Despite this "maturity" the big three corporations are set to
grow by absorption and the small three of the top six are predestined to
consolidate further. In 1997 Bridgestone (Japan) bought Firestone (USA), in 1999
Goodyear combined with Sumitomo (Japan) to make a strong first rank contender.
All this has put pressure on stand-alone Continental. Continental has just 8% of
the world tyre market, but most of it is in Europe - the basic territory of
leading player Michelin. There were purchases and consolidations amongst the
smaller companies, including, for example, Cooper Tyre’s of USA purchase of
Avon.
The big three will determine the direction of future
consolidations. The "triadised" industry - named after the triad of trading
blocs centred on North America, the European Union and Japan/Asia - has divided
up the world market on the basis of regional hegemonies. Thus
French-headquartered Michelin has 32% of the EU market, Japan-headquartered
Bridgestone 28% of the Asian market and USA-headquartered Goodyear 30% of the
North American and South American markets.
Chemicals: Continuous Restructuring
The global chemical industry is experiencing a slowdown after
many years of high growth, which mostly outstripped general industrial growth
rates. While this slowdown is blamed primarily on economic conditions in major
producing and consuming countries and, to a lesser extent, on the fall in South
East Asian demand, it also reflects a downswing in the traditional industry
cycle of over-capacity/under-capacity. In 1996 the global output of the industry
moved to $1.570 billion which represented a growth of only 0.2%. This contrasts
with a 10-year average growth rate up to 1996 of 6.3%.
Over the past 15 years there has been some shift in global
production, away from North America and Western Europe and towards the
Asia-Pacific region. This has, however, been a less limited shift than is often
stated. For example, it only reduced the global stake of North American
production from 28 percent of the world total production in 1985 to 25% in 1995.
The changes in the economic prospects for the East-Asian region after the
economic events of 1997 mean that the expected surge in production and
consumption in this region is likely to be dampened.
Global Top 10 Chemical Corporations
|
Corporation |
Sales billions
Nearest 1997 |
Employment
(estimate) |
|
E.I du Pont de Nemours |
$41 |
98,009 |
|
BASF |
$32 |
105,885 |
|
Bayer |
$32 |
144,728 |
|
Hoechst |
$30 |
137,374 |
|
Dow Chemical |
$20 |
42,861 |
|
ICI |
$18 |
69,500 |
|
Rhone-Poulenc |
$15 |
68,771 |
|
Mitsubishi |
$14 |
11,973 |
|
Montedison |
$14 |
27,693 |
|
Norsk |
$13 |
38,271 |
Mergers, acquisitions and alliances in the current period have
been stimulated by a desire to concentrate resources on key areas of production
and achieve savings and efficiencies compared with other producers by increasing
plant size to global scale.
Globalisation, market share, regionalisation, focusing, and
internal profit taking are the language of size and power in the global market.
In 1995 US-headquartered multinationals produced 23% of world production,
Japan-headquartered 16% and German-headquartered 8%. With such concentrations
already in place, the merger of corporations from the same headquarters country
produce dominant national and global companies needed to secure global market
share in particular product groups.
According to an authoritative UN ranking, the chemicals and
pharmaceuticals industries are the most "transnationalised" based on a criterion
that combines foreign assets, sales and employment distributions. Thus, for
example, using this index, the Solvay company becomes the second most
transnationalised corporation in the world with 92% of its assets, 94% of its
sales and 90% of its employment outside its headquarters country of Belgium. By
comparison, BASF rates as the 48th most transnationalised corporation with 43%
foreign assets, 72% foreign sales and with 37% of employees – 40,297 persons –
outside Germany.
Alliances and joint ventures for technical cooperation and
market shares are becoming common between USA-headquartered and Western-European
headquartered companies. In 1996 alone the following alliancing and joint
venture arrangements were made:- BASF with Dupont in China for synthetic fibres;
Exxon and DSM of Netherlands for speciality chemicals for rubber; Dow and
Montell Polyofines (itself out of a alliance between Shell and Montedison from
Italy); Dow and P.B. Chemicals for polyethylene process cross-licensing.
Likewise, USA headquartered companies Exxon and Union Carbide allianced for new
metallocenes; Dow and Du Pont created Du Pont Dow Elastomers.
Behind this activity lies a strategy to deal with foreseen
over-capacity and recession. The head of the strategic planning unit of Shell is
reported to be of the opinion that "joint ventures are becoming more the norm.
There are probably a lot more to come. People are using this vehicle in hopes of
getting economies of scale and increasing profits". But experts at the same
meeting noted that 50% of the surviving mergers do not outperform industrial
averages after the merger.
More violent restructuring is also to be expected as
corporations concentrate on their core activities. Japan-headquartered Shin
Etsu’s purchase of Rovin - a Shell/AKZO holding - will push the company to the
top of the world PVC production league. Hoechst and Rhône-Poulenc have a firm
agreement to merge to create a "life-science" corporation called Aventis, which
may be completed by the end of 1999. The new company would have sales of $20
billion and a workforce of 95,000, but the plan calls for both companies to sell
their chemical activities. The two companies had combined sales of $45 billion
in 1997 and it is expected that this will mean a transfer of chemical sales in
the order of $15 billion.
If all, or part, of this revenue went to any of the top five of
the chemical industry then the top structure of the industry would become even
more concentrated. Already the combined sales of the top 4 corporations are more
than the combined sales of the next 12 corporations
ranked by their sales revenues. The chemical industry’s top-heaviness is so far
less noticeable in aggregate than is the case in other industries, but the
tendency is clear when product groups are assessed.
