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I N D U ST R I A L A N D E N G I NE E R I U G C H E M I S T R Y
fully evaluated. For any interests not covered with sufficient thoroughness or promptness, the best available other sources (such as trade journals, patent gazettes, etc.) must be chosen with the usual attention to cost and performance. Like care must be exercised in utilizing these sources for the sake of maximum results per dollar of cost. k%PPLYING
FCXDAMEXTAL PRIXCIPLES
Proper application of the basic law of efficient information service and of the prinriples depending thereon, requires skill, discernment, and sound judgment, supported by familiar knowledge of the practical problems t o be solved. But these
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alone are not sufficient: there must also De much niutual understanding and cooperation between the informationservice staff and the chemists. Obviously, the principles which have been discussed are meant to serve, riot to be served; the slave must not become the master. Common sense must prevail; observance of basic principles is not to be wasted on trifling details nor carried to absurd extremes. With due attention to these logical limitations, svstematic application of the fundamentars of efficient information service can notably improve many services no^^ operating and can be very helpful in organizing ne^^. ones. RECEIVED March 8, 193%.
A Banker’s Viewpoint of Industrial Research BRODERICKHASKELL,JR. G u a r a n t y C o m p a n y of New
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N AS address some years ago, Whitney of the General Electric Company referred to research as the parent of industrial growth. There is much essential truth in that statement, and, when one considers the indissoluble link between industry and banking, I believe that a considerable part of the banking business may likewise trace its origin indirectly t o the doors of science. During early generations in our businesq historv, research was confined largely to academic institutions or was hidden away in the small private laboratories of inquiring individuals. Khen a promising idea was produced, the more practical hands of business seized upon it and a new enterprise resulted, but continued development of principles behind the idea was ieldoni thought necessary by those capitalizing upon its original conception. Success and prosperity were at hand; the future could take care of itself with the result that, when the future came, its favors mere more frequently than not bestowed elsewhere. Industry finally began to learn the meaning and consequence of obsoleqcence. The first measures o f defense against this new risk in business resulted in the era of industrial monopolies. The corporate giants of those days provided good insurance for themselres against the newcomer with new ideas gleaned from research who might come in to disturb the str~tus quo in their respective indust rips. The government and the people in due course tired of their tactics and decreed them opposed to public interest, not ihe least of the objections against them being the restraint which they placed upon new and independent enterprise. Out of the era of “trust busting” which followed, there came a new measure of corporate freedom. Government vigilance over trade practices gave renewed confidence in the survival of the fittest. From that time on, the corporate mind began t o realize that the one way t o be fit and thereby survive was to be always several jumps ahead of one’s Competitors in technical achievement. Management, manufacturing, merchandising, salesmanship had, of course, to be superior, all other things being equal; but, when some one made a better article at half the price, such factors did not mean much. The best insurance against such a contingency was twofold: first, unification of all important divisions of a given industry, and secondly, organized research as a means of keeping in the van of progress and knowing a t all times as much, if not more, than competitors. Such measures of preparedness are the very foundations upon which our leading industrial corporations have been reared. Their potential strength today lies in
York, New York, N. Y. their ability to prepare for recovery in many directions t o maintain low costs, and to accommodate themselves to whatever new developments may evolve. It is such companies (presuming, of course, that they have kept their financial house in order) that can command credit and whose equities are included among investments acquired today for holding through the period of recovery. I know of no more significant tribute to research than to compare a list of industrial common stocks measured by the frequency with which they occur in the portfolios of our investment trusts and a list of c.ompanies measured by their activity in industrial research. The order of names on each list is almost identical. In reflecting upon those hectic days so filled with optimism of several years ago, I think research was “overdone” and “oversold” in some respects. Stories are told of manufacturers who consistently refused admission to their plants until they had .et up a laboratory and organized a qtaff of bright young technical men to keep the pots boiling and the wheels turning. When that was done, the doors were opened wide. “Baiting” of that kind in some instances was successful-both bankers and the public were drawn in. The blame is a divided one. From one aspect there was a n element of misrepresentation; from the other, it was clearly a case of allowing the imagination, untempered by practical knowledge, to become oversold upon the immediate productive value of research. To investors, new and handsome laboratory equipment was the insignia of untold future wealth. They had lost sight of the fact that the days are long past when an inquiring but untrained mind could play with test tubes and reagents and produce results of great material value. For research in industry to be of sound commercial value and beyond the category of rank speculation, it must have as its foundation a vast accumulation of diversified experience, it must be served by large resources and trained judgment, and it must have opportunity for great latitude. Such conditions can be afforded, apart from government agencies, endowed institutions, and a few commercial laboratories, only by our large corporations. For them, research (except in rare instances) has become a n obligation, and, if examination into their affairs does not reveal a continuous and genuine program of technical development, a very real doubt arises with the banker who may be considering the value and future of such companies. I do not mean to infer that there is not a great deal of constructive and valuable scientific work being done on a small scale by small corporations or individual., but
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under such circumstances the speculative element predominates and there is little ground for banking recognition.
