Corporate Decay
Corporate Decay
GE, Boeing, Intel On The Path Of Decay
I am somewhat fascinated by the evolution of large organizations over time.
So it is not an accident I write a lot about the fate of empires, nation-states, and entire civilizations.
Each human-built structure goes through a path tracing from obscurity→growth→peak→decay/fracture.
And let’s be honest, the growth and decay parts are the most fascinating ones, as they contain so much more drama and action than the relatively boring peak phase.
Many will fail on the way and never achieve much growth, not achieving any peak.
The same which works for nations is true for businesses.
The world is full of successful but stagnant pizzerias and industrial SMEs with excellent records in one field, but which are stuck in the same spot for decades.
Interestingly enough, such “failure” can last a lot longer than the more accomplished sort. The oldest businesses in the world are of the boring type.
In Estonia, the oldest continuous business is a small pharmacy in the old town, open continuously since …1422. Over the world, you will also find similar small-building companies, hot springs inns, vineyards, or Irish pubs.
What you do not find is large manufacturing or trading companies. Over a certain size, the only path for a company seems to be growth or death.
Let’s study a little how and why it happened through 3 recent examples.
First is Intel, for the obvious reasons of the bloodbath the stock has been in the last few days.
Second is Boeing, for the continuous trainwreck of a technical failure the company has been in the last few years.
And last is GE for its uniquely American way of failing by over-financialization.
Intel’s Chips Are Down
What prompted the idea of this article was Intel's surprise news of firing 15,000 people, despite being touted as the future of US-based chip manufacturing, together with the forever delayed TSMC factories in Arizona.
Suspending the dividend also increased the investors’ exodus from Intel’s stock.
Here the problem seems to be a simple case of complacency.
I have been recommended 2 articles that go deeper into details:
The short version: Intel made so much cash from server CPUs that it never felt the urge to embrace anything else.
There are a lot of more complex details of course, but this is the crux of it.
This cash cow kept bringing revenues, so the company could keep growing its headcount anyway, despite degrading fundamentals.
The historical equivalent would probably be Imperial China. So long at the top, so wealthy and comfortable that it could never imagine that the upstart small nations like France or the UK could ever threaten it from the other side of the globe.
Similarly, Intel managed to fail to grab the chips for the smartphone market, and the GPU market (that turned out to be also a crypto chip and AI chip market).
The dominance of TSMC from using EUV, something Intel contributed to inventing is rather striking.
We are reminded of how China invented gunpowder, only to be forced by European gunboats to open for the devastating opium trade a few centuries later.
Boeing’s Technical Crash
Boeing is in another situation than Intel’s slow erosion of a competitive moat and missing a new market.
Instead, when still dominant in its industry, it started to fail from a technical and safety point of view SO hard that its reputation is falling like a stone.
This includes many high-profile crashes and panels taking off mid-flight, due to faulty design, poor manufacturing.
And for something as fragile & technical as airplanes, so many mistakes are rather unforgivable.
When Intel fails, some other companies make better chips. When Boeing fails, hundreds die.
The latest failure is the less dramatic but maybe even more high-profile, with an 8-day trip to the ISS potentially turned into being stranded for 8 months at least.
As usual, the jokes are the best part of a pretty lame situation. At least this time no one died.
The rest of Boeing’s space program is going as well as Starliner:
You can read in detail more about Boeing’s recent failures in “Boeing’s tragedy: The fall of an American icon“.
Cutting Corners To Death
When studying the failures of Boeing, a recurring theme emerges: corner-cutting.
When Boeing, a famously excellent and engineering-focused company, absorbed the MBA-type sharks of McDouglas in 1977 (that had already run McDouglas into the ground) they essentially took over Boeing.
The difference is that for a while, the excellence of Boeing's previous design, in-house engineers and overall accumulated capital allowed for the company to cruise on past achievements from a technical perspective.
At every turn, when safety or technical excellence entered into conflict with short-term profits, the company took the wrong decision:
Firing or harassing the “asshole” engineers that insisted on costly quality control and redundancy in designs.
Plenty of share repurchases and sells of assets to maximize financial metrics.
Distribution of its supply chain all over the world at the lowest cost, instead of preserving vertical integration and in-house manufacturing.
