A Future Perfect: The Challenge and Promise of Globalization

by John Micklethwait

  The architect of this urban regeneration is an affable Hong Kong immigrant in his late forties named Charlie Woo. The last few years have clearly been good to Woo: His stomach droops over his belt, and his face is so pudgy that it pushes up against his large glasses. But he has all the energy of a much younger man, talking rapidly, laughing loudly, and waving his arms about to illustrate his many enthusiasms. The overall impression of vitality is such that it is easy to forget, until he gets up to pull down a toy, that a childhood illness has left one leg paralyzed and that movement is painful for him. His office is a combination of thoroughfare and storehouse: His employees rush through his office to reach a loading bay in the back of the building; stacks of Darth Vader masks threaten to tumble over and submerge him. An endless succession of Chinese men, most of them apparently cousins, drop in for tea. His fearsome secretary, who has failed to master the intercom he bought for her, announces each new visitor with a piercing scream of “Charlie! Charlie!”

  This informality conceals respect, even awe. Woo is known locally as the king of Toytown, and he takes his regal duties seriously. Anybody who braves the beggars to visit him is treated to an enthusiastic tour of his kingdom. Despite his handicap, he repeatedly stops his car (a specially modified Mercedes) to walk around or swap gossip with one of his competitors. As he wanders around, Woo points to houses that were once crack dens or storerooms that contained more rats than products. He contrasts the desolation of Fifth Street when he first arrived not just with the present but with an even brighter future, when thousands of new businesses will bring work to everyone in the area. It is only when he looks to the gleaming towers down the road that his habitual optimism departs. Businesses no longer need a huge superstructure of managers, he argues: The skyscrapers are Potemkin towers, 80 percent empty. But there will always be places for entrepreneurial businesses such as his own—small companies that actually make things.

  Woo came to America in 1968 to embark on a Ph.D. in physics at UCLA. He was a promising student, but his family wanted him to make money, and he reluctantly dropped out to spend several years running a Chinese restaurant in Laguna Beach. Then he flirted with the rag trade before dismissing it as too fickle. Finally, pondering the sorry state of the local toy market, he saw an opportunity.

  p. 99 At the time, the American toy business was really two industries. One was a relatively high-quality affair, dominated by multinationals such as Mattel. The other comprised cheaper, fly-by-night firms, often selling their tawdry products through flea-market hawkers. Woo calculated that he could undercut the likes of Mattel by importing cheap but not flimsy toys from Hong Kong. Woo started his first business, ABC Toys, in 1979, drafting his father and three brothers from Hong Kong to help him; a decade later, he spun off Megatoys, the business that he runs today.

  Downtown Los Angeles proved to be a better place for a toy business than even Woo imagined. The people who owned the buildings around Fifth Street were so keen to get rid of them that they all but gave them away. There were plenty of immigrants willing to do the grunt work. The proximity of the giant twin ports of Los Angeles and Long Beach meant that Woo could import toys from the Far East much more cheaply than his rivals in other parts of the country could. And, to his surprise, his market was not limited to the United States. Mexican retailers, who lacked the connections to import toys directly from Hong Kong but who had a huge market in their child-obsessed homeland, started beating a path to his door. Other toy makers joined Woo’s little cluster, and Toytown appeared.

  For most of his career, Woo’s biggest headaches have been political rather than commercial. He spent years trying to get something done about the street people who harassed his staff and customers by day and broke into his buildings at night. But left-wing city councillors treated him like a sweatshop owner, and the city’s conservative establishment was too busy building its gleaming towers to pay any heed to a manufacturer of fluffy toys. Woo won some friends by employing street people as cleaners and security guards and becoming heavily involved in local charities. Meanwhile, many of the big companies that once promised to populate the region’s skyscrapers were gobbled up by out of towners. Woo, who only a few years ago was unable to get the lowest local dignitary on the phone, is now inundated with invitations to civic functions.

