AT A TIME WHEN so many of the nation's giant corporations seem helpless before mounting foreign competition, IBM Corporation has emerged as the great bastion of American corporate power. No longer the focus of intense antitrust action, IBM, with its ability today to rebuff overseas challengers -- especially the relentless Japanese -- has acquired an aura among policymakers unmatched by any other U.S. corporation.
"If you talk to people around here, you get the sense that they are regarded as a national resource, one of the assets that prevents our trade imbalance from being even worse," comments Republican Rep. Ed Zschau, the one-time electronics entrepreneur who represents Northern California's Silicon Valley. He adds "that if we didn't have an IBM, the whole industry might be dominated by someone like Fujitsu by now."
Viewed from the perspective of trade deficits that could top $150 billion, it is not difficult to understand Washington's enthusiasm. This Armonk, N.Y.-based multinational over the past five years has contributed over $5 billion to the nation's net exports. It is widely credited with blunting the Japanese drive to control the strategically vital computer/telecommunications/robo tics industry that, by the 1990s, is expected to generate $1 trillion annually, making it the world's single largest economic sector.
But to an increasing number of Zschau's constituents in Silicon Valley, as well as entrepreneurs and venture capitalists across the country, this growing dominance of IBM -- which accounts for 40 percent of the U.S. computer industry's revenues and 70 percent of its profits -- may well pose as great a threat to America's competitive edge in high- technology as the dreaded Japanese.
By making life miserable for entrepreneurial firms in places such as Silicon Valley, these critics contend, IBM could be choking off the prime source of innovations that long has stood as America's greatest asset in the battle for technology supremacy.
"IBM's overweening power has little to do with any technological superiority but with ability to use their size in unfair and anti-competitive ways. They basically want the entrepreneurs to lay down the foundation so they can take the business away," claims Kevin Kinsella, a general partner at Avalon Ventures, a San Diego-based venture capital firm. "The long-run effect of this is to make people simply reluctant to even try. If that happens, the silicon will turn into sand just like the steel in the Midwest turned to rust. The country will suffer from a lack of new products and companies. It could be a real tragedy."
The critics point out that with its dominance of the market (two-thirds of all personal computers are IBM- compatible), IBM has set up de-facto technical specifications and industry standards in every aspect of computing. This constrains both customers and entrepreneurs. An inventor could produce an excellent innovation that would never sell simply because his gadget is not compatible with IBM.
The critics also note that as a dedicated multinational, IBM is among Japan's top computer exporters, too, and that blunts its positive contribution to America's balance of trade.
And they fear that the only thing that stopped IBM from devouring the industry was the antitrust law, which they say Washington has all but abandoned.
"IBM has certainly been useful keeping the Japanese on the defensive, but that's no excuse for having Armonk lay out the industrial policy for the nation," notes Michael Borrus, a member of the Berkeley Roundtable on the International Economy and a leading expert on the worldwide technology industry." There's a danger in letting a company that big run wild. The entrepreneurs are still creating a lot of the jobs and innovations out there. We can't just let them get wiped so we have someone to fight the Japanese. There's a lot more to America than IBM."
There are few computer industry executives who do not trace IBM's current juggernaut at least in part to the January, 1982 decision by the Reagan Justice Department to drop its 13-year-old antitrust action against the giant familiarly known by the color of its trademark: Big Blue. No longer concerned about Washington's commitment to enforcement of antitrust statutes, these critics contend, IBM now feels free to employ its enormous financial and market leverage in ways that, under previous administrations, would have seemed reckless at best.
"Ever since they dropped that suit, they have become an increasingly malevolent force," says L.J. Sevin, who is on the board of Houston-based Compaq, one of IBM's few remaining rivals in the personal computer field. "They give no quarter, so you better not ask for any."
Among the more "malevolent" moves cited by IBM's industry critics has been the company's recent large-scale "promotional" giveaway of computer software. Some software firms fear this could drive them out of existence, despite their belief that their programs are more innovative. Another has been a spate of personal-computer price-cutting, a tactic which is widely credited with helping drive several hardware- makers to the brink.
The benign Reagan regulatory climate has also allowed IBM to grab new telecommunications territory though investments in switching- system-maker Rolm, and long-distance-carrier MCI. "If the old antitrust policies had been there, this wouldn't be happening," maintains Brian Jeffrey, veteran IBM-watcher for the Palo Alto-based International Technology Group. "There's simply no restraints on them buying their way into any market they want."
