How Westinghouse Lost its Way

Founded in 1886, Westinghouse Electric grew to be   one of America's industrial giants.  Second only to General Electric. In August 1998, the company  sold off its industrial and   power generation businesses  and became a media company.

How did such a titan so badly stumble  and lose its way? We like the simple   answers. Managers were greedy.  They took their eyes off the ball. Dive into the history, and things  get a bit murkier. In today's video,

we discuss how Westinghouse Electric lost its way. ## Beginnings Westinghouse Electric was founded in 1886 by  the legendary engineer, George Westinghouse.

At the age of 23, George invented the air  brake device that made stopping a heavy train   far safer - saving the lives of hundreds,  perhaps thousands of railroad workers. And over the long term, the air brake  enabled the economic scaling-up of rail

transport by allowing trains to go faster  and pull more cars. Truly revolutionary. So Westinghouse Electric was George's second big  venture. He first got into electricity because   he wanted to control his train systems with it.  He then got into alternating current systems.

In 1886, he licensed a patent for a step-down  transformer system that made long-distance   AC power distribution practical. This and other  systems formed the basis of Westinghouse Electric. It has no ties to the Westinghouse  Air Brake company, now known as WABCO.

The company then gained considerable fame  for its ferocious competition with Thomas   Edison and his Edison General  Electric to wire up the country. The War of the Currents as they called  it. It took a heavy financial toll on   both companies. Thus in 1896, the two  negotiated peace via a shared patent

pool that cemented them as oligopoly  players in the US electric industry. George was a brilliant engineer. But as many an   arrogant Silicon Valley computer  programmer (are they engineers,   really?) learns when they take on management  duties, that doesn't make for a great manager.

George centralized company decision-making around  himself and delegated little to his subordinates.   And his fearless, entrepreneurial optimism  led the company into fruitless speculations   and a disastrous debt-fueled expansion in  the lead-up to a major financial crisis.

That crisis - the so-called Panic  of 1907 - toppled the over-leveraged   company and caused George's bankers  to sideline him from operations. He had little involvement with  the company thereafter. Later   dying in 1914 at the age of 67, a life well lived.

## Radio and the Benign Circle After George's departure, the bankers -  led by chairman Guy Tripp - took over. They cleaned up Westinghouse's finances  and capital structure and remade their   management styles to be more like  rival General Electric. The company   also benefitted from government  revenues during World War I.

All these happenings did not affect  the company's engineering culture nor   did it hamper growth. Westinghouse  settled into their core business of   electrical equipment like turbines  plus grid equipment like switchgear. During the 1910s, they accumulated radio  patents and started manufacturing receivers.

This also first brought them into  the broadcasting business. Including   founding a pioneer radio station called  KDKA which broadcasted news from the roof   of the Westinghouse radio factory in Pittsburgh. Though they did miss out on the TV opportunity

when they paid insufficient attention  to their employee Vladimir Zworykin.   Zworykin eventually decamped to RCA,  where he invented the picture tube. But the real growth trend was in power generation,   and Westinghouse tried to get involved in  that trend from both sides. In the 1920s,

Americans began a decades-long trend of  household electrification and modernization. This led Westinghouse to join General Electric  in offering electric appliances like ovens,   stoves, refrigerators, and washing machines. Both companies justified this diversification as  helping to generate more demand for themselves.

Appliances cause households  to use more electricity,   which gets utilities to buy more  GE and Westinghouse turbines. They called this the "Benign Circle",  and it eliminated what had previously   been a boom-and-bust cycle in the  turbine business. The Benign Circle

would drive the two companies'  corporate strategies for decades. ## Defense Contracts The company hit an air pocket in the  1930s due to the Great Depression. Thus in 1935, they consolidated their existing  R&D efforts into a central industrial lab like

Bell Labs. They sought to do ground-breaking  science that can eventually lead to new products. Westinghouse's senior managers were not qualified  to evaluate the results. So while the lab did do   some interesting research in mass spectroscopy and  nuclear physics, few successful products emerged.

In 1937, they unveiled the  Westinghouse Atom Smasher - a   large particle accelerator shaped like a  pear. Its work discovered the process of   photofission - where uranium and thorium  atoms are split when hit by gamma rays.