  The Myth Factory

  For Charlie Woo, globalization is simply a fact of life—or, perhaps more accurately, it is a set of facts about suppliers, customers, and workers. It does not matter to him that many aspects of Toytown seem to contradict common perceptions about how capitalism affects society. He does not use the word globalization except in sales pitches. In this he is not unusual. Busip. 100nesses of all sorts have discovered that globalization is a good excuse for everything from closing plants to buying a new private plane for the chairman. In Tom Wolfe’s novel A Man in Full, the hero, Charlie Croker, calls his Atlanta real-estate firm Croker Global mainly to justify the private jet that he uses to commute to his estate for quail shooting. Meanwhile, governments use globalization to justify everything from defending fixed exchange rates to not having the cash for school reform.

  Endowed with equal amounts of emotion and imprecision, globalization has thus joined that list of turbocharged words—others include family, fairness, and community—that usually tell us more about people’s underlying attitudes to the world than they do about what is actually going on in it. For most cultural conservatives, globalization is a code word for everything that perturbs them about the modern world, from broken homes to ubiquitous pop music. For people in high-tech industries, by contrast, it is one of those words that prove that you “get it.”

  Turbocharged words inevitably generate myths. Here, we will single out what we regard as the myths that need particular scrutiny: (1) that globalization is leading to the triumph of big companies; (2) that it is ushering in an age of global products, from Coca-Cola to Marlboro; (3) that it has ended the traditional business cycle; (4) that globalization is a zero-sum game (in which some people have to lose so that others can win); and (5) that it means that geography does not matter.

  Exposing such globaloney is more than just an exercise in intellectual housekeeping. The myths associated with globalization, no less than other uninformed prejudices, lead to actions that can have dismal effects on the lives of millions of people. The idea that companies must be big or products global leads to pointless mergers. Investors pile money into absurdly valued companies, convinced that a “new economy” has obliterated the rules of economics. The idea that countries are engaged in a struggle for a limited number of jobs—in which one side will inevitably come out the loser—fuels the fires of protectionism and gives succor to more benign illusions, like the idea of “fair trade.” The idea that firms are now rootless pushes governments to spend millions to dissuade a company from moving.

  The First Myth: That Size Trumps All

  Charlie Woo’s office in the shadow of Los Angeles’s skyscrapers is a good place to sit and ponder the first of our myths: that a handful of global megacorporations will carve up the world between them. The “faceless p. 101 multinational” crops up in screed after screed about globalization. Coca-Colonization; Disneyfication; Mcjobs; the Nike economy: Such slurs are bywords for the process in which the small guy gets crushed. The onrush of mergers in the past few years—there were some $2.4 trillion worth in 1998 alone—seems only to add to this image. With each new deal—Daimler-Benz mating with Chrysler, Vodafone with Mannesmann, America Online with Time Warner—we are told that the reason has to do with the need for “scale” in the global economy.

  But the idea that the big are getting bigger is an old myth that seems to get statistically more inaccurate each time it is repeated. More than thirty years ago, in The New Industrial State, John Kenneth Galbraith predicted that the world would be run by huge corporations: “With the rise of the modern corporation, the emergence of the organization required by modern technology and planning and the divorce of capital from the
control of the business, the entrepreneur no longer exists as an individual person in the mature industrial enterprise.” Ever since then, of course, American corporate history has been dominated by entrepreneurs of one sort or another, whether corporate raiders ripping apart the old monsters or young tycoons simply outsmarting them. The proportion of American output coming from big companies rose gradually from 22 percent in 1918 to 33 percent in 1970, but it did not change between then and 1990 (and surely, given the arrival of the technology industries, it must have fallen since then). In Germany, Japan, and Britain, the proportions all fell pretty dramatically between 1970 and 1990.