Pharmaceuticals: A Prescription for Concentration
Pharmaceuticals have long been a global growth industry,
although the nature of its products is set to change in the next decade. The
growth is neither stable nor guaranteed, as it arises from the combination of
new markets such as India and China and from the increased use of drugs by aging
populations in Europe, Japan and North America. The Indian market, for example,
has grown to 200 million persons who are estimated to be able to afford basic
medicines and the drugs market is growing at 15% per year.
Top 10 Global
Pharmaceuticals Corporations
|
Corporation |
Sales $billion
Nearest (1997) |
|
Merk |
24 |
|
Johnson & Johnson |
23 |
|
Novartis |
22 |
|
Bristol-Myers Squibb |
17 |
|
American Home Products |
14 |
|
Glaxo Wellcome |
13 |
|
Roche |
13 |
|
Smithkline Beecham |
13 |
|
Pfizer |
13 |
|
Abbott |
12 |
Concentration in the pharmaceutical industry is increasing
rapidly. In 1995, 25 companies controlled 53% of the world prescription drug
market. That level of control is now achieved by just 15 corporations. The
merger of Sandoz and Ciba-Geigy to form Novartis joined two companies with a
2.5% world market share each in prescription drugs. This brought them level with
the Merck share of over 5 percent. The industry is now moving to the position
where the top 4 corporations will control nearly 20 percent of the world
market.
The actions of the pharmaceutical corporations are being driven
by five different trends. First, a number of patents for important profit-making
drugs are soon to expire - in the next 10 years about 135 single-source
prescription drugs will lose their patent restrictions in the USA. Second,
generic drugs are competing with the higher profit and profiled brand names.
Third, a price resistance derived from pressure on health care costs and
especially on the use and cost of drug treatment is almost universal. Fourth,
success in the global policing of "illegal" copying of drugs. (Spear headed by
the rules of the World Trade Organisation the multinationals have been putting
pressure on governments in Asia and Latin America to curb their local copying
practices with some success.) Fifth, the market for pharmaceuticals is not
homogeneous. The market is in fact a series of mini-monopolies, dictated by
specific diseases and protected by tough patent legislation.
The first wave of restructuring was to prepare for the decline
in controlled markets and brand name drugs. This meant four years of corporate
negotiations and a wave of mergers and acquisitions. A second wave is now
occurring. This wave is not characterised by defensive action but by initiatives
to increase global market shares and it is likely to continue until the
concentration looks more like the profiles of the other industries.
Japanese corporations have been in a special position in the
global corporate picture. The Japanese pharmaceutical corporations have a low
profile in size and international spread yet over the past years they have been
responsible for a disproportionate number of new drug registrations, amounting
each year to at least 35% of world total. At the same time 90% of Japanese
corporation sales are within Japan. This situation has been substantially
disturbed by new national price regulations which have required a series of
price reductions - 6.8% in 1996 alone and further regulations in the pipeline.
Paper: Dominant and Secondary Mergers
Through to 1997 paper and board production has increased for 14
years reaching near 300 million tons. Part of this growth has been driven by
Asia, which now represents 29% of paper and board production. The global
regional figures are adjusting as the South East Asian downturn works through
and Russian production is still declining.
Top 6 Global Paper Corporations
|
Corporation |
Sales $billion
nearest (1997) |
|
International Paper |
20 |
|
George-Pacific |
13 |
|
Kimberly-Clark |
12 |
|
Weyerhaeuser |
11 |
|
Oji Paper |
10 |
|
UPM-Kymmene |
10 |
The industry is consolidating and, through cross-border
mergers, rapidly globalising. In Finland 10 years ago there were 20 companies
and now there are three. These three are seeking global market shares. Swedish
corporations are following the same pattern but at the same time seeking
footholds in Finland as with the recent merger of Swedish Stora and Finland’s
Enso. In the USA, International Paper bought out Federal Paper Board and now
directly controls 34% of the bleached board market.
An industry analyst noted last year, "We are going to see five
or six global companies develop into dominant players on the market" and others
argue that the "dominant" mergers, when two already large corporations merge,
will be accompanied by downstream smaller mergers.
Typical of this process is the Finnish-headquartered
UPM-Kymmene, which was created from two Finnish corporations. Throughout 1998
the corporation aggressively sought cross-border purchases, especially in Asia.
It established a joint venture with Pacific Resources International of Singapore
making it the biggest alliance for fine printing paper. Then it acquired an USA
subsidiary of a New Zealand headquartered corporation. The CEO noted, "We have
satisfied our strategic intent. We saw we needed to be a world-wide producer not
just a world-wide seller... having achieved this in the USA and Asia I am
content with our position today."
Environmental Services/Waste Management: Cleaning Up
Globally
An important industry has developed around the issue of waste
management in all its aspects. Prior to the wave of privatisation restructuring
noted across all industrial sectors, this industry was largely handled as a part
of general public infrastructure. A number of major corporations, operating
across national borders, now cover an increasingly lucrative private market in
waste management and waste clean up.
According to a private-sector estimate, in 1996 the global
environmental market represented some US$ 452 billion in revenues generated by
private companies and public-sector bodies. Half of the market was generated by
fees generated by services, with the remaining half almost equally divided
between equipment sales and the sale of environmental resources. Around 87% of
the total was generated in the USA, Western Europe and Japan; only the remaining
13 per cent was generated by developing countries.
However, there is still huge potential in many developing
countries where growth in the environmental industry has reached 5-25 per cent
and where there is a critical need for environmental services to deal with
sometimes dramatic environmental problems.