It took a long time for these decisions to really impact the company, but now it is hitting from all angles at once.
The 737 MAX crashes were due to a deadly mix of only 2 sensors for the angle of the plane, leading to the software being confused when one captor malfunctioned (which one should the computer believe?).
This broke a golden rule that any important sensors should be in 3 copies, so when one fails, the computer can assume the 2 functioning are the “right” ones.
In addition to the improper data input, the software also made grave mistakes like forcing the plane to perform the wrong maneuver when the sensor failed.
This led to the 2 deadly crashes costing the lives of hundreds, and Boeing’s reputation.
The software programming was subcontracted to an Indian firm winning the job for $9/h, with the quality we can assume for such a low price.
“Rabin, the former software engineer, recalled one manager saying at an all-hands meeting that Boeing didn’t need senior engineers because its products were mature. “
Improper fuselage riveting leading to panels flying off mid-flight was also linked to a growing “it’s good enough” attitude in Boeing’s factories.
Overall, there is some touch of the same arrogance as at Intel, the “we will sell anyway” mindset.
But more dramatically, it is clear that financial profits and pleasing shareholders every quarter were more important than not killing passengers or ensuring the company's long-term survival.
It is a classical case of corporate self-cannibalism, where the company is stripped of its assets silently until the damage to the foundation is so great that the collapse is almost inevitable.
Now, remember that Boeing is also one of the largest defense companies in the world, and I let you guess what it means for the quality of NATO equipment.
General Electric's Loss Of Direction
General Electric, or GE, was founded by engineering and business legend Thomas Edison. It would grow into the quintessential American company.
Starting from the lightbulbs, it went on to invent so much more:
GE inventors developed X-ray tubes and radio voice broadcasts. They created an electric car and an electric train. In the ’20s, GE got into home appliances. It built the first U.S. jet engine in the ’40s, and by the ’60s it was making the plastics and silicones used in the moon landing.
Later on, GE would get involved in nuclear energy, laser, and CT scans.
By 1999, GE employed 340,000 people worldwide. It was in everything modernity wanted, from trains to electronics to jet engines.
This sort of peak is usually when, would GE be an empire in Antiquity, imperial outreach & corruption start to creep in.
From that point, the structure is just so big that management has only a tenuous connection to the ground-floor operation. The way the Roman Emperor would barely hear about a bad harvest or a revolt in Britain months after it happened.
This is also when complacency can grow without consequences.
The taxes from Britain keep flowing to Rome anyway.
The revenue stream from GE jet engines and patents keeps flowing anyway.
But this was not enough.
It would take a legendary CEO, praised beyond all others, Jack Welsh, to destroy GE's long historical legacy.
Instead of cutting corners (although there was plenty of that), greed and corporate hubris were the fuel that would burn GE to the ground.
In 2024, GE would be broken up into 3 different companies, after almost 2 decades of slow decline.
Greed
Despite solid results, GE activities were all of the heavy industrial type, with plenty of required R&D spending as well as capex to keep at the top.
This resulted in an okay, but not great return on invested capital.
However, the sheer size of GE and its network gave it a great advantage in raising funds. GE Capital, the financing /shadow bank (at the time, the 7th US largest) branch of GE, would bring a lot more “capital” efficiency than clunky, boring, dirty factories.
A new culture of firing anyone not performing enough every quarter would take over the slow and steady rise of excellence in new technologies.
The nickname "Neutron Jack” appeared, after Jack Welsh the neutron bomb, only the building was left, but none of the employees.
Exit the workers and engineers, and enter the bankers and accountants.
Unsurprisingly, the incentive to pamper numbers lead to many accounting frauds and dubious practices.
More importantly, capital started to flow to “investment” instead of R&D.
Hubris
And there was plenty of investment. The pressure for division managers to perform and grow perpetually meant an easy way out for acquiring competitors.
Or unrelated businesses.
Or even better, loan money to your customers, so they can buy more of your products.
“My wife worked for GE Capital called GEHFS. They were the golden boys for sure. They were cowboys financing anything to anyone with zero shits given. Broke hospitals with negative books leasing 50 million dollar MRI machines? SURE!
