15. Integrated We Stand

Those were the kerosene days, when nobody had heard of octane ratings, of East Texas, of catalytic cracking or even of industrial "integration." But he said, rather prophetically, "Each of the stages in the industry can be more economically conducted when it works in entire harmony with every other stage, and such entire harmony can be secured only through a single control." Because of its nature, the oil businessis one of the most highly integrated industries in this country. It was not so in. 1907, when the Commissioner made his remark. The early Standard Oil Trust, and the later Standard Oil Company, were mostly interested in refining. It was only when independents like Texas, Pure Oil, and Sun began to give the nine new little children of the big company a heavy run for their money that refiners began to reach back for supplies into the oil fields, producers began to reach forward into refining, and the whole industry, in a rough and tumble competition that the arrival of the automobile only aggravated, began to sprawl and grow, horizontally and vertically. The upshot of this competitive free-for-all was, among other things, the gro,vth of over 200 refining companies which are integrated in varying degrees, of which about 20 are 116 INTEGRATED WE STAND 117 arbitrarily called the "majors" by governmental and other critics.

The basic reason for this integration can be found, perhaps, in simple form. There is a standing teen-age joke that when you open a peanut-shell, you will "see something that nobody has ever seen before nor ever will see again." But in the case of most petroleum products, nobody ever sees them. When the motorist drives down the road, he is using for fuel something that throughout its life has been not only "untouched by human hands" but also unseen by human eyes. Out of the ground, it has flowed, unseen but almost steadily, through pipe, coil, cracking plant, bubble-tower, tank car, tank-wagon, and filling station, into the back of his car. A huge oil refinery is an almost motionless massof silence. Only through a few little glass openings do the engineers ever see the product. Yet it is in almost con stant flow. It is not strange that this flow is so fre quently handled by a single "integrated" management, from the oil well to the filling station.

So it is of interest what the executives of integrated oil companIes have to say about the structure of their companies. A prominent oil company lawyer recently said: Integration is a great deal more than the mere putting to gether . . . of enterprises. . .. It is a combination of functions for a new purpose. . .. [It] is to management . . . what assembly line production is to a manufacturing plant. . .. Integration facilitates the full, free, easy trans fer of information about the several aspects of the petroleum business to one management. . . . The integrated firm canmore easily engage in effective advance planning. . .. It is the difference between a group of people with organized and understood teamwork rela tionships ... and a number of separate firms with ...

118 INTEGRATED WE STAND different plans and objectives . . .. different views of their relationships to one another and of their objectives and responsibilities. . .. The integrated, enterprise can plan better . . . take a longer view . . . and . . . better coor dinate the carrying out of its program. . . .1 And of the oil industry's wartime achievements, the same man said, "Experts who handled these operations during the war agree that they would have been impossi ble without integrated companies. . .. There would have been 500 phone calls instead of five. . .. There simply isn't time during war for such inefficiency." A former president of the Standard Oil Company (N. ].) told the TNEC Committee: Integration is the uniting into one business of several of the stages through which a material passes. . .. The re finer needs to be assured of his market . . . The marketer needs to be assured of his supply. . .. There is a high degree of mutual interdependence. . .. If such relation ships are not provided by common ownership they must be provided by contractual arrangements. When [they] take the integrated rather than the contractual form, there is no need for secrecy or tactical manoeuvring . . . planning can be more effectively accomplished by an integrated com pany . . . the inherent risks of the oil business are substan tial . . . conservative investors . . . want to have some as surance of continuity and stability of earnings. . .. With out integration oil companies would not have been able to spend such large sums on research and improvements.2 A competitor, president of the Sun Oil Company, said, ... If producer, transporter, refiner, and marketer are all owned and operated independently . . . every unit . . .

must have its o'wn buying and its own selling organization. This is expensive. But a greater difficulty is that among these multiplied buying and selling agencies there is nobody who has his eye on ultimate' results-the final cost of the product and the price ... to ,the' consumer. Everybody is thinking of INTEGRATED WE STAND 119 how to make the best deal with the man next to him nobody is worrying about the consumer down at the end of the line. . .. In the completelyintegrated unit . . . an ex ecutive authority-president, chairman, executive director, board of directors, or what you will-has its eye always on that party down at the end of the line: . . . After all, the consumer is the boss; . . . somebody must keep him in mind all the time; and the hagglers along the way can't be expected to do it. They are too much engrossedwith their own particular jobs; too many removes from the consumer. . . . 3 And another oil-company president has claimed that "it is mainly the large integrated company that is doing the fonvard-Iooking research and development work, which requires the assets of an integrated company and requires the interrelation-because many problems in volve ... manufacture, sale, and transportation." 4 But oil is only one of many integrated industries.

