Despite beliefs about the inevitability of size and concentration, and despite vigorous efforts to make them come true, the share of large firms in total output is not going up.
Size and Scale
In yesterday’s article, we showed that firms which thought that large size was essential for success in the twenty-first century would obtain little consolation from the fate of the firms that thought the same thing a hundred years ago. USX, once the largest company in the world, functions today in the shadow of firms twenty times its size. J & P Coats, once Britain’s leading manufacturing firm, is now one element of a mid-cap company: Pullman – the railroad giant – is only a memory: Anaconda, once the world’s greatest minerals producer, was long ago absorbed by a larger rival. And despite these beliefs about the inevitability of size and concentration, and despite vigorous efforts to make them come true, the share of large firms in total output is not going up.
The Share of the Largest 100 Manufacturing Firms in Manufacturing Net Output
1918 1970 1990
USA 22 33 33
Japan 23 22 21
Germany 17 30 23
UK 17 40 36
Table 1 is the best and most recent evidence we have (which itself says a lot about the relative importance of opinion and information in business strategy) The basic picture, at least as far as manufacturing is concerned, is that the share of large firms in total output increased until about the 1970s, particularly in Britain and the United States, and then stopped. These figures relate to the manufacturing industry as a whole: but the results are generally reproduced at the level of the individual industry. A study by Davies et al of around 50 industrial sectors in the 1980s, for example, showed that on average, concentration had declined and the largest firm had lost around 5% of its market share.
While manufacturing data is better and easier to interpret than any we have for other sectors, it seems to be representative of a wider picture. In banking, for example, the ten largest banks in the world have accounted for between 20% and 25% of total deposits and total lending for as long as data are available. Which the ten largest banks are has varied quite a lot, however. They used mostly to be British and American: then French and Japanese banks entered the picture: then the emphasis switched even more strongly to the Far East: and, if you did the calculation today, German and Swiss institutions would feature strongly. Anyone who thinks that size is the key to success in banking should recall that, within living memory, Midland Bank was the largest in the world. The recurrent pattern of the industry is that banks grow quickly by diversification, acquisition or foolishing lending and then shrink again when the consequences become apparent.
There are some industries, of course, where concentration has increased – like accounting. These are offset by others – like automobiles – where it has fallen. You may be surprised by automobiles, since this is the first industry most people use to illustrate the importance of size and scale. But the high point of concentration in the car industry was reached in the 1950s, when GM, Ford and Chrysler produced almost all the cars in America and more than half the cars in the world. Since then, there has been a steady stream of new entrants into the automobile industry and a steady fall in the share of the largest firms.
There are still significant economies of scale in the auto industry. But as incomes have risen and as car prices have fallen relative to other goods, simple cheapness has become less important. Consumers have been willing to pay for differentiation. Modern manufacturing methods have reduced the cost of providing it. Henry Ford once dominated the US car industry with his standardised model T. Then Ford lost market leadership to General Motors which offered a wider range of models and crossed several market segments. And globalisation, far from increasing the dominance of GM, gave market opportunities for smaller firms and new entrants. Proton could never have become a car maker at all if it had been forced to rely on the Malaysian market.
When cars were first invented, there were hundreds of tiny manufacturers. Most of these firms fell by the wayside. Production became focused on a limited number of firms and types of car. As the market matured, differentiation again became more important, which is why so many companies are able to survive.
This is a common pattern in business history. For a time, it seemed that a small number of Italian firms reaping large economies of scale would dominate the European domestic appliance market. But ultimately they failed. Over time cheapness mattered less, consumers were choosier about the models they wanted, and flexible manufacturing made it cheaper to give them what they wanted. We see the same thing happening in computers and many other businesses today.
But there is no common trend – to size, globalisation, or anything else in industrial evolution. Across the economy as a whole, there is no general tendency for concentration to rise or to fall. Individual sectors go through phases of concentration and deconcentration, but some industries (like banking or cigarettes) remain more than averagely concentrated and others (like retailing or agriculture)continue to have many firms. Within these overall patterns, however, the rankings of the leading firms change frequently under the influence of competition. Today’s leading tobacco company (Philip Morris) hardly existed in 1912, while the leading tobacco company of 1912 (American Brands) has now exited the business: the title of the world’s leading bank has changed hands at least six times in the same period.
Where there is little merger and acquisition activity or other enforced rationalisation – as in post-war Germany or Japan throughout the century – concentration remains broadly stable. Waves of mergers, particularly in Britain and the United States, occasionally disrupt this stability, but are generally followed by some reaction. And in the most recent periods, the growth of divestment and buy-outs has meant that even quite substantial corporate activity has had only modest effects on levels of concentration.
If there is a general story it is that there is no general story, and that woolly assertions about critical mass, and the inevitability of global concentration contribute less than nothing to our understanding of how the business environment evolves. That depends an appreciation of the specifics of particular industries.