Indubitably good science, but no  products came out of this nor from   their mass spectroscopy research. Their  work in microwave electronics however was   a home run that led to a lucrative radar  equipment business for the US military. After the war, things took a  temporary downturn. In 1946,

the company turned its worst year since  the Great Depression with a $53 million   operating loss, thanks to the cancellation  of $3 billion in defense contracts post-war. But then defense spend more than tripled in the  years afterwards due to the Korean War and the

fight against Communism. CEO Gwilym Price  oriented Westinghouse deeper into defense. Revenues surged past the $1 billion  mark in 1950 for the first time. Contracted products spanned the gamut from  things like helmet liners to nuclear space

propulsion. One costly effort was for a  big wind tunnel in Tullahoma, Oklahoma. Ultimately useless commercially,  but the wind tunnel was pretty cool. Anyway. Most of the projects  were in radar, electric systems,   and nuclear technologies. Two projects of  note were the development of jet engines

and submarine nuclear reactors for the US Navy. The jet engine effort failed despite  a seemingly good start. Perhaps due to   insufficient company investment beyond government   subsidies plus an excessive focus on  producing products just for the Navy.

However, the reactors became perhaps the company's  most iconic product. One quite synergistic with   their core steam turbine division, because  nuclear reactors output steam for the turbines. It validated management's belief  that government-funded R&D can

eventually lead to profitable commercial  products. More Benign Circle stuff. ## Bigger Turbines However, this plunge into defense contracts   also sucked engineers away from  that very steam turbine business. Being half General Electric's size, the shift to  defense contracts starved the turbine division of

investment and talents, and their execution  started to break down at the wrong time. After World War II ended, America's electricity  demand accelerated. The implications of such,   Westinghouse did not properly  anticipate nor adjust for.

Westinghouse and General Electric both  emerged from World War II producing smaller,   standardized turbines between 25 to 99 megawatts. Roughly speaking, these are two-chamber turbines.  The steam passes through the blades once,

which puts less stress on the turbine  blades, and is easier to mass-manufacture.   About half of Westinghouse's turbines in the  day were this smaller, standardized design. And in 1948, they bought and retooled a  new factory in Sunnyvale, California - far

from their core manufacturing facilities in  Pittsburgh and south Philadelphia - to build   such standardized units. A factory  ... in Sunnyvale! Imagine that. But starting in 1950, the utilities started  asking for larger, "reheat-style" turbines.

These reheat the steam after it passes through the  first chamber and then sends it through a second   chamber. Such turbines are more energy efficient  but also more technically challenging to deliver. Market leader GE aggressively switched away  from the standardized manufacturing model and

started doing these larger turbines custom -  investing time, building larger forge presses   and innovating new metal technologies to  achieve these big design requirements. Westinghouse however realized this trend too late.

One engineering manager  recalled in court testimony: > Oh golly, that is when the real desires of  the power industry became more apparent with   respect to demanding turbines of larger capacity,  extremely high pressures and high temperatures

> And we simply had to put on a crash program  to find out the behavior of these materials,   so that we could keep our stresses within  the bounds of what would be acceptable. Westinghouse's engineering chief  recalls being very shorthanded   during these years - especially  during the Korean War years of

1951 to 1953. Staff worked Saturdays and  Sundays with occasional night shifts. Backlogged orders skyrocketed. A  backlog then made worse by a brutal,   10-month labor strike between  October 1955 and April 1956.

After the strike, Westinghouse understandably  decides to concentrate on expanding production   capacity at the cost of doing less R&D. Annual  R&D spend would decline in the six years after   1957. Leaving them unprepared for the major  technological changes to come in their industry.

## The Price Fixing Scandal As this was happening, a major scandal wracks the  whole industry. In the first half of the 1950s,   the electrical equipment-makers built  many turbine factories for the war effort. But after the Korean War armistice in 1953,  a massive over-supply situation emerged. The

turbine-makers were left with empty factories  and expensive fixed costs. Westinghouse,   the second largest player, started cutting prices. General Electric, the leader, tried to  hold the line but soon caved. After a   brutal round of price cuts in 1955,  executives from GE, Westinghouse,

and number three Allis-Chalmers began  secretly meeting to collude on prices   of equipment like switchgear - sending  in identical bids to the utilities. This backfired in so many ways. In 1959, the  government-owned Tennessee Valley Authority

utility - suspicious that something  was going on - shocked everyone by   awarding contracts to foreign firms like  Britain's CA Parsons. But the foreigners   quoted prices 30-40% cheaper  than what the Americans did. Then in early 1961, the US government caught GE,

Westinghouse, and others over  their unfair competitive practices. Over 1,800 court cases were filed and 29 companies   and 45 executives were charged. Some  even went to prison. Imagine that. The fallout of the electrical trust case smashed  prices, allowed in foreign competition, and forced

out the number three American turbine-maker  Allis-Chalmers. GE and Westinghouse had to   find a different way forward. ## Burnham Steps In In 1963, Donald Burnham succeeded Mark  Cresap as CEO after the latter stepped

down due to health issues relating to hepatitis. Burnham had arrived to Westinghouse  a decade earlier from General Motors   to clean up manufacturing efficiencies,   and did so using extensive automation.  They called him Mr. Automation.