  Big companies have never been particularly good at remaining on top. USX was once America’s largest company; J&P Coats was once Britain’s biggest manufacturer.[1] The title of world’s biggest bank changed hands at least six times in the twentieth century. As Robert Samuelson has pointed out, an American president who wanted to talk to corporate America once needed to talk only to J. P. Morgan. Now he would need a small amphitheater. Industry after industry has fragmented. In the 1970s, America’s roads were ruled by just three companies (Ford, Chrysler, and General Motors), its airwaves by three (NBC, ABC, and CBS), its telephones by AT&T, and most of its technology industry by IBM.[2] Nowadays, whatever you think of Microsoft, it remains just one of nearly ten thousand software companies. And even in industries where there has been obvious consolidation, such as banking, globalization and deregulation have created opportunities for competitors from all sides.

  There are plenty of ways in which globalization reduces the power of big firms. True, national champions find it easier to spread their tentacles p. 102 around the world, but they have tended to encounter other giants spreading their own rubbery arms. In Woo’s own industry, Mattel and Hasbro have run into Lego, Sony, and Nintendo; Toys “R” Us has been losing market share to discounters such as Wal-Mart, and now it has to contend with Internet toy firms. Small firms have few of the fixed costs of their bigger rivals, such as bloated head offices and waffling middle managers. The deregulation of the capital markets has made it easier for such firms to borrow money; the availability of information technology has made it easier for them to do the sort of number crunching that was once the preserve of the giants; and the declining cost of transport has turned the entire world into their marketplace. Consider many of the characters we have already met—not just Woo but also Patrick Wang, Marcus de Ferranti, and Jackson Thubela—and it is not hard to see why small firms feel less cowed than they once did.

  So why are so many large companies trying to become even larger ones? There are clearly some markets in which size has always mattered: aerospace, for example. There are others where it is beginning to matter more than ever. The rising cost of designing new cars means that carmakers are dividing into two tiers: Half a dozen global giants are prospering while their smaller rivals are treading water or going under. But in many big mergers, companies are pursuing size out of weakness rather than as part of some megalomaniacal scheme of world domination. The world’s biggest oil companies have been driven to merge by their own fatalism about a long-term decline in the price of oil and also by the difficulty of finding more of the stuff. Many big mergers, including both Daimler-Chrysler and Exxon-Mobil, are intent on reducing costs in industries that have too much capacity.

  These sound like good reasons. Yet the only thing more certain than a continuing rise in the number of mergers is that most of them will be failures. A relentless series of academic studies has come up with the same conclusion: Roughly two out every three mergers do not work; the only winners are the shareholders of the acquired company, who receive for their shares more than they are subsequently proved to be worth. The obvious reason for this preponderance of failures is that companies overpay. In the heat of battle, ego often triumphs over logic. (See, for example, Bryan Burrough and John Helyar’s Barbarians at the Gate.) One delicious study points out that the size of the overpayment is linked to the number of magazine covers graced by the acquiring boss prior to the deal.

  But the faults in the big-is-better arguments go much deeper than just price. Diversity is not a sufficient condition for a successful merger. South Korea’s chaebol, for example, managed to diversify into a dizzying range of activities, from shipbuilding to hair care, but rarely became world-class in p. 103 more than one. In other cases, buyers cite mythical synergies, such as the hardware-software argument that lured Sony and Matsushita into Hollywood. Rather than correct weaknesses, upsizing can often exaggerate them. Most American bank deals have been done in the name of cost cutting. Yet when Anthony Santomero, a finance professor at the Wharton School, examined the cost-cutting performance of retail banks in America, he found that the wise virgins had usually cut costs faster than banks that had gone through the sweaty distraction of mating.

  Above all, there is the difficulty of welding an empire together. Many a promising fit has been undone by the presumption that computers like each other. Boeing and McDonnell Douglas were left struggling with 450 incompatible computer systems. The marriage between Union Pacific and Southern Pacific in 1996 was supposed to deliver seamless rail service; instead, it produced a logistics nightmare, with at one point ten thousand train cars stalled throughout Texas and California. Even worse than incompatible machines are incompatible people. Look behind any disastrous American deal—AT&T’s acquisition of NCR (bought for $7 billion in 1991; spun off in 1995 for $3 billion) or Quaker Oats’ takeover of Snapple (bought for $1.7 billion in 1994; sold for $300 million in 1997)—and one word always appears: culture. People never fit together as easily as flowcharts. After one large American merger, for example, the two companies had a row over the annual picnic: Employees of one company were accustomed to inviting spouses, the others were dead set against the idea. The issue was resolved only by agreeing to allow spouses in alternate years.