Another one, which has incidentally held down its.prices far below the average over recent decades, is aluminum. The president of the Aluminum Company of America recently said of his business, "An industry made up of small, primary producers could not possibly bring alumi num to the public ata price the average customer could afford to pay. An efficient producer of primary alumi num must be well integrated, and it requires a great in vestment of plant and facilities if the operations are to be efficient. . . ."5 Perhaps the largest recent growth of vertical integra tion has been in dry· goods and groceries--through the growth of mail {)rder houses and chains. It began, per haps, about twenty years ago. An economist had this to say about it. "The unfortunately wide differentiation between wholesale and retail prices may be regarded as a vestigial remainder of' the mercantilist system [as a 120 INTEGRATED WE STAND colossal system of restraint upon trade] which has only recently begun to be undertnined. The growth of mail-order houses and of large-scale retailing through chain stores is salutary and . . . abundantly promis• " 6lng....

The cotton textile industry has been going through the throes of integration during and since World War II. It had been an outstanding exception to the general trend. In contrast to petroleum, cotton textiles are normally' touched, felt, and traded a half dozen times from the breaker~room of the spinning mill through the weave-shed, the bleachery, the dying and printing plants, the wholesaler's warehouse and the retailer's shelves. But mills began buying up converters, and converters began buying up mills. The first reason the trade gave for these economic marriages was the wartime desire of government buyers to minimize the number of contracts. These government buyers wanted to be able simply to buy the finished goods, instead of having to buy the gray goods and shepherd them through all the later transac tions. Also, mill owners looked over the fence into the converters' business and saw bigger profits, while con verters looked over the fence into the mills' business and saw a chance to have a sure supply by'buying a mill. So Lowenstein bought Merrimac Mills in Alabama; Pacific Mills (partly a converter) bought Rhodis Mills. Cluett, Peabody bought. the Grosvenordale Mills; and so on.

And all this, incidentally, at a time when millswere selling at the highest prices per spindle in 25 years. There seem to have been many reasons for the vertical integration of American industry. Chiefly, perhaps, they could be boiled down to the following: (a) Stability of operations; (b) Spreading of the risk; (c) Assurance INTEGRATED WE STAND 121 of either a reliable supply for the marketer or a reliable outlet for the producer. In "(a)" and "(b)" of these reasonswe are back to our old friend of the previous chapter-the "subsidizing" of one department by another. And here we can go back to the simpleillustration of the energetic corn-hog farmer. He is in two businesses (raising both corn and hogs), not, presumably, because he can make money in both. In any given year, he probably makes more money in one than the other and, if that went on indefinitely, he would presumably shift to the one he was best in. But he can't tell. And by being in two businesses (and closely related ones), he has a better prospect of staying up financially than by being in only one business, just as an airplane is safer with t\VO engines than one.

Re is, however, not going to stay in either of these businessesif it nets him a loss year after year and seems likely to keep on doing so. N either, by the same token, will any integrated company stay persistently in any branch of the businessthat brings it annual trouble, year after year. As two of the above-mentioned oil presidents told the TNEC ten years ago: "... If any branch of an in dustry is regularly and persistently unprofitable, the average earnings of a fully integrated company will be lower than those of companies which engage only in the profitablebranches. Only if the profitableness of each branch varied greatly, frequently, and in opposite di rections from the others would the integrated company have an advantage; and that advantage would consist solely in its having comparatively stable earnings, not higher average earnings over a period of years." 7 In other words, nobody with an eye to the main chance (financially, that is, to steady long-term profits) is going 122 INTEGRATED WE STAND to really "subsidize" one branch of a business out of an other. He may be willing to earn less out of one branch than another, over a period of years. Or he may be will ing to risk his money in that branch for a year or several years in the hope of a profit that does not materialize.

But if these are "subsidies," then this is a new meaning for the word. It is a meaning which consumers should like. It means that somebody is willing to take a com paratively small profit, or a comparatively large risk, from which the consumer is bound to be the chief beneficiary. The attack on integration in itself seems to be another attack on "hard competition." It seems to be a defense against injury to competitors, rather than injury to com petition. The attackers are generally quite frank about this. Up till now, anybody in any part of any business has been free to move into any part of that business and try his hand at it. The result is bound to be more com petition. The attack on integration-in-itself could not help but slow this down. The consumer would .Jose. The result would be as though the law had been changed in the early days to protect the petroleum teamsters who tried to tear up the pipelines refiners were laying down.

The shot would be aimed at the integrating company; but the consumer would be the "innocent bystander." There is today, however, one more way in which the public in~erest is jeopardized by this attack. It was re lated by the District Court Judge in the latest decision in the Alcoa case. Refusing to order the breakup of the Aluminum Company, Judge Knox "pointed out that a strong aluminum industry was 'a vital necessity for na tional security and the peacetime welfare. . . .' He described Alcoa as a company whose service to the public had been outstanding in many ways and mentioned the INTEGRATED WE STAND 123 testimony of Army and Navy officials that a disservice would be done to national security if the efficiency of the aluminum industry were impaired. . . ." 8 16. The Great Atlantic & Pacific Tea Company1 As a preliminary to the recent conviction of the A&P under the Sherman Act, 18 government investigators spent 23 months going over A&P's books, files, records, and so on. They examined 2,000,000 documents, going back nearly 30 years, and photostated 50,000 of them.