In 1963, company morale was at a  low point - severely beaten down   by weak business prospects and the  fallout from the antitrust scandal. And to make things worse, the company's  once-profitable government contracts were

at risk. The new US President, Lyndon Johnson,   had consolidated power in both the White House  and Congress in the wake of JFK's assassination. LBJ then set out a sweeping new vision  called the "Great Society" - a series of

government policies to reduce poverty  and improve American livelihoods. This shifted spend away from defense, making it  harder for Westinghouse to make money. They had   to undertake more "fixed price" contracts  in high-risk development projects. And ROI

for military projects declined from  10.2% in 1958 to just 6.3% in 1964. Okay. So before we proceed, let us ponder the  situation and Burnham's position. What would

you have done? How would you have ordered the  company to be changed? What should be different? ## The Great Diversification Westinghouse eventually decided  upon a radical change in direction. For decades, they just followed in General  Electric's footsteps - leading to greatly

overlapping product lineups. How were they  going to be competitive if they are the same? So Burnham asserted that it was time for  the 80-year old Westinghouse to emerge out   of GE's shadow and be different. In 1966,  they revised the corporate charter - which

previously restricted the company to  only electrical systems to, and I quote: > Products and services in markets in which  Westinghouse can generate suitable profits   and growth using existing skills and strength  reinforced as needed by acquired capabilities

In other words. All goes if  it makes money. Internally,   he reorganized the company into decentralized  business units and instructed their heads to   produce revenue sales growth of 10% and ROI of  15%. How they got there, he didn’t push them on.

This led to Westinghouse's now infamous  diversification effort of the late 1960s.   During this wild five-year period,  they bought into X-ray machines,   soda bottler companies, desalination, education,  car rentals, and even mail order watches.

To Burnham, Westinghouse was only  going into businesses where it felt   it could "bring something  to the party", as he said. In the late 1950s, Westinghouse  advertised the "All-Electric   Home" and "Live Better Electrically". The  idea was tied back to the Benign Circle,

to generate more demand so  they can sell more turbines. It was so successful that Westinghouse  decided to start developing entire   cities - acquiring a home building  company planning a city in Florida   called Coral Springs. The idea being  to provide everything for the city.

They went into ocean engineering in partnership  with the famed explorer Jacques Cousteau, because   Burnham felt it can help with oil drilling and  fish farming. They built a diving saucer together. Education because they had experience from doing  broadcasting and wanted to train vocational

workers. They wanted to create schools with  computer-managed learning systems - Project PLAN. And then there was the electric vehicle project  - done because there was a "revolt against the   internal combustion engine". And waste disposal  research because there was a "social need".

Burnham evidently embraced some of the ideals of   LBJ's Great Society. But reading  with the benefit of hindsight,   it all feels a stretch at best and cope at  worst. A top executive at the time recalled: > We had this conviction that  we could manage anything.

## Turbine Failure As this diversification effort progressed, the core electrical equipment business  was losing its competitiveness. Remember how Westinghouse chose  to invest in more capacity over   R&D so that they can work through the big backlog? That insufficient R&D led to them being caught  off-guard yet again when the utility customers

shifted once more in the mid-1960s. Wanting  to have more marginal electricity available   to avoid blackouts, they asked for yet larger  turbines - between 500 and 1,000 megawatts. General Electric had the resources  and technical skill to produce these

so-called supercritical steam units, which heat  steam to very high temperatures and pressures. Westinghouse on the other hand found themselves  wrong-footed and tried to shortcut by scaling   up their existing designs. This fell flat,  leading to Westinghouse turbines experiencing

failure rates four times higher than their  competitor. With legal implications later. The funny thing is that Westinghouse did end up  beating General Electric in nuclear reactors,   their PWR design becoming far more widely adopted.

But their turbine business did not  benefit as much as desired because   utilities preferred using GE's turbines  to turn that nuclear steam into power. The famed Harvard business academic Alfred  Chandler would later blame Westinghouse's   decline on this acquisition spree -  saying that it distracted the company

from its core turbine business  and diverted capital from that. And he might definitely have been  right. Reviewing the chronology however,   one can also argue that Chandler got it  the wrong way around. Westinghouse started   diversifying because its core turbine  business was already on the way down.

Basically ever since they botched the mid-1950s  technological shift to reheat-turbines,   Westinghouse lagged behind General Electric.  And when the utilities transitioned again to   supercritical steam, they knew catching up would  be a mighty task. They were fishing for a new hit.