Perhaps the most significant effect of the Reagan policies, critics say, has been to bolster IBM's virtual stranglehold on users of mainframe computers, where it holds over two-thirds of both domestic and foreign markets. These large processors, ranging up to $2 to $3 million each, last year provided IBM with nearly 25 percent of its revenue and roughly half its over $6 billion in earnings. This mainframe dominance gives Armonk a critical advantage in selling customers a growing family of peripheral products such as disc-drives, terminals and workstations.
Critics maintain that without the threat of antitrust actions, IBM seems freer to engage in such tactics as the "bundling" of various hardware, software and service products.
Last year, for example, Bill Cross was shopping for a new mainframe for Seminole Electric Co., a small Tampa utility company. Cross, the company's director of information systems and a long-time IBM customer, decided to look at a mainframe made by National Advanced Systems (NAS), a joint venture between National Semiconductor and Japan's Hitachi Ltd.
Cross says that it soon became clear to him that, once faced with the possibility of losing a sale, the IBM representative wasn't about to stick only to such fundamentals as price and performance. "The IBM guy indicated to us that if we went to another vendor, our level of support for our existing IBM equipment would not be as good," recalls Cross.
Although fearful that any reduction in mainframe service could hurt his company, Cross refused to be intimidated, purchased the NAS system at what he claimed was a 20 percent cost saving, and says that IBM ultimately did not carry out its threat. Resistance to such tactics, however, is exceptional, according to industry insiders, who claim such threats can affect even the largest and most powerful corporations.
IBM officials scoff at such assertions. "Regarding Seminole, this is the first time we have heard of this," an IBM spokesman said. "We have had no complaint from the customer. It's our practice not to discuss customer relationships."
IBM vice president and chief legal counsel Nicholas deB. Katzenbach even steadfastly insists that the Reagan administration's dropping of the antitrust case did not produce major changes in the way IBM does business -- a notion that struck former IBM sales executive and computer industry newsletter publisher Bob Djurjevic "like looking up at the sun and calling it the moon."
Rather than reflecting a change in the regulatory climate, IBMers such as Katzenbach credit the company's recent successes solely to the excellence of their technology, marketing, and manufacturing operations. To him, the widespread complaints about the company's aggressive marketing smack of sour grapes.
"If you were a CEO in this industry and you really blew it, would you be more likely to blame it on some competitor? And if you're going to blame it on some competitor, who would you like to blame it on?" asks Katzenbach, who served as U.S. attorney general during the Johnson administration. "How many CEOs have you ever heard say, 'Jesus, I really blew it and that's why the company's not doing well'?"
As seen from Armonk, IBM's aggressive expansion reflects a thoroughly respectable attempt by the corporation to grow at the same rate as the computer industry as a whole. This is something that eluded the company throughout the '70s, although IBM has been matching the 15 percent per year average growth rate of the industry in more recent years. Its sales topped $46 billion last year.
In addition, they point out that products such as the IBM PC have created enormous opportunities for scores of entrepreneurial firms in software, peripherals and even compatible computers. "There are many companies, small in size, that got venture capital support because they played in the computer industry somehow," reasons Jack D. Kuehler, senior vice president in charge of IBM's worldwide manufacturing operations. "Did IBM have any hand in the growth and success of the computer industry? If that answer is yes, then IBM's existence and what they've done in the computer industry had beneficial effect on that company's existence."
Yet many of those entrepreneurs blessed by IBM's "beneficial effect" now stand among Armonk's bitterest critics. IBM, for instance, has in just three years overwhelmed the market for personal computers -- an industry spawned in the basements of Silicon Valley.
Once highly touted start-ups such as Osborne Computers, Victor Technologies and Gavilan Computers have greatly disappointed the once-high hopes of their investors, deflating market enthusiasm for many other such new ventures. Such start-ups have declined by as much as 50 percent in the past year in Silicon Valley.
IBM bitterly resents the notion that it is responsible for this decline, saying it can hardly be held accountable for every problem associated with high-risk start-ups.
Yet, "You're a lot less likely to bring out a product that would go into competition with IBM," notes L.J. Sevin, who is also a general partner at Dallas-based Sevin-Rosen Management, one of the nation's most respected venture capital firms. "It's part of the checklist both for venture capitalists and major corporations. Is IBM in this field? What are the interests of IBM in this market? The effect on entrepreneurs has been devastating."