The factors which are driving demand for waste management
services include:
- the development and enforcement of environmental
legislation
- market-based incentives
- fiscal policies
- public education and awareness
- multilateral and bilateral assistance programmes
Despite its relatively recent emergence from public ownership
into the private sector in most countries, the pattern of concentration in this
industry is already very marked. Its domination by global waste corporations is
also advancing rapidly. Waste Management of the USA remains the world’s largest
solid waste company. It is a thoroughly global operator, managing waste disposal
in the streets of Sydney, Australia, as well as throughout the USA and in many
countries of Europe. A recent buy-out of Marius Pedersen of Denmark has also
made Waste Management the largest company in the sector in that country. Taken
over by USA Waste Services in a recent merger at a cost of over $20 billion, the
group has received clearance from the US authorities to further extend its
empire by taking over Eastern Environmental Services, despite the fact that it
now controls 22 per cent of North America’s waste business.
The leading four companies in solid waste in the USA control
over 50 per cent of the market. This wave of consolidation is moving further
ahead with the purchase of second-place Browning-Ferris by Allied Waste
Industries Inc. for a price of over $9 billion. The new entity promises a
further round of cost-cuts, despite the burgeoning market in waste disposal.
In Europe too a similar route to market dominance is evident.
French Vivendi recently announced that it has put together a war chest of nearly
$7.5 billion to make acquisitions over the next two years. Formerly Compagnie
Générale des Eaux (a water utility) the group has been totally restructured
since 1996, with operating profit climbing vertiginously by 65 per cent in the
first half of 1998. Its recent purcahses include FCC of Spain, the country’s
biggest services provider, aimed at a joint push into Latin America. A rival
local waste company, Bofesa Medio Ambiente (BMA), has responded by buying a
controlling interest in two smaller undertakings. BMA is controlled (51%) by
German group Berzelius Umwelt Service.
Germany’s Euro Waste Services (EWS) recently acquired waste
disposal activities of Preussag Noell, following purchase of the scrap metal
business from steel maker KRUPP earlier in 1998. The German Cartel Office
approved a plan in mid-1998 that allowed the merger of the waste disposal assets
of Ruhrkhole and VEW.
Not to be left behind in the race, UK’s Waste Recycling Group
(WRG) bought the waste division of Yorkshire Water to form the biggest private
waste management company in Britain. Yet with a market share of a little over 3
per cent of the UK’s $10 billion annual waste market, the process clearly has a
long way to go before it rivals the position of the global players emanating
from the USA.
Cement: Strategic Participation
Because cement is produced for very local markets the global
industry is characterised by large numbers of smaller locally owned plants. But
the large corporations affect the local markets by "strategic participation".
Their size allows them to dominate pricing and market access through managing
economies of scale because of the large capital investment involved in building
cement works. Over 50 per cent of a typical cement plant’s cost structure is
fixed, resulting in low marginal cost of incremental units of production. Thus
financial returns are particularly sensitive to volume and pricing is crucial.
The larger the group, the more it is able to exploit this advantage in times of
crisis.
Cement travels well only in bulk and by sea. Therefore it is
not a highly traded product. Less than 6 per cent of global production enters
into international trade, with the result that there are strong incentives to
isolate national or regional markets and to secure a separate dominance in each.
Thus the pattern of consolidation in the industry is not necessarily mergers
between the large seven multinationals globally, but rather their purchase of
smaller companies in different regions.
Thus British-headquartered Blue Circle has recently expanded in
Malaysia, Singapore and in Chile. Together with Holderbank, it controls 80 per
cent of the Chilean market and 20 per cent of the US market.
Ownership of the US cement market by foreign-originating groups
has increased from just 5 per cent in the 1970’s to over 80 per cent today. None
of the largest US producers is domestically owned. Investigation of price fixing
and market allocation between the supposed competitors is a perennial problem
for regulatory authorities in all national and regional markets.
The largest cement corporations are Swiss-headquartered
Holderbank, active in 61 countries with a turnover of $4 billion and
French-headquartered Lafarge, active in 60 countries. Lafarge sold nearly two
per cent of its share capital to institutional investors during 1999 to create a
war chest of over $1 billion to pursue its acquisition plans. Heidelberger of
Germany merged with Swedish/Norwegian joint venture Scancem in the course of
1999 at a cost of $2.5 billion. The move makes the new group the dominant player
throughout the Nordic and Baltic region and becomes the second largest producer
in the UK behind indigenous Blue Circle. Italian-headquartered Italcementi and
French-headquartered Ciments Français complete the ranks of the global cement
companies. These corporations account for only about 15% of total world
production, but control much more than they produce directly for the reasons
stated above.
Privatisation of previously state-owned cement groups is
proceeding fast in Eastern Europe and elsewhere. In Uzbekistan the State
Property Commission announced the sale to foreign investors of a further 25 per
cent of Akhanarantsement, one of the largest building materials producers in the
country. Holderbank already owns nearly 36 per cent of the stock. Egypt also
announced that it would be selling off 77 per cent of the state Assuit Cement
Company as part of its ongoing privatisation drive.
Glass and Ceramics: Cost-cutting Drives Job Losses
Ceramics
The international competitive position of the ceramics industry
varies according to each subsector. Subsectors include tableware, ornamental
ware, tiles and sanitaryware. In these particular areas the fastest growth has
been occurring in the East Asian markets, with China displaying considerable
growth over the last few years to become the world’s largest ceramics producer,
with more than 9.9 billion items produced annually. New technology and equipment
have been introduced to improve production. China has more than 1,000 ceramics
companies with exports to 150 countries and regions, worth US$1.09 billion.
