The high-tech glassmaker's latest results hold valuable lessons about innovation, volatility, and leverage
This financial crisis has taught us a couple of unfortunate lessons. First, innovation-driven economies like that of the U.S. are necessarily highly volatile, because innovation is so unpredictable. Second, and more distressing, that volatility is amplified by taking on too much debt and leverage, as the U.S. did over the past 10 years. As a result, when innovation fell short, we found ourselves in a bad place.
The big question: As we dig ourselves out of the wreckage, can our economy be rebuilt in a way that preserves innovation, while mitigating the volatility?
Obviously this is a deep question. I thought the example of Corning (GLW), the big materials manufacturer, could be useful for thinking about the broader economy. Corning is an innovation-driven company which has been subject to big boom-and-bust cycles. It prospered mightily during the tech boom when demand for fiber-optic cable, one of Corning's main products, went sky-high. The company's employment shot from 21,000 in 1999 to 40,000 in 2000, its stock soared, and Corning took on huge debt to build new capacity.
Then, when the tech bust came and demand for fiber-optic cable plummeted, Corning, laden with big debts, went through a near-death experience. The company was forced to cut roughly half its workforce. Its stock plunged from 113 a share to just over 1, and things looked tough.
Controlling Costs and Debt
But then Corning came back to life—not because of fiber-optic cable, but because of another product, glass for flat-screen, liquid-crystal-display TVs. As demand for those TVs soared, so did Corning's profits and stock price—until the financial crisis hit. Wham! Demand fell off the table.
A replay of the tech bust? Hardly, because Corning learned its lesson. During the LCD boom, it kept costs and debt under control rather than expanding too fast. Now demand is recovering for LCDs, and Corning has been rehiring workers at its North Carolina plants in Wilmington and Concord because of demand for optical fiber related to expansion of China's 3G telecom network. And Corning's first-quarter earnings and sales, reported on Apr. 27, were better than expected—although profits were down 79% compared with a year earlier, leaving out restructuring charges and a litigation-related credit reported in 2008.
What did Corning do differently this time, and are there any lessons for the U.S. economy? I think it's instructive to revisit an extended interview I had in February 2009 with Corning CEO Wendell Weeks, in which we discussed how the company changed its approach to innovation and financing. Here's an excerpt.
MANDEL: Your company is innovation-driven and highly volatile. You almost got wiped out in the last bust. Then you had another boom. How did you avoid the same thing happening again?
WEEKS: We asked ourselves—where do we want to be when the next bump comes, because it will come. The best way to survive the inevitable volatility is to make sure you are financially stable. That means having way more cash than debt. It also means structuring our debt so nothing is due of significance over a four- to five-year time frame, because no down cycle for us has lasted more than a few years.
So for you, having an innovation-driven company means taking less risks financially. That's something to think about for the U.S. economy as we wrestle with the debt crisis. Now let's talk about innovation vs. manufacturing. A lot of U.S. companies focus on the innovation, but leave the manufacturing to others. That's not your strategy.
We used to be stunning at the early to middle stages of an innovation, but then we didn't always dominate the very end cycle of the business. If you are going to have conservative financials, that means you have got to get your cash out of your businesses. You have got to do it the old-fashioned way, which means you've got to be the leader through maturity. So we redid the way in which we approached our businesses so we would hang with major Asian producers as costs went down, all the way through the cycle, be the last guy out, so that we generate cash. This provides interesting tension with Wall Street, because by definition your growth rate is going to be slower.
That's fascinating. So in terms of managing risk, it was important for you to succeed as both innovator and producer. How did you do that?
We took all our spending that is not R&D and we said that can only grow at half the rate of sales. We said if we are going to be in a spot years from now when the next bad thing happens, we've got to become top quartile in terms of efficiency and our spending in everything but R&D.
Still the same theme, then—an innovation-driven strategy requires taking less risk elsewhere. What other steps did you put in place for the inevitable downturn?
We manage our whole innovation portfolio to invest for balance. We balance the inputs because you can't balance the outputs. So while everybody else was retrenching from fiber optics, we kept pressing on it.
So you have a long-term perspective on innovation?
Usually the first idea that we have is not the right one, it is the second or the third. So that means you've got to sustain your people through failure. They fail, you don't punish failure. We know we'll be back with that same idea, but applied in an entirely different way.
A great example of this is something we call Gorilla glass, which is now starting to really grow. Originally we invented it for windshields back in the '60s, and it failed as a product then. Now touchscreens come along, and all the advantages of this are back. Basically if you drop it, it doesn't break…. This is hundreds of millions of dollars of opportunity for us.
Our technology for controlling diesel emissions is a huge bet for clean air. The other big energy bet we are making is in photovoltaics. We are making a big attempt to invent a glass substrate that improves the conversion efficiency of thin-film photovoltaics and that is progressive.
Let's just get back to the current bust. Did you see it coming?
I have seen this sort of thing happen in industries before. In telecom, at first I was amazed: How can companies that just came into existence get the dough to build whole networks?
And then you bought into it.
Back in 2000 I bought into it. That's why I knew better this time.
Too bad the rest of us didn't learn the same lesson. Thanks.