## Di-worsification Burnham’s diversifying initially looked like a  stroke of genius. Revenues and profits surged. Burnham was hailed as a Lisa  Su-esque savior. A visionary who   took a long-running second-place  player and made them a leader.

His run seemed so successful that in  1972 he implemented a semi-retirement   plan that required him to step down five  years ahead of mandatory retirement.   Though he remained CEO "Emeritus" to  study "white collar productivity".

Things fell apart the next year,  1973. The year started well enough,   but halfway through, it began to dawn on  management and the stockholders that the   company was taking huge losses  from four of its subsidiaries. Two involved in water desalination  and home building - negatively

affected by the Nixon Administration  withholding subsidies to the fields. But the third was the mail order watch  distributor Longines-Wittnauer. No,   not the actual Swiss watch companies.  That might have been actually worth

something. Just a US mail order  distributor bearing the name. They bought that one on a whim. They  actually wanted Longines-Wittnauer's   books and records mail order  business for their growing   broadcasting business. The watch  business just came along with it.

But the timing was impeccable - it happened just  as a wave of cheap Japanese watches came ashore,   annihilating the business  and producing heavy losses. The fourth black hole was an unnamed French  elevator company. This one is fun. They

originally bought it in 1965 to counter rival  Otis. Told to hit the button on orders, the   French managers sold elevators for the next three  years at prices that turned out to be way too low. Because the French company had no idea of their  own cost structure. Which was later discovered

to be ridiculous. They had a factory in the  city of Nice, a high wage area even back then. They tried to lift prices, but demand went  straight to the basement. Westinghouse was   thus left with hundreds of high-paid  employees that they were too scared to

lay off because this was France in the 1970s. Not to mention, France was buying  Westinghouse-designed nuclear   reactors for their massive nuclear  power drive. Sometimes you focus   on the big picture. Vice Chairman  Marshall Evans recalled in 1976:

> We learned to our horror that  these companies had gone totally   hog-wild in committing the corporation to very  substantial projects that were costly to complete They later stabilized that business and  sold it to the Finnish company Kone,

which named it to Kone Westinghouse. This all  took a great deal of time from the executives,   as well as an emergency $500 million credit line. Over the next ten years - from 1974 to 1983 -  the company sold off its various subsidiaries,

including its storied appliances arm.   These sales cut $2.5 billion off the revenue  top-line. And selling the appliances business   would in an indirect way began their path to  financial crisis. But I get ahead of myself.

Interestingly enough, one of the  acquisitions that did do well was   the 7-Up soda bottler buy - generating  substantial cash for them. Tactical win,   strategic loss. Because what does selling soda  have anything to do with nuclear reactors?

## Back to Basics Burnham retired for good in 1975 - forced out  essentially - and was succeeded by Robert Kirby. Kirby attempted a pivot back  to Westinghouse's core turbine,   electrical equipment, and nuclear  reactor businesses. Back to the basics,

so they say. But those faced major  new challenges both inside and out. By 1974, they had been sued by nine  utility customers for up to $200 million   in damages due to serious defects in  their turbines causing breakdowns.

This was related to the lack of turbine  R&D that I mentioned earlier. It is   that "Well, Well, Well, If It Isn't The  Consequences Of My Own Actions" moment. They were also sued by the BART metro system for   muffing up the automatic controls.  So those two things were on them.

But it was also true that Westinghouse  faced a radically changed power landscape. The first Oil Crisis changed the  paradigm of demanding ever more   power generation. Now focus suddenly shifted  to conservation and efficiency - a permanent

shift in growth down from 7.5 or  8% a year to just about 1 or 2%. Utilities no longer needed the next  big turbine. A demand compounded by   economies of scale ending at about  1,000 to 1,300 megawatts. Their

blades now so large that their metals  can no longer handle the stress and   vibration. Steam turbine technological  progress would stall for two decades. High inflation also hurt the company's  bottom line because their contracts with

utilities had fixed pricing terms. But the most costly inflation mistake  involved uranium. In the late 1960s,   Westinghouse sold utilities a turnkey nuclear  plant. This included the uranium fuel,   which they sold at a largely fixed price.

Note that Westinghouse did not actually  produce the uranium. They just bought and   resold it as part of the package. But by  selling it at a fixed price upfront and   buying it at time of delivery, they were  essentially shorting the uranium price.

Why didn't they first lock in supply contracts  for ALL of the uranium they agreed to deliver   to the utilities? The general consensus was  that they were counting on the US government   nuclear regulator, the AEC, to release its  own stockpiles. Or they were just careless.