GE Medical would just "buy them back" when the hospital stopped paying which they almost always did. Then a couple of years later they'd turn around and do it again. Too risky? Not for GEHFS!“.
Another user in the same thread discusses interesting accounting practices to pamper the annual report earnings by laying with inventory:
I worked on an account that supplied locomotive components to their train manufacturing division in 2008-2011. The thing I distinctly remember was they did the same thing every year in the last quarter and first month of every year (exact months may vary I can't remember if their fiscal year was differerent) From Feb - Sept they would order a consistent number of components every single month (matching their locomotive production requirements). Oct/Nov/Dec they would stop ordering almost completely unless they ran out and then January they would order 4 months worth of the components.
Why would they do something so ridiculous? So that they could draw down inventory to juice their end of year financial reporting... of course that only worked the first year they did it... and then they were subsequently forced to keep doing it or people would lost their bonuses.
Considering what came out over the years, these accounts, while unconfirmed, feel accurate.
There was nothing GE could not do. It acquired 600 businesses in 20 years, or one every 12 days. It owned the NBC network.
Most acquisitions would later collapse or be resold at a massive loss.
GE Post Mortem
More than just corner-cutting and outright stupid decisions like in Boeing (like saving a few hundred bucks on a third key sensor), there was a true callousness to GE's methods.
Accounting fraud, careless loans, tens of billions in share repurchases to get management’s outrageous bonuses paid, etc.
If Boeing is Imperial Rome in decline, GE was at that stage of decline where the corrupt elites pillaged their own city before leaving it defenseless.
Takeaway
There are really only 3 types of corporate and national crises:
An external crisis, brought by an exogenous shock, like a new technology or an invasion.
A healthy corporation or empire can see these coming in time and normally anticipate and reduce its impact.
If it has catastrophic consequences, it is very likely that the real cause is not the external one, but the complacency.
While problematic, this can be solved if the shock induces enough of a change of tactics and the end of complacency.
Intel seems so far a good case of such an issue, with the jury still out to determine if the shock has been enough to change its course.
A crisis of competency, where bad decisions are taken as the wrong people are in charge, and they are too stupid and/or shortsighted to take the right ones.
Competent people, either good engineers or good generals, get replaced by incompetent finance and politician types.
The new management can for a while make things seem not only okay but better.
This however hides an ever-deepening rot building into the organization.
This seems to be mostly the case with Boeing, with decisions like removing a cheap sensor or updating poorly the software of Starliner not so much short-sighted than outright stupid. You can be sure there was somewhere in this team an engineer who pointed out that could cause a problem and got told to shut up and stop “being difficult”.
And then, there is the last case, outright malice and fraud.
While it can be difficult to distinguish from crisis #2, a key factor is the ruthlessness of it.
Instead of bumbling idiocy that does not even save money, you see the organized and systematic pillaging of the healthy part to feed the parasitic parts.
Welsh clearly knew what he was doing. He also knew that with the right lobbying, he would be perfectly shielded from the fallout of his accounting shenanigans and failed empire-building.
Funnily enough, most of the CEO followers of Jack Welsh, Boeing executive included, seem to have truly believed him a hero and genius, making them commit #2 type of mistakes. Because the smart one would have figured it was all a fraud to fill a few people’s pockets.
An organization tends to have different types of crises at different stages of its life cycle.
Still, dynamic structures will fall for #1 when they get too successful or big.
Past their peak organization will often commit #2 errors. They might or might not survive them.
Type #3 however tends to always be fatal. The way type #2 is an accident you might survive, but type #3 is premeditated murder.
Investing Takeaways
Intel
As it was the Intel stock crash that prompted this article, let’s discuss it briefly.
As far as I can say, Intel's failure is more akin to a series of technological wrong turns than outright stupidity or malice.
So while I would not want to buy the stock yet, there is maybe a point where the company can rebound.
Especially if it keeps getting cheaper.
As the company is now below its 1997 price, and on the way to its $12/share of 2009, it might be one of these trades like buying Apple or Amazon after the dot com bubble imploded.
Boeing
Boeing’s problems are however a lot deeper. Not only did it make bad decisions, but instead of complacency, it is outright incompetence that is killing it.
A dangerous situation for a company producing fragile and mission-critical products like missiles, helicopters, planes, and spaceships.