FINANCING OF RESEARCH The financing of research is a fruitful field for discussion.
Most financially strong and ablemanaged companies with conservative tendencies in their accounting treat all development work as an expense, t,hereby absorbing its cost in current operations. Such practice is commendable, as it recognizes research as an integral part of the operations of the company, and its cost as a fixed charge to be absorbed with the same regularity as interest, insurance, and taxes. The latter, however, are true expense and are not productive of future return. Proper research over the course of time should pay its way so that the company treating it as an expense is in effect laying away a hidden reserve against obsolescence. Some companies, regularly charging off all direct development costs, will from time to time assign values to new patents and processes and take them into their balance sheet as an asset with a corresponding credit to surplus account. Provided such assets are regularly amortized over a proper length of time, this practice frequently is justified. Capitalizing all development expense, on the other hand, carries many dangers. It assumes, in the first place, that research will pay for itself, or, to look a t it another way, it treats money put into research in the same manner as money invested in plants. There is, however, little salvage value and no basis for earning depreciation in unsuccessful research. I have in mind one case of a company that had been in the public eye as a successful leader in an important industry, earning its preferred dividends regularly with a good balance for its common stockholders which it largely paid out in dividends each year. The company was reputed for its engineering advances; in fact, it brought about several basic changes in the industry which it served. Its securities were in demand a t prices amply discounting the future. There was, however, in its balance sheets from year to year a marked shrinkage in working capital and a rapidly growing asset labeled “development expense.” After a rather abrupt downfall from a position of high estat,e, the company entered receivership. When an independent audit going back for a number of years had been made, it was evident that the practice of capitalizing research in a modest way had gotten out of hand. I n a period of good business with new developments being put ahead rapidly in order to outdistance competitors, all manner of expenses had been capitalized, including errors in estimating the cost of contracts and the penalties of living up to performance guarantees on new and untried equipment. It was clear from this subsequent audit that for the years under review, upon any conservative basis of accounting, the company had never earned one dollar toward even its preferred dividends. By conducting its affairs in that way, the payment of dividends had only hastened the receivership. When a company has no adequate earning power to maintain a research and development program, the alternative use of capital funds must be carefully considered. If reserves have been laid away in prosperous times, and there is no problem of indebtedness, well and good. Broadly speaking, borrowed capital should not be used for experimental work. There is the uncertainty of a return being earned upon such money, and there is the difficulty of having the rewards from successful research coincide with debt maturities. We had occasion recently in the commercial end of our business to turn down a banking relationship with a company that for many years has been the leader in its field. We were asked to accept a substantial deposit account which in the course of time was to serve as the basis for unsecured borrowing.