Faced with this new competition, mergers have been on the
increase in the industrialised countries. Waterford Wedgwood (UK) acquired 85%
of Rosenthal (Germany) and Royal Copenhagen merged with Orrefors to form Royal
Scandinavia. Low cost producers from Eastern Europe, Latin America and East Asia
have highlighted the vulnerability of small-scale producers in the west.
Companies are under increasing pressure to merge or form alliances, as evidence
mounts that the industry will soon be dominated by a handful of global players.
Just five companies now dominate 92% of the dinnerware market – these are Lenox,
Noritake, Wedgwood, Royal Doulton and Mikasa. American Standard (a US based
sanitaryware manufacturer) absorbed Britain’s Armitage Shanks last year at a
cost of $415 million. As a result, the combination now has over 18% of the
European market, making it number one in the industry and almost twice as big as
its competitors Sanitec and Keramik Laufen. It has plants in more than 20
countries (including three in China) total sales for the first quarter of 1999
were $1.7 billion. In response, Sanitec (Finland) recently announced a $124
million take-over of a Dutch rival, Sphinx Gustavsberg, to create one of
Europe’s largest bathroom products businesses. The merged entity will have
combined sales of more than $850 million.
For technical ceramics, Japan is the most important producer
worldwide closely followed by the USA, with the EU occupying third position.
Within the EU Germany dominates the market for technical ceramics. It is perhaps
in this area that there is likely to be most growth with new applications in
automotive, telecommunication computer and semiconductor industries. Many of the
companies listed as top ceramic and glass manufacturers (see below) operate
within this category.
The refractories sector is heavily dependent upon the iron and
steel industry and 65% of the 22 to 25 million tons of refractories manufactured
worldwide will be used by this industry.
It is clear that globalisation has not left the ceramics
Industry untouched. There has been a process of change within the sector for a
number of years as companies have accelerated industrial restructuring. Problems
typically faced are a low take up of technology, a lack of innovative and
dynamic management, poor premises and environmental performance. The process of
change has meant a severe loss of jobs, changes in work practices and production
processes. It is estimated that there could be further job losses within the
industry of up to 20% and possibly more. With some 262.000 people employed in
the combined sectors of the ceramics industry within Europe alone this is a
significant figure for future employment.
Glass
Similarly to the ceramics Industry the glass industry can be
broken down into subsectors. These include reinforcement / glass fibreglass,
household ware, special glass, flat glass, and container glass. Production
percentage volumes for each subsector are:
Reinforcement glass 4%
Household Ware 4%
Special Glass 6%
Flat Glass 24%
Container Glass 60%
Currently the largest glass-producing region in the world is
the European Union with the leading country being Germany. There has, however,
during recent years been a shift in production to Central and Eastern Europe,
especially on the basis of price and shifting investment. Saint Gobain is the
largest producer of container and flat glass and a prime example of this
process. As the production process is labour intensive the company has opted to
shift production to Eastern Europe, where labour costs are much lower.
Gullfiber, a subsidiary of Saint-Gobain, is opening an insulation plant in
Gliwice, Poland at the beginning of June 1999. This will be the group’s
15 th establishment in Poland. A recent
Institut der deutschen Wirtschaft research bulletin quoted labour costs in
Poland at DM 5.48 per hour worked compared to DM 47.92 per hour in Germany. At
the beginning of 1999 Saint-Gobain bought ERG-Okfens, in Czeladz, and recently
opened a car glass plant in Dabrowa Gornicza. Saint-Gobain began to invest in
Poland in 1992 and has invested more than PLN 1.17 billion. A further
development in Poland is the news that the Privatisation Agency will soon
announce a new tender inviting interested investors to bid for the Czestochowska
Huta Szkla (CHS) glassworks. The company requires an estimated PLN 200 million
in modernisation and investment within the next two to three years. Other
leading companies in this sector include Pilkington, Gerresheimer, and
Glaverbel/PPG.
The subsector for special glass covers areas such as glass used
in PC screens and TVs. Largest producing countries are Japan and the USA with
the top three companies being Schott, Corning, and Nippon Electric Glass. This
area is growing as the reduction in cost of PCs has increased demand in the
retail sector.
Household ware is the most "visible" glass sector in the market
and international competition is fierce. The sector includes general tableware,
crystal giftware, stemware and barware. The Far East is increasing production in
this area but Eastern Europe remains a dominant producer with the Czech Republic
being the biggest producer and exporter of table and crystalware. A recent
report in CTK business news stated that the glass sectors restructuring
amounting to some Kc30bn had to a large extent been carried out with the support
of foreign capital. Of the above amount 70% was said to be earmarked for
technological equipment with environmental elements of the investment amounting
to some Kc6.5bn. Leading companies in this area are Waterford, Mikasa, Noritake
and Oneida.
The effects of cost cutting on the glass industry are typified
by Pilkington’s recent efforts to reduce overheads and increase margins by axing
as much as 20 per cent of its workforce.
Global Top 10 Ceramics & Glass Companies
|
Corporation |
Revenue
$ billion |
Home Country |
|
Compagnie de Saint-Gobain |
16.7 |
France |
|
Philips NV
Semiconductors Division |
15 |
Holland |
|
Lafarge S.A. |
11 |
France |
|
Motorola Schaumburg, IL
Motorola semiconductor product sector |
8 |
USA |
|
Asahi Glass Co. Ltd |
7.3 |
Japan |
|
American Standard Companies, Inc |
5.8 |
USA |
|
Kyocera Corp. |
5.5 |
Japan |
|
Cooper Industries, Inc. |
5.289 |
USA |
|
Pilkington, Inc. |
4.8 |
UK |
|
Owens-Illinois Inc. |
4.7 |
USA |
The "Normal" Trend to Mega-Corps
The tendency for businessmen to cooperate, collude or conspire
for market control has been a known characteristic of the market system since
the earliest days of capitalism. For this reason almost all countries have laws
against "unfair" competition, monopoly behaviour, abuse of market power, and
cartels.