  Global mergers are even harder. It is even more tempting to start counting which side is winning if the other firm is from another country. In Japan, foreign banks that have bought local firms, such as Merrill Lynch, have had to cope with employees who would not dream of refusing to lend friendly clients money just because their business was obviously tanking. The link between Swedish Pharmacia and American Upjohn in 1995 was supposed to be driven by cost cutting and by complementary drug portfolios. But plenty of time was wasted on rows about “American” practices, such as banning alcohol at lunch. Even worse, Pharmacia had not properly integrated an Italian acquisition. The new company thus started with power bases in Stockholm, Milan, and Kalamazoo. After a botched attempt to make everybody report to a new office near London, the firm eventually moved to New Jersey. At BP-Amoco, what was billed as a merger of equals rapidly became a British takeover. “How do you pronounce the company’s name?” went one joke. “BP: the ‘Amoco’ is silent.”

  Similar stories emerged from DaimlerChrysler, arguably the most “global” p. 104 merger ever and one that is proving a case study in how (or how not) to reconcile different management cultures. One immediate issue was compensation. Chrysler’s boss, Robert Eaton, who pocketed at least seventy million dollars as a result of the takeover and is used to earning up to five million dollars a year, had to report to the more modestly rewarded Jürgen Schrempp. Similar discrepancies still occur throughout management. If Chrysler were to cut pay to German levels, then its managers might defect to Ford and General Motors. But the egalitarian Germans also dislike the type of pay disparity that is common in American firms. One Daimler man shudders to think of his reputation in the small town where he lives if, say, it were reported that his pay had tripled.

  The Second Myth: The Triumph of Universal Products

  The sister myth to the triumph of size is the triumph of global products, the idea that an elite group of powerful brand names, supported by mighty marketing machines, will end up conquering the world. The clearest statement of this view is to be found in “The Globalization of Markets,” a classic article by Theodore Levitt, a m
arketing guru at the Harvard Business School. Levitt argued that technology was producing “a new commercial reality—the emergence of global markets on a previously unimagined scale of magnitude.” Global companies that ignore “superficial” regional differences and exploit economies of scale by selling the same things in the same way everywhere would soon sideline not only small local companies but also the old sort of multinational company that spent much of its time trying to be “respectful” of local quirks and peccadilloes. “The earth is round,” argued Levitt, “but, for most purposes, it’s sensible to treat it as flat.”[3]

  But is it? There are a few upmarket products—The Economist is one—that happily inhabit Levitt’s “flattened world,” many of them selling to the cosmocratic class. But most people have begun to realize that in marketing, just as in navigation, treating the world as if it is flat can have drawbacks. In the broader consumer market, there are only a handful of truly global brands that sell everywhere to everybody, and even these giant names do not mean the same thing in Beijing (where they are status symbols) as they do in Boston (where they are far from cool). Asked to name how many truly global brands there are, one of the top people at Coca-Cola mentions McDonald’s, Mercedes-Benz, BMW, and Sony, “and that is about it.”

  Even Coca-Cola finds it hard to live up to its “Always Coca-Cola” slogan. The bottlers who bring the magic liquid to the world’s consumers are indep. 105pendent contractors rather than company employees—so independent, in fact, that one Coke chieftain was reduced to pleading to a group of them at a company conference in Mexico, “Please paint your trucks red.”[4] The company is also far more responsive to local tastes than it likes to pretend. Coca-Cola’s biggest-selling product in India, for example, is not Coke but Thums Up, which outsells “the real thing” by a margin of four to one in some markets.[5]