IBM orders may have played a major role in the rapid growth of such microcomputer disc-drive makers as Tandon, Seagate, Miniscribe and California Memories, Inc. but, observes Jim Porter, editor of industry newsletter Disc/Trend, IBM has at times turned out to be a fickle benefactor indeed.
In what has become a familiar pattern, some IBM suppliers have found themselves with huge contracts one year, only to find that the next, IBM has suddenly decided to switch suppliers, sometimes to Japanese firms. "IBM is like a dope- dealer in a schoolyard," observes disc-drive maven Porter. "They get you hooked and excited. You feel 10- feet tall. Then they drop you."
But IBM has precious little sympathy for the struggling entrepreneurs back in California. "IBM does not lead people on," an IBM spokesman said. "We keep our suppliers informed .., so that decisions that affect our relationship with them should come as no surprise." To top executives like Allen Krowe, IBM's senior vice president for finance and planning, the problems faced by these suppliers and competitors reflect more the fundamental weaknesses of some high-flying entrepreneurial companies than any malevolence on the part of Big Blue.
"Some entrepreneurs are interested in making money and then going and living on the beach and having a good time. I don't knock that, but that's not the infrastructure that provides the long-term support for the nation," observes Krowe. "How many times have you seen the picture of the new entrepreneur standing astride his twin Lamborghinis out there, number one and number two on the license plates. He's standing out there looking like the king of the hill. And then 14 months later, his inventory is out of control; he had overcapacity at a given factory; he announced a new product he can't deliver; and now he's in Chapter 11."
Krowe's notions about the excesses of some entrepreneurs reflect something of IBM's unique corporate culture. In many ways, the company represents a throwback to an earlier, more self- confident era of American industrialism, when American managers prided themselves on the smoothness of their operations from production technology to the management of human resources.
Indeed, despite recent media hype about IBM's "changing image," what makes the company so awesome is how much it still reflects the monomaniacal, highly conformist spirits of its founding fathers, Thomas Watson and Thomas Watson, Jr. For instance, one can spend almost a full week at company headquarters at Armonk and not see a single male executive wearing anything but the white shirt and dark suit mandated decades ago by the Watsons.
However absurd this conformity might seem to an outsider -- particularly one accustomed to the anything-goes culture of California -- it does seem to produce a singleness of purpose and loyalty rarely seen in American companies, particularly in electronics. For instance, most high- tech companies experience annual personnel turnover rates over 20 percent and announce mass layoffs with shocking regularity. IBM, with 400,000 employes worldwide, has an annual turnover rate of under 3 percent -- even lower among factory workers -- and has not laid off one employe for economic reasons in nearly a half century.
"Our people when they come to this company work for life," notes IBM manufacturing czar Kuehler, who spent 15 years in Silicon Valley at IBM's San Jose Research Center. "They work as an IBM team, for the common goal to be very competitive. A lot of the things you read about Japanese management techniques, IBM has been doing for years."
Perhaps nothing better illustrates IBM's commitment to being "competitive" than their determination to stay abreast of the Japanese and other East Asian companies in the manufacturing field. Once-ballyhooed entrepreneurial firms such as Tandon and Atari have largely abandoned domestic manufacturing for the short-term benefits of overseas production. Even larger firms, such as Sperry, have turned to the likes of Mitsubishi to produce their personal computers. But IBM has invested an estimated $32 billion over the past five years in new plants, equipment, and engineering as well as research and development.
In the end, this emphasis on maintaining control of the means of production could prove IBM's most vital contribution to the American economy. The entrance of the Japanese companies -- with their massive financial resources and advanced manufacturing capabilities -- as major players in the information- processing industry has changed forever the rules by which American companies must play, notes Dr. Ralph Gomory, IBM senior vice president and director of research.
Companies that fail to meet the Japanese challenge at the factory level, Gomory believes, will be unlikely to survive, no matter how innovative their product design or marketing strategies. Indeed, to Gomory, the situation is analogous to Australia when Europeans first introduced their animals to the wilds. Those firms unable to compete with the new "intruder" (Japanese companies) could, like many of Australia's indigenous species, go "poof," he says. IBM, on the hand, is determined to survive by beating the Japanese at their own manufacturing game.
"We are not intimidated by our ability to compete as a manufacturer with anyone in the world," claims Kuehler, who has played a central role in IBM's massive new commitment to upgrading its world-wide manufacturing operations. "We believe we can be competitive in every one of those areas. We have the will, we have the desire and I believe our history has shown we can do it, and therefore we are doing it."