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They invited us to study their situation, which we did, only to find that they were committed to a broad program of research and development work which had been started just a t the outset of the depression. The company was then amply financed from the proceeds of additional capital stock, but for fear of missing the market for new products during the recovery which so many people counted upon early in 1930, they expanded a laboratory experiment into full production. After a year in service this equipment had to be replaced. This mistake cost them $1,500,000 which they capitalized as development expense. Undaunted they had worked the kinks out of that product and had researched and engineered several other lines of considerable promise. When they came to us they were a t the crossroads looking for money. To stop the merchandising of their new lines meant abandoning the field to competitors who were already beginning to crowd in upon this company which had made a head start. To stop their research and development work meant disbanding probably the best organization of its kind in the industry. Their need for more capital was urgent but it was a need that could not be met under any rule of sound commercial banking. Current operations were without profit, and prospects in their established lines of business were poor. There was no evident way that the bank debt once incurred might be liquidated except by the successful exploitation of the company’s new developments. What they needed and really deserved was new permanent capital which a bank could not properly give or anticipate under present conditions. I think there are two sound rules for financing research: First, treat it as a current expense; secondly, if operations will not carry the load, obtain permanent capital to do the job, and obtain enough of it. Someone has aptly said that starting a new enterprise with insufficient capital is one of the most effective ways of insuring failure.
PUBLICITY IN RESEARCH The publicity given research, by its proper timing and by
its quality, good or bad, has frequently a profound effect upon the security markets. Only a few examples need be cited:
A machinery manufacturer built his first Diesel engine and announced the fact before any trials had been run. The company’s stock, already a t a high level, almost doubled in price during the test period, the results of which were wholly unsatisfactory. I n the course of time both the engine and the added market value of the company’s equity were abandoned. Company -4served markets a great distance from its base of operations with the result that the manufacturing costs were but a fraction of the delivered cost of its products. Competitors with new processes, using new raw materials and operating a t the centers of consumption, came into the industry. Company B as a defense move developed a new process that reduced by half its direct manufacturing cost. This development was widely heralded as having great promise, and new money rushed into the business. It was not made plain that the saving to be had from this achievement in research was scarcely more than 10 per cent of the then market price for A’s products, a wholly inadequate margin to warrant practically doubling the company’s invested capital. The lay mind has become quite technical-minded in the past decade, Science has been popularized to an extent that has made it a faith with many people that have no adequate means of appraising it. A public trust is placed therefore in the hands of those who are able to interpret properly the economic significance of research. The editorial work to that end in the majority of technical journals is commendable, but their circulation reaches, for the most part, those who are the last to need such help. It is the public that needs guidance and protection. The mysteries of science are all right to
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discuss in an academic way, but, when the average imagination attempts to grasp their economic significance, a proper sense of value is apt to be lost. Research accomplishments should be revealed only when a company is prepared to disclose and interpret all relating facts in their true light. Many of our prominent companies have public relations experts who scrutinize and control all releases to the press and journals, and who do not for a moment consider their job to be done until they have followed up the ultimate form in which such news reaches the public, with a view to correcting important errors in its interpretation. Such work is a real public service, and the more we have of it the less distortion there will be in our security markets from misinterpretation of the true economic value of scientific development. The corporation executive who knowingly allows erroneous publicity regarding his company’s technical accomplishments to swell the public imagination and thereby the value of the company’s securities is guilty of a breach of public trust.