I am under the impression that the accumulated loss of top talent, bad manufacturing practices, and poor management flowing from the top down to the team leaders is likely incurable.
In any case, the bad news are almost certainly not done coming.
The only case where I would invest in Boeing would be after a massive restructuring, downsizing, and re-establishment of an in-house supply chain.
It could make for a good short I guess, but I don’t short. And most likely, neither should you.
For sure, the stock does not look cheap when it is barely below its recent peaks and still above its 2016 stock price.
Others
Of course, corporate post-mortems are fun, because you can sound smart on something you have enough data to talk about.
But if you had forecasted the downfall of GE in 2005, few would have appreciated your genius.
Looking back, what warning signs can you detect that a corporate collapse is brewing?
Here are a few common features, of all 3 types of crises:
Too big, with size either the driver of complacency or a good way to hide fraud.
Technologically sensitive, as a company Coca-Cola would not be so easily disrupted (points to Buffett here).
Degrading performance with little to no reaction, including declining headcount.
In general I would not recommend shorting any of these, as we are in very bubbly times.
Tesla
Of the #1 crisis I can see forming is Tesla.
The company is starting to severely lag behind its Chinese competitors of technology.
The branding that relies on no marketing costs thanks to Musk might suffer badly from Musk's entry into politics.
A focus on gimmicks and wonder technologies (cybertruck, self-driving software, humanoid robots) instead of fixing the degrading core business.
A Musk-centered company, I am not sure Tesla can survive without a crisis after the de-facto departure of Musk, too distracted by politics/Twitter and SpaceX to deal with it.
NVidia
Of course, Nvidia's price rise is reminiscent of Cisco in 2000, which is a problem in itself.
But I suspect it is getting complacent in the face that most of its main clients (Facebook, Google, Microsoft, etc.) are actively pouring tens of billions into developing their own AI chips.
Almost a decade of growth from crypto and AI has made the company complacent and greedy.
In the long run, if its profit margins are too high, either a competitor (AMD?) or its own clients will create a cheaper alternative.
It also seems that NVidia is starting to do a lot of the “loaning money to your clients so they can buy your products” shenanigans.
So it might be more of type #3 fraud than simply complascence. The most dangerous type.
Visa / Mastercard
Exploiting a duopoly for decades in an unavoidable middleman position will for sure make you complacent.
Crypto enthusiasts claim they will bring down the legacy payment systems and they might for all I know.
What I am a lot more certain about is that the business model of dominating the world finance from New York, simply because your company is American, is over.
It died when the West seized Russia's currency reserves and the US State Department started sanctioning everyone everywhere.
Progressively, national or regional equivalents will be taking over, breaking the steady growth of these companies.
Amazon
Another one that seems obvious to me is Amazon.
The company has evolved from the cheapest retailer destroying everyone's margins and wiping out entire industries to an overpriced reseller of Aliexpress and Temu products.
It is also losing the battle to stay the number one e-commerce site in South America (MercaLibre, see previous report), Eastern Europe (Temu/Alibaba), and SE-Asia (SEA).
The company's future entirely relies on its AWS business, the only real money maker.
But like Visa, do you want all your business and data in the hands (at the mercy) of an American company in 2024 if you are Muslim, Russian, Asian, African, etc.?
Besides, I have the impression Jeff Bezos is sort of distracted for a while…
This would explain how the company can blow up $1B on the Ring of Power. In case you missed it, it managed the feat of being universally loved by critics, hated by viewers, and literally makes people cancel their Prime subscription.
I mean, imagine making a Lord of the Rings series and losing money.
This is a blunder as big as Disney almost killing Star Wars.
When your organization cannot handle such a simple task, the problems are piling up quickly at the horizon.
Disney
Speaking Of Disney, the only branch of the company making money seems to be the amusement parks.
But the parks make money only thanks to Disney’s IP, of which the last successful one was … Frozen … in 2013. ELEVEN YEARS AGO.
Meanwhile, it managed to sink cultural icons like Star Wars, Indiana Jones, and the Marvel movies.
Very much a #2 crisis, utter incompetence, in this case, due to terminal infiltration by political activists.
Not much to say, except a big KEEP OUT sign.
Another fascinating post, Jonathan