However self-serving, IBM's view about manufacturing's crucial role in high-tech reflects a growing consensus among industry experts who, like Gomory, have reflected long and hard on the Japanese challenge. "There's a real change in the world now that makes it hard for the guy in the garage to become the next Apple," notes Jack Beedle of In-stat, a high-technology consulting firm based in Scottsdale. "To deal with the Japanese you probably have to have a few dominant giants like they do, people who can keep investing through the hard times. You have to have players who can play with Mitsubishi and Hitachi, and IBM's one of the few we've got."
Giant Japanese electronics firms such as Hitachi have used their manufacturing expertise and massive financial resources to devastate many of the U.S.'s remaining independent semiconductor makers, particularly in such critical products as dynamic RAMs, an essential component in personal computers and scores of other products.
Yet as even such strong American producers as National Semiconductor have been forced either out of the market or into layoffs, IBM -- which produces only for its own consumption but makes more semiconductors than any single company in America -- continues to run triple shifts on the most advanced RAM chip.
"While everyone in the Valley is out bailing water, IBM is out there doing everything right," observes Dan Hutcheson of VLSI Research, a leading San Jose consultant firm. "They are probably two, three years ahead of the Japanese in memory production. They are putting money where it counts. In the end, it has to be IBM and the Japanese who control this business."
These essential strengths of IBM -- from a strong manufacturing orientation to virtual lifetime employment -- have made IBM the one American company that Japanese executives actually fear. Although IBM-Japan's market share has slipped some in recent years, from 50 percent in 1970 to roughly 30 percent today, some top Japanese executives see dangerous signs that Big Blue -- which recently dispatched an additional 200 mostly American IBMers to Tokyo to join the over 16,000 mostly Japanese employes already in place -- is about to mount a new major assault on both the home market and segments of key export markets.
"The fear of IBM going into new areas -- like printers -- is causing great concern with companies such as (Japanese computer and printer maker) Epson. People respect IBM and fear it. It's very scary," observes Koichi Shirashi, editor of Nikkei Personal Computing, a leading Japanese trade publication. "The power of IBM in Japan is not to be underestimated."
With scores of American companies screaming for protection from Japanese firms or surrendering their production to them, the spectacle of Tokyo executives quaking before an American corporate giant makes IBM seem a sort of a corporate Rambo, a living symbol that the American industrial system still has a little life in it. This, more than anything, lends credence to the argument that IBM is a "national resource" not to be trifled with by antitrust or other punitive actions.
"There are far more people willing to accept massive vertical integration than ever before. There's a sense that, with the Japanese out there, antitrust is a luxury we can't afford," says John Shenefield, Carter administration head of the Justice Department's antitrust division. "There's a growing feeling that we should place our bets with IBM, AT&T and the other giants."
But Shenefield and others point out that there's danger in confusing IBM's corporate strategy with the needs of America. "The contention that aiding IBM in its total domination of the market is a weapon in our war against the Japanese is one I just don't buy," maintains venture capitalist Sevin. "If IBM is going to be our centurion in the battle, I'm not sure I would trust my soldier. He's likely to make a deal with the enemy."
As Sevin suggests, IBM is not an American "centurion" but a devoutly multinational company which tailors its strategies to local economies. Ever since the Watsons expanded their empire beyond the nation's borders, IBM company policy has sought to make each overseas subsidiary essentially a local firm -- employing predominately native workers and executives, as well as manufacturing and procuring parts there.
Indeed, IBM-Japan, a model of the company's internationalism, rather than reducinpan's massive trade surplus, is itself among the top Japanese computer exporters and nearly 40 percent of those exports consist of products bought from other companies including those of leading Japanese firms.
Nor is IBM's contribution to the U.S. balance of trade nearly as great as might be supposed in Washington. Last year, for instance, the company contributed little more than 20 percent to the computer industry's roughly $5 billion positive contribution to the balance of trade. These numbers are low compared to the company's share of U.S. computer industry revenues and an even smaller contribution based on its overwhelming share of computer industry profits. Other computer companies -- notably minicomputer manufacturers -- contribute far more, relatively, to the balance of trade than does Big Blue.
All this suggests that, although perhaps the greatest U.S.-based corporation in history, there may be dangers in single-mindedly signing up IBM as our "centurion" in the growing battle with our overseas competitors. By emasculating the antitrust laws that may be the only brakes on its growth, we might, out of fear of Japan, concede far too much power to a corporation whose unbridled sprawl could spell disaster for the entrepreneurs who have made this nation the world's innovative wonder.