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scribe. The solution to such overcapacity will come largely through obsolescence and the faster it comes the better off we will be. The only way it can be induced is through research and development. Already in this country there are hundreds of idle plants or parts of plants that will never again produce, and it will not be for want of capital or want of markets. Obsolescence has overtaken them. Their loss has been already discounted. For in terms of security prices there are many instances where plant assets are being given little if any value. In fact, one could make up a n imposing list of companies that are valued in the open market for less than their working capital. The scrapping of their obsolete plant assets will not represent further loss, but, on the contrary, the replacement of their capacity by modernized equipment will provide an important measure of employment and a turnover to capital. In 1921 we had a vast burden of obsolete plants, rendered so by the transition from war- to peace-time conditions. Their reconstruction provided an important contribution to economic recovery in this country. Today we have no such extraneous factor to stimulate business. We have scrapped RESEARCH AT THE PRESENT TIME the value of our plants, but there is no inducement to scrap The immediate problem confronting research I believe to be the plants without new ways to better the quality and cheapen a grave one when measured by the responsibility that carries the cost of our products. Incentives to this end must come with it. We are surrounded in all directions by the dark from research. Without them, a period of serious and declouds of depression and there is much thought that borders structive competition in many industries is inevitable. The textile industry, for example, has not made any notable upon despondency. Even those convinced of certain recovery are grasping for “straws in the wind” upon which to base their and fundamental advance in the art of cloth manufacture for hopes. I, for one, belong to the latter school, and one of my generations. Machinery built from forty to fifty years ago firm convictions is that industrial research is one of the and accomplishing many of the essential phases of production is still actively used in several of the most efficient and strongest factors making for recovery. One has only to take stock of the new industries that have economically operated mills in the country. Stimulated by come upon the horizon since we were in the depth of the last war-time demands, the industry was grossly overbuilt with depression to realize what an important contribution success- plants that in no important way differed from their earlier ful research can make toward prosperity. The radio and contemporaries. Such overcapacity has proved ever since a radio broadcasting have given permanent employment to constant drag upon the industry, with the result that it had thousands; the sound picture forced the movie industry to no perceptible share in our last prosperity. Correction of invest millions of dollars in new equipment; commercial air this condition has been dependent upon mills being eliminated transportation is enjoying a record demand even under through high labor costs, poor management, errors in financial present conditions. Chemical science has provided synthetic judgment, or geographical disadvantage. This has been a ammonia, alcohols, resins, plastics, and countless other slow process, destructive of profits for everyone in the busiproducts which have given rise to new enterprises in almost ness. It is still going on and has some distance to travel, for every instance. Rayon, chrome plating, stainless steel are each failure does not mean the permanent abandonment of a but a few of many more industries which have had their in- mill. The fixed property is taken up for a few cents on the ception since the war and which in many cases still have their dollar or perhaps even for taxes by new interests who keep it best years ahead. Moreover, the list did not stop growing going as long as their working oapital may last. Certain courageous and constructively minded companies when the depression came upon us. Electric refrigeration and Cellophane have both come into their own since the close of have recently been buying up some of these properties for 1929 and are steadily finding wider use. Television and the their salvage values and scrapping them. How much better universal air conditioning of homes are industries in the offing. it would have been if obsolescence had induced the abandonThe powers for discovery in the chemical industry are better ment of all properties of pre-war vintage during our last organized and better equipped today than ever before. depression! If this had been the case, I am sure the textile Physical science is bearing down upon the secrets of atomic industry, which has not lacked an ample demand for its energy. These factors are making for the continued creation goods, could recount a far better record of profits in recent of new industry which is the highest achievement of research. years. Unless we again resort to price fixing or monopolies in There is, however, equal reward and benefit to be found in the improvement of all existing products and processes. trade, a similar plight, I daresay, awaits every industry that Such changes inherently improve the economics of production does not enjoy the correcting influence of that type of reand are the key to new markets and to new industrial con- search among its leaders which makes for constantly better struction. One of the arguments advanced by those who are products a t lower costs. Such evolution is essential; otherdiscouraged over the ultimate future of business in this wise, all elements in a given industry tend to become marginal country is the tremendous overcapacity to produce that today producers and thereby do business without profit. The pervades our entire industrial structure. This condition has overcapacity that exists in almost every direction of our existed at the depth of every depression. It is inevitable, industrial structure is a great challenge to research, and, but it does not spell the end of profitable enterprise in this when in the future we look back a t these dark days, I am country a t present any more than it has a t like times in the confident we shall find that those companies accomplishing past, unless we have reached and passed the zenith in indus- the most by way of research will have led the way toward trial art-a theory I have yet to hear advanced and to which recovery. I am sure technical men and bankers alike would not sub- RECEIVED June 8. 1932.
