By Jerry Davis
This post is part of an Aspen Institute Business & Society Program conversation series exploring ways to align the incentives of business and the capital markets with the long-term health of society. To learn more, visit www.aspeninstitute.org/bsp.
Dell’s (DELL) buyout is the latest in a series of firms leaving the public market. Since 1997, the number of American companies listed on stock markets has dropped by more than half, from more than 8,800 to roughly 4,100. Some firms leave the market due to mergers or going private (Dell), while many are delisted due to bankruptcy or liquidation (Circuit City, Borders, or Eastman Kodak).
But Dell's buyout represents something bigger: The triumph of the virtual corporation.
Dell's announcement coincided with the 20th anniversary of Business Week's famous 1993 cover story on "The virtual corporation." The virtual corporation was described as a temporary network of specialists that could be snapped together and re-configured like Lego pieces. Designers designed, manufacturers manufactured, marketers sold. The article was prescient in many ways, but missed out on one development: The growth of "turnkey" manufacturers in industries ranging from PCs to pet food.
In the 1990s, companies like Ingram Micro and Flextronics took on the mundane tasks of assembly, supplier management, and distribution for many large PC makers -- often manufacturing competing brands on the same assembly lines. During the 2000s, the vast majority of electronics assembly moved offshore. The numbers are stark: At the start of 2001, the Computer and Electronic Products industry had 1.9 million employees in the US. It now has fewer than 1.1 million -- about as many as Foxconn alone empoys in China.
The Dell Model
Dell's approach was the opposite of the virtual model. In contrast to many of its competitors, who sold off-the-rack products through resellers, Dell took orders directly from customers and built customized PCs on its own assembly lines in Texas, Tennessee, North Carolina, and elsewhere. And while US employment in its broader industry collapsed, Dell's US employment grew.
Dell's skill at mass customization at low cost was one of its core strengths. By 2000 it was the world's largest PC manufacturer. Even as Apple (AAPL) and other firms adopted a Nike (NKE) "design and market" model, Dell's 2006 annual report noted that it still manufactured most of the products it sold, stating: "Dell believes that its manufacturing processes and supply-chain management techniques provide it a distinct competitive advantage. Its build-to-order manufacturing process is designed to allow Dell to significantly reduce cost while simultaneously providing customers the ability to customize their product purchases."
But by 2012, even Dell had undergone Nikefication: "Third parties manufacture the majority of the client products we sell under the Dell brand. We use contract manufacturers and manufacturing outsourcing relationships to achieve our goals of generating cost efficiencies, delivering products faster, better serving our customers, and building a world-class supply chain."
Michael Dell's dormroom insight in the early 1980s was that the parts to make a PC were easily available off the shelf, and that consumers are willing to buy an off-brand product rather than an IBM (IBM) if the price was right and the quality was good. Others have taken Dell’s core insight in the opposite direction. Vizio grew to be the largest-selling brand of LCD television in the US in 2010, beating Samsung and Sony (SNE), with only 196 employees. Contract manufacturing and a savvy distribution deal meant that a low-cost generic TV could be produced with little need for employees or capital. Flip became the best-selling brand of portable video camera in 2009 with only 100 employees.
With large-scale manufacturing and distribution available to anyone with a credit card and a Web connection, we can all start virtual corporations in our dorm rooms now.
The End of the Public Corporation?
Unlike Dell, however, few expect these businesses to grow into institutions to rival Eastman Kodak. Cisco (CSCO) bought Flip in 2009 and shuttered in 2011 because the smartphone had rendered it obsolete. No doubt the same thing will happen to the makers of smartphones when Google (GOOG) Glasses make them obsolete, and to the makers of Google Glasses when retinal implants replace them. These are the corporate equivalent of pop-up stores.
Dell's buyout is not just the loss of one more public corporation, but a sign that the public corporation itself may be at its twilight. The companies that sold shares to the public in the 19th century were railroads and utilities that needed capital on a large scale. Manufacturers in the 20th century went public when they needed capital to build factories and warehouses. Corporations raised capital because they actually needed capital.
But why should a 21st century virtual corporation be a public corporation? And what long-term investor would buy its shares? When capacity can be rented and scaled up or down at whim, then the need for capital can be minimal. Facebook’s IPO prospectus noted that "we do not currently have any specific uses of the net proceeds planned" and that "Pending other uses, we intend to invest the proceeds to us in investment-grade, interest-bearing securities...or hold as cash." Going public to satisfy one's venture capitalists (or employees) might make sense for these early investors, but it is hardly a persuasive pitch to new investors, who might be skeptical that the latest online game or app or coupon vendor will grow up to be the next Dell.
Many see the flood of delistings and the drought of IPOs since 2000 as a troubling sign. Fears that the US was over-burdening its public corporations with Sarbanes-Oxley and other regulations led to provisions in the JOBS Act allowing smaller firms to opt out, in hopes of encouraging more startups to go public. Yet perhaps the root cause of the IPO drought was not regulation but economics: In a world where product categories rise and fall quickly, where brands offer little protection from competition, and where anyone can assemble the components for a business, the public corporation may no longer be a good bet. Dell may be one of the last of its kind.
Jerry Davis is the Wilbur K. Pierpont Collegiate Professor of Management at the Ross School of Business and Professor of Sociology, The University of Michigan. Davis received his PhD from the Graduate School of Business at Stanford University.