"People of the same trade seldom meet together, even for
merriment and diversion, but the conversation ends in a conspiracy against the
public, or in some contrivance to raise prices. It is impossible to prevent such
meetings, by any law which either could be executed, or would be consistent with
liberty and justice. But though the law cannot hinder people of the same trade
from sometimes assembling together, it ought to do nothing to facilitate such
assemblies; much less to render them necessary."
Adam Smith (often considered as a guru of ‘free market’
economists) writing in his classic study, ‘The Wealth of Nations’ in 1776
– nearly two hundred years before the establishment of the GATT and World Trade
Organisation!
In May 1999 a $725 million fine was imposed on the European
chemical giants, Roche and BASF, for their part in a nine year long
market-rigging cartel in vitamins. Joel Klein, head of the antitrust division at
the US Justice Department, said: "This cartel was truly extraordinary. It
lasted almost a decade and involved a highly sophisticated and elaborate
conspiracy to control everything about the sale of these products". The
nature of business, it seems, does not improve with time.
These laws are the proof that past politicians and economists
were convinced that "healthy competition" in the market was not a natural
process, but one which had to be artificially enforced - if necessary, through
fines, injunctions and imprisonment - against businessmen who departed from the
agreed rules of the competition game.
Economists accepted that oligopolies could earn "abnormal
profits" (and do so in the long term) if barriers to entry to the industry were
maintained. But all these politicians, writers and theorists made a fundamental
assumption: this was that amalgamation and restraint of competition was a
national matter that could be controlled by national laws.
There are no international laws that can be enforced against
global monopolies to promote competition on a world basis. Corporations that
have the scope to operate at global level may therefore to a large extent escape
from the constraints imposed upon national companies, even though they may have
"local" or regional problems. In 1994 in the European Union, for example, 33
cement companies were convicted for fixing prices across the region and were
fined for this infringement of competition rules. It made no difference to the
structure of the global industry, which continued its headlong concentration to
the point where now just 5 companies command a dominant market position. Nor did
it make a difference to the practice of charging substantially different prices
for the same product in different national markets.
Given this general trend to unrestricted concentration, two
internal factors of corporate governance have assumed increased importance.
These are internal profit taking and the divorce between stockmarket valuation
and productive effort.
Executive Pay and Internal Profit Taking
It is widely agreed that executive salaries and benefits in
large corporations have reached irrational and unacceptable levels. Even
pro-business journals and organisations have complained over the past 10 years
of the increasing divorce between real corporate performance and the level of
executive remuneration. In the 1998 Business Week survey it was revealed that
Chief Executive Officers of the leading US corporations received an average
annual ‘compensation’, including their stock options, of $7.8 million. That
represented a 35% increase over the previous year (compared with average wage
increase for production workers of 3%) and was 326 times the earnings of the
average American factory worker. Furthermore, an analysis of these earnings by
the Institute for Policy Studies revealed that many of the highest paid
executives were the ones who had eliminated the most jobs.
;)
Executive "reward packages" are composed of four components:
basic pay, bonus, privileges and stock and pension options. In the USA, stock
options can be worth more than a third of the total package, although in other
countries, such as Germany and Japan, stock options are less important.
Executive super-salaries and their knock-on effect upon the
salaries of lower ranked executives and smaller companies (see chart) have been
a major factor increasing the gap between the lowest and highest paid in all
industrial countries.
Excessive executive pay has another important incentive: it
encourages top management to increase the size of the corporation through merger
and acquisition. Increased size lowers the accounting impact of big salaries as
a proportion of turnover or profits and increases the stock market valuation of
the corporation. As part of top executive pay is increasingly linked to stock
value, executive rewards increase with corporate size.
Executive pay is part of internal profit taking within the
corporation. This means that an important part of the surplus made by corporate
operations is distributed internally in unequal proportions between professional
and production workers. Top management divides any surpluses created amongst
themselves, the stockholders and a host of professionals - consultants, lawyers,
accountants, architects, management consultants, designers and other
professional contractors. In recent years such external professionals have not
only increased in number but have also increased their fees. For example, in
order to pay the directors and CEO’s their average $7.8 million in 1997,
corporations employed "remuneration committees" who, in turn, employ "pay
consultants" who most certainly employ lawyers. The surplus is thus distributed
among a wider and wider circle outside the ranks of those who made the original
surpluses.
All these fee-earners have an interest in inflating executive
pay, fees, perks, bonuses, and expenses. Under the current circumstances, they
also share an interest in laying off workers, cutting social overheads,
resisting customer claims, reducing health, safety and environment expenditures
in order to create greater surpluses upon which this feeding frenzy breeds.
From Productive Capitalism to Finance Capitalism
If stock prices rose only in response to the excellence and
efficiency of the company then the reward system would at least be logical, even
if still excessive. But stock prices no longer move year-on-year in that way.
With the increase in internal profit taking has come a vast growth in the use of
shares as speculative instruments on the open market. The ‘stockholder’ of the
past has become the ‘stockdealer’ of the present. Share value has become more a
function of market image than a reflection of productive effort. Shares can -
and do - increase because of cost cutting moves that promise to add
effectiveness. They can - and do - increase because assets of the corporation
appear to be more valuable, or are said to be more valuable, through no action
of the corporation - as in the re-evaluation and over-evaluation of real estate.
But, above all, they always increase at a time of merger.
