech economy created a new generation of business heroes out of the chiefs of Apple, Oracle, Cisco, Google, and the like, as well as superstar players in the world of securities and banking. In Europe, regulatory reforms, privatization, and the creation of a single market gave birth to new corporate icons. Swashbuckling billionaires emerged in Russia, and former Third World nations once derided as recesses of state control and poverty produced burgeoning business empires, brands, and tycoons. Critics from the Left raised alarm at the new dominance of capital. Boosters praised it. But no one disagreed that it existed.

The global recession and financial crisis have done little to clarify our picture of corporate power. On the one hand, the need for governments to rein in unbridled corporate behavior again became apparent. But so did the notion that certain businesses—banks, insurers, automakers—were “too big to fail”; they could not be allowed to go out of business without immense adverse regional, national, or even global consequences. Some, like General Motors and Chrysler, were saved by government intervention. Others, like Lehman Brothers, were allowed to go under. Banks deemed too shaky to survive were sold to larger ones, creating ever-larger behemoths
and bolstering claims of critics who saw power concentrating in a tight-knit, untouchable financial elite. Unquestionably, corporate giants exist today on a scale barely imaginable a few decades ago. Some industries have consolidated a great deal. And clearly antitrust and other key regulations, whether in North America, Europe, or elsewhere, have fallen behind some of the tools and techniques that businesses—especially in finance—employ on a daily basis.

So which is our reality? Unbridled corporate power that foists costs and liabilities on governments and taxpayers while preserving high pay and profits for executives—or insecure business leaders constantly at risk of being squeezed by new entrants and technologies, thwarted by reputational disasters, scrutinized by market analysts, and ultimately removed by rebellious shareholders and impatient boards? In other words, what is happening to the power held by large corporations and their top executives?

To understand the fundamental forces that are transforming corporate power in the twenty-first century, we need to explore a concept that was introduced in
Chapter 2
: market power.

Pure economic theory assumes cutthroat competition, which means that upheaval is the normal state of affairs in capitalism inasmuch as competition kills some companies and rewards others. The ideal state known as “perfect competition” leaves no space for monopolies, cartels, or a small number of dominant companies to prevail, let alone endure for years.

Reality is obviously different: some companies persist while others go under; legendary investors and executives rule for decades while others vanish as fast as they appeared; some brands seem to be ephemeral artifacts of passing fashion while others are able to outlast any number of technological transformations, market expansions and contractions, and management changes. Some large companies make it impossible for others to compete in their market, and small groups of companies in the same sector collude to extract the most profits for the longest possible period of time. Also, the very nature of some sectors where low barriers to entry are the norm facilitates the entry of new competitors (restaurants, garments); in others the barriers are so high that it is very hard for new companies to challenge the incumbents (steel mills, mobile telephony).

In other words, capitalist business contains a wide variety of patterns and expectations that manifest themselves in the symbolic language of our investor and consumer society. They produce enduring competitive oppositions (Boeing versus Airbus, Coke versus Pepsi, Hertz versus Avis); they turn brand names into vernacular common nouns (Xerox, Hoover, Kleenex); they invest some (Rolex, IBM) with prestige and others (Timex, Dell) with practicality. When they obliterate, they do so ruthlessly. Be it Pan Am, Woolworths, Kodak, or Wang—the end of a corporation, whether dissolved or absorbed into another, is a vanishing act.

What stokes this constant motion of symbols, products, people, and names is in large part the day-to-day action of sellers and buyers in the market—as well as risk-taking, accidents, mistakes, happenstance. But it is also power. And this is where market power comes in: it is the power that dwells in being able to charge prices for products and services that are above marginal cost, and hence generate and sustain extra profits, without ceding market share. The more market power a company possesses, the more autonomously it can set its own prices without worrying about rivals. The more market power is present in a given sector or marketplace, the more entrenched its industry structures and the more static its league tables.

In real life, products are not interchangeable, and even when they are, they are differentiated by brands and promoted by advertising. In real life, companies do not have access to the same information. They do not enjoy the same laws and rules for running their operations or solving disputes, the same tacit or overt backing from governments, or the same access to precious resources. Intellectual property restrictions carry rather different weight in Switzerland than they do in China. A US firm with a large “government affairs” division dedicated to lobbying politicians in Washington, a Russian company founded by an oligarch with personal friendships in the Kremlin, and an Indian company finding its way through the tangle of decades-old licensing and bureaucratic requirements face drastically different regulatory environments from one another, let alone from a startup seeking to enter an industry for the first time. Companies also differ with respect to the internal resources they have to train personnel and develop new products. All of these differences in business scope, resources, and operating environment affect the cost of doing business, decisions to expand, and the choice of whether to take on an activity in-house or to farm it out to a supplier or contractor. In short, they produce the structure of industries.