Stockdealers and top managers thus have a vested interest in
the rise in the external value of the corporation’s stock prices and therefore
in mergers which produce short-term increases in stock prices. This system not
only produces an excessive interest in the short term, but also results in a
drive towards gigantism and cost cutting that has little or nothing to do with
real productive efficiency.
Ownership of capital has become increasingly divorced from its
application to productive purposes. One recent authority (Joel Kurtzman, writing
in ‘The Death of Money’, 1993) estimates that, for every $1 circulating in the
productive world economy, between $20 and $50 circulates in the economy of pure
finance. According to 1993 US Federal Reserve figures, corporate capital raised
from the sale of new share offerings amounted to only 4 per cent of the total
finance capital of US companies. The rest came mostly from earnings retained
within the corporation (82 per cent), or from external borrowing (14 per cent).
Between 1987 and 1994, companies paid out more to the market to shore up their
own share price than they received in new stock issues. In early 1998 what is
now inaccurately called ‘investment capital’ was flowing FROM
corporations INTO the stock markets at an annual rate of $110 billions.
In other words, the net flow of funds from the stock market into the companies
in which stocks are theoretically invested is actually a negative flow.
Productive effort is being bled dry for speculative gain.
From Profits to Surplus
Market propaganda promotes the idea that profits are obtained
for investors by investment in efficient businesses that show results in
increased sales, productivity and expansion of market demand for goods, leading
naturally to a profitable outcome.
The consolidation and gigantism at the top of key industrial
sectors has changed this pattern.
Most leading companies have achieved, or are aiming to achieve,
stable market shares within relatively stagnant or mature world markets. The
result is frequent bouts of over-production that put downward pressure on
product prices. Under such circumstances surpluses are achieved by short-term
cost-cutting. Output and market scope may remain the same – or even may decline
- but raw materials, labour costs and other operating costs must be reduced to
produce high "profitability".
There are other factors that have become important in the new
situation. Corporations have begun to rely on receipts of extra income from
activities that have little or no direct connection to core business operations.
When real estate held by the corporation is revalued it represents an apparent
gain in that year - economists call this ‘rent’ and when it becomes a policy it
is ‘rent-seeking’.
Rent-seeking, coupled with cost-cutting, represents a new
corporate concept that differs substantially from the classical idea of "profit"
under the old economic system. In fact, the corporation increasingly seeks not
externally declared profits but internally consumed "surpluses" which are
derived from squeezing labour, raw material prices, exchange speculation,
real-estate revaluation, transfer pricing and other non-productive devices.
This new operating goal has important impacts on the world of
political activity. Wages, raw materials, currencies, are influenced by an
interplay of forces between business, governments, unions, civil organisations,
regional organisations, etc. To manipulate these forces in the interests of
increasing surplus, the corporation must shift its focus from strictly business
to political operations. Altering the prices of these inputs requires recourse
to political pressure, lobbying, bribery, propaganda, price fixing and
manipulative public relations.
Many key corporations have effectively moved in this way from
the profit-seeking market arena to the surplus-seeking power arena.
Cost-cutting = Redundancies, Speed-ups, Health and
Environmental Hazards and Non-Sustainability
Under this new situation, the corporation is driven from inside
by the desire for ever-rising stock market valuation and executive salaries and
from the outside by the need for increased market share and global power. As a
result, the company may pursue a number of alternative strategies that affect
workers, lower income groups and society in general.
Labour cost reductions have become the principal route to cost
cutting. -Reducing the wages bill used to mean increasing the productivity of
existing workers as sales also increased; now it means cutting numbers employed,
lowering wages and benefits and increasing the intensity of work.
Union members have become very familiar over recent years with
the mechanisms used by companies to reduce wages. Universal demands for "more
flexibility" in labour markets amount to:
- replacing senior and permanent workers with temporary and
junior workers
- increasing the pace of work for the same or lower wages and
benefits
- out-sourcing tasks to lower-waged smaller enterprises and
informal workers
- shifting production to lower wage areas
"Production chains" have been established by the mega-corps
that shift the focus of parts production from the familiar central factory to
small sub-contractors and across national boundaries to exploit cheaper,
unorganised labour.
All these strategies have impacted heavily upon all sections of
the workforce, but the most noticeable victims have been women at work and in
the home. Often the first to be laid off when restructuring takes place, they
are also shouldering the burden of reduced public expenditure on health care,
child care and care for the elderly. Even in the workplace, the scandal of lower
pay for women has not been eradicated. Job classification schemes that
discriminate against "women’s work" are still the rule rather than the
exception.
These strategies attack all the existing laws, regulations and
institutions that have been established by slow and painstaking social
negotiation over 70 years for the protection of workers against precisely such
threats. National governments, which have in the past been pressured by big
business to reduce anti-trust laws and corporate taxation, are now being asked
to deliver deregulation in the labour market, wage reductions in the public
services, and cuts in health and environmental protection costs in order to
assist the search for surplus.
From Competition to Contest
The search for surplus has also meant a retreat from open
"market competition" in the traditional sense of competing on price and
efficiency of production. Instead, a winner-takes-all "contest" has ensued in
many sectors where merger, acquisition, politics, and economic coercion are used
to destroy other market participants and thereby to eliminate competition. The
modern mega-corporation is as much a political animal as a business enterprise
in its efforts to secure a position of enduring market dominance.
The global tyre industry may be a model for these developments.
The three leading companies each have an overwhelmingly dominant share in their
own region. Although each may stake a claim to global spread,
French-headquartered Michelin controls of 32% of the European market,
USA-headquartered Goodyear 30% of the Americas market and Japanese-headquartered
Bridgestone 28% of Asia-Pacific. Each segment allows the companies to make their
surpluses in different ways. Labour costs are lowest in the Goodyear segment,
prices are higher in the Michelin segment and Bridgestone can adjust between a
large number of countries which have a tyre-dependency not characteristic of the
other markets.
For this reason, traditionally flexible or free systems have
increasingly come under corporate control. Of all these systems, world trade is
the most important example.
Managed World Trade: From Exchange to Transfer
One of the closely kept secrets of the times is that the much
vaunted "free" trade system is not free at all - 70% of it is controlled
directly or indirectly by the mega-corps.
Commentators still persist in describing trade as if it were
concerned simply with the exchange of goods and services between independent
nation states. Yet today’s so-called "trade wars" are really struggles between
global corporations in which state delegates are the spokespersons. Statistics
from official sources produce tables of inter-national imports and exports
without mentioning corporations. Politicians exhort populations to export or
become "competitive" when success or failure lies in the hands of a few giant
companies and the interplay of global power.
Here are the facts of "world trade":
1) The modern multinational mega-corporations have widely
distributed their chains of production around the world. The notion of "national
origin" for any specific product has therefore become increasingly meaningless.
Total capital in place invested in production facilities of foreign ownership
now exceeds $3,000 billion. Almost all of this (98 percent) is owned, operated
and manipulated by the mega-corporations.
2) At least 35% of "world trade" consists of internal parts and
product transfers between subsidiaries of the same corporation. A shipment of an
intermediate chemical from one plant in Uruguay to the same corporation’s plant
in Argentina, for example, will be recorded as an "export" from Uruguay and an
"import" to Argentina. There is no way to describe this as "competition on the
world market"; it is merely a transfer between parts of the same
corporation.
3) Another 35% percent of so-called "world trade" is accounted
for by the sale of goods produced by subsidiaries of the same corporations. If a
corporation closes a plant in Germany and opens the same plant in Hungary to
send the goods to the same customers as before in Germany, then according to the
statistics, Hungary and Germany have increased their trade and the sum of "world
trade" has increased.
4) In addition to this 70% of world trade that is directly
managed by multinational corporations, a sizeable (but unrecorded) part of the
remainder is accounted for by the supply of raw materials, parts and supplies
from smaller sub-contracting firms that feed the needs of the mega-corps. This
proportion is growing as raw materials from the South decline in price and
privatisation shifts state exporting companies to the private sector.
In the new corporate world, contests between corporations are
hidden behind old mythologies of trade between nation states.
Managing National Governments?
Corporate influence over national governments is a complex and
controversial issue everywhere in the world. Accusations of being "pro-big
business" often reflect on specific items of policy rather than on the political
shading of the government. Yet statistics over the past 25 years do demonstrate
that the main policy lines adopted by governments of all types have tended to
encourage rather than to impede the growth of the mega-corps.
Firstly, over this period the biggest companies that the world
has ever seen have been created without serious government intervention.
Secondly, corporate taxation has been declining. Thirdly, there have been no
effective legal or tax attempts to restrain the growth of high reward packages
for executives. Fourthly, the abandonment by governments of full employment
policies has helped to reduce wage costs. Fifthly, the relaxation of protective
labour laws has allowed corporations to secure surpluses from cost cutting at
the expense of workers.
Privatisation programmes that have enabled the private
corporations to increase their size by consuming public assets have cemented all
of these policies. Between 1994 and 1999, Western European governments have
offered $217 billion of state assets for sale. The "transitional" economies of
Central and Eastern Europe and the countries undertaking structural adjustment
programmes in the South have given rise to even greater proportional windfalls
to private capital.
Ideology and business interests provide almost insurmountable
barriers to action by national governments to sustain employment and to ensure
that income is more evenly distributed. Any move to oppose the higher income
groups and corporations that currently benefit from this social injustice would
meet with an immediate flight of capital and result in destabilisation of the
economy.
From Constructing to Merging
The contest for survival, the switch from seeking profit for
distribution to making surpluses for maximising share prices and the dynamic
towards megacorporations have changed the nature and dimensions of the old
international economy. The rules and operating culture established during the
last century either no longer exist, are directed at false targets, or are in
drastic need of updating to fit the new situation.
The economic dynamics of the mega-corps has produced a major
over-supply of all types of goods. The imbalance between a world in need and an
oversupply of manufactured goods that the greater part of the world’s population
cannot buy is the major contradiction of our age. It cannot be solved by the
current dynamics at play in the private sector.
All these factors encourage a basic strategy – to restrain the
expansion of production, cut costs and grow larger by acquisition. In the late
1970s corporate spending on acquisition of existing companies for the first time
exceeded new investment. Since then the trend has accelerated as corporations
have steadily absorbed existing capacity rather than build new. (See graph). The
mega-corporation is created, stock market value goes up, layoffs mount and the
global social economy spins downward.
From Democratic Dialogue to Market Force
A barrage of propaganda that has also distorted any debate on
social policy has disguised the changes to the global governance of the world
economy. Attempts to plan the future in a reasoned dialogue between elected
representatives have been undermined by the exercise of private power.
The corporate agenda is everywhere proclaimed as the received
wisdom. The virtues of the market, the need for competition, for flexibilisation
of labour and for de-regulation of the corporations are preached with a
religious fervour. Financed by company sponsorship at the national level through
subsidised institutes, agencies, universities, business schools and captive news
sources, the global media is itself thoroughly dominated by
mega-corporations.
At the international level the World Bank with 10,000 employees
concentrates, as its constitution requires, on providing public relations for
the virtues of international investment and market forces.
Many commentators have noted that:-
l
the less competition that exists between corporations,
the greater the flood of propaganda for the virtues of competition
l
the more managed international trade becomes, the more
business sources preach the importance of "free" trade
l
the more corporations control the economies and the
lives of the people, the more citizens are told by politicians that they cannot
control the power of the market
l
the larger the corporations become, the more
"smallness" is presented as a virtue
l
the more the market becomes an arena for the contest
between corporations, the more it is presented as the uncontrollable product of
the "invisible hand of the market"
l
the more that nationalism is said to be dead and
undesirable in the face of globalisation, the more the nation-state is used as a
unit of competition in the world economy.
"The development of a global economy has not been matched by
the development of a global society. The basic unit for political and social
life remains the nation-state. International law and international institutions,
insofar as they exist, are not strong enough to prevent war or the large-scale
abuse of human rights in individual countries. Ecological threats are not
adequately dealt with. Global financial markets are largely beyond the control
of national or international authorities. I argue that the current state of
affairs is unsound and unsustainable. Financial markets are inherently unstable
and there are social needs that cannot be met by giving market forces free
rein."
George Soros (leading market speculator, identified by
Malaysia’s President Mahathir as the architect of the Asian financial collapse),
in his book ‘The Crisis of Global Capitalism: Open Society
Endangered’,1998.
The voices of concern, those urging prudence, those protesting,
those concerned for the future of the world, are relegated to marginal
organisations of limited size and even more limited means. The debate on social
policy, on the public means for solving the public issue of unemployment, the
mechanisms that can be used to redress the balance towards democracy and
transparency in the world, are distorted and weakened.
Restoring democratic health and empowering the social policy
debate is the key task of any organisation interested in a more just world.
Section 4. THE WORLD SOCIAL ECONOMY: INCREASING
INEQUALITY
The world economy has never been just. There have always been
vast differences in wealth and welfare between countries and between income
groups within countries. But now the world social economy displays the greatest
inequalities since the last century. Inequalities between income earners,
between those with work and those without, between nations and groups of nations
have widened almost everywhere.
From 1930 onwards the differences between rich and poor nations
and the rich and poor within nations had modestly begun to narrow. The great
events of that time left a positive impact on social justice in the world. By
1945 trade unions had become legitimate in all the major economies of the world.
This was an early indicator of the acceptance by democratic governments that
they were responsible and accountable to the public and it was their duty to
ensure policies that attended to the needs of the population. The "welfare
state" became a desired goal and even an achievement in some countries.
The liberation of the colonies brought improved living
conditions for millions and other developments assisted countries to escape from
the serfdom and warlordism of the last century and to begin to concentrate on
education and basic needs.
These modest and stumbling advances were halted in the 1970s
and the psychological clock turned back to the turn of the century in which
privilege was the dynamic force in the social economy.
Wage and Income Inequality
In the global social economy the most visible and universal
aspect is the widening income inequality. The rich are getting richer and the
poor are getting poorer at the plant, local, national and international levels.
The concentration of enormous wealth in fewer hands has continued to the point
where just 225 people are estimated by the UN Human Development Report for 1998
to have a combined wealth of over $1,000,000,000,000 (one trillion dollars) –
more than the poorer half of the world’s population earns in a year.
"Wage dispersion" is the economic jargon for the development in
which the wage gap between the lowest paid and the highest paid in the
enterprise or country has widened. According to the ILO Employment Report 1997
there were only three small European countries which had escaped this trend. The
worst cases were the UK and the USA.
A variety of strategies have been used to bring about this
situation. One of them has been the dismantling of full employment policies
which has lead to greater unemployment or to a much greater number of low-paid
jobs.
The most recent ILO survey shows that at least one third of the
world’s 3 billion labour force is unemployed or underemployed. There are
minimally 150 million fully and official unemployed and a further 850 million
that would wish to work full-time but are not able to find full time work. The
so-called financial crisis in Asia will add at least 10-15 million to this
figure.
But unemployment does not of itself explain the redistribution
of income. There has been an income struggle in which the lower paid and poorer
people have lost in contrast to the period before 1975 where gains had been made
through full employment policies, social security systems and educational
expansion. In many cases the worsening distribution of income fell on countries
which already had very unequal income shares.
The global economy of the mega-corps is the enemy of social
economics and the effects of this are now beginning to be seen. Conflicts are
mounting between groups, between nations and within regions. Desperate people
will take desperate action.
Rich and Poor Countries: In the Same World Economy?
The global trend towards widening income disparities has been
matched by a widening difference between rich and poor countries. Regionally it
is Latin America and Africa that have seen their relative position decline most
dramatically. Between 1980 and 1990 Chile, often quoted by free market
apologists as the miracle economy of Latin America, saw the percentage of people
in urban poverty increase from 12% to 32%, Bolivia 15% to 43%, Argentina 7% to
15%. In Africa, where statistics are less easily available, Zambian urban
poverty moved in 20 years from 26% to 45% and in Kenya from 10% to 29%. Only in
Asia were there some gains in reducing poverty but these have been reversed in
many cases since 1997.
Globally, the richest 20 percent of the world’s population have
seen their income increase. Over the past 25 years their share of world income
has increased from 70 per cent to 83 per cent.
Statistically, the rich and poor countries seem to inhabit
different planets. Even after adjusting for exchange rates and local purchasing
power, it is still the case that the average income for a Swiss citizen is
$25,000 as compared with the average for a Honduran citizen of $2,000 - a 12
times ratio. On the scale from the highest, Brunei with $31, 000 per inhabitant,
to the lowest, Democratic Republic of Congo at $335 per inhabitant, the ratio is
one to 92.
The most important aspect of world income inequality is not
perhaps the size of the gap between the very rich and the very poor, but the