Anyway. Prior to 1973, Westinghouse contracted  with 26 utilities around the world to provide   about 65 million tons of uranium fuel over  20 years at about $9.50 per pound. Then after   the Arab oil embargoes, uranium prices soared  to as high as $40 per pound nominal by 1975.

It was essentially a short squeeze that put  Westinghouse on the hook for $2 billion in   losses - the total amount of shareholder equity.  It would have ruined them. They tried to ghost   their way out of it. But the utilities then  sued them to make good on the contract.

They predictably lost that court case,  but negotiations and price fluctuations   afterwards led to them lose only about  a billion dollars. Ha, only a billion. ## Credit Splurge Throughout the late 1970s and early 1980s, Westinghouse stabilized and settled into an  existence as a boring industrial conglomerate.

The nuclear energy business in the United States  declined throughout the second half of the 1970s   as environmental challenges and bad PR from the  Three Mile Island incident froze the industry. But Westinghouse could count on its  other operating units, which included:

A turbine business, a military electronics  systems business, a thriving broadcasting   business with lucrative distribution and  advertising rights for popular TV shows. Oh, and there was Westinghouse Credit. In 1954,   Westinghouse founded a small credit subsidiary  to help people finance purchases of appliances

like fridges. A very boring business  ... as most finance stuff should be. In 1960, a guy named John McClester joined to help  build the company's non-consumer lending division.   That went along until 1974, when Westinghouse  sold their consumer appliances division.

Consumer loans were then half  of Westinghouse Credit's book.  They needed new customers to loan money to and  make interest and fee income from. So in 1981,   that boring Westinghouse Credit subsidiary started   issuing high-interest loans to businesses  and real estate developers mostly in Texas.

It did well. Maybe too well.  Two years later in 1983,   Westinghouse Credit reported annual  profit of $50 million - way more than   anyone expected. So they started lending to  real estate projects all over the country.

Meanwhile Westinghouse Electric had  been counting on robotics to keep the   company on the cutting edge of industry.  Sounds familiar. And in the mid-1980s,   they acquired a company called Unimation,  which made hydraulic-powered robots.

But its Unimate product suffered a  severe vibration problem. Their robot   collaboration with GM never panned out, and  the subsidiary's whole software division left.   So in 1987, Westinghouse sold Unimation and turned  to financial engineering to drive future growth.

In 1987, the credit division tripled its pace  of lending. And by 1989, it singlehandedly   contributed 17% of total profit - the fourth  highest earning division in the whole company.   Westinghouse Credit grew to become  the third largest financial company

in Pittsburgh after PNC Financial and Mellon Bank. McClester and his successor William  Powe ran the division like it was   their own fiefdom - and they looked like geniuses. ## Credit Implosion The party came to a big screeching halt in

early 1990 when the investment bank  Drexel Burnham Lambert collapsed. The real estate markets then  started to implode - an effect   made worse by the fallout of the First Gulf War. Suddenly, Westinghouse Credit found itself in big

trouble. Incoming Chairman Paul Lego  came from the industry side and knew   nothing about Credit's operations. Credit  themselves had no idea what they were doing. Powe himself was a salesman who was said to  have cared more about the selling than the   product. Employees later recalled approving  loans worth 110% of the property's value.

They didn't even have a breakdown of  their real estate portfolio by type. Lego completely fumbled it. In late 1990, he  assured investors that the credit situation was   under control. The board agreed and granted all  the executives bonuses at the end of the year.

Then in February 1991, Westinghouse announces a  $975 million fourth-quarter writedown of Credit's   assets - causing it to show a $475 million  loss. They did not claw back the bonuses.

Lego spurned advice from Credit's own  managers - who knew that $975 million   would be nowhere near enough - and  bankers to spin off the bad loans   or sell off the subsidiary. They held on as  the real estate market continued to crash.

In November 1991, Credit wrote  off another $1.75 billion.   The whole company was now a billion dollars in  the red and Lego had to lay off 5,000 employees. By 1992, total charges at Credit had risen to over  $5 billion. But Lego and the rest of Westinghouse

refused to recognize reality - saying that  it wasn't his mess, it wasn't his fault. The board gave him one final shot to  sell the Credit subsidiary to General   Electric - who three times before tried to buy  it - but negotiations fell through once more.

In January 1993, the board had enough  and let go of Lego. It took them six   months to find a successor. They  eventually chose Michael H. Jordan. ## Jordan's Turnaround Shot Born in 1936, Jordan spent a long career  at Pepsi's international division before

becoming Westinghouse's first outside CEO. Coming in with no sentimental attachments, Jordan  began his tenure by laying off thousands of   workers and selling off Westinghouse's electrical  distribution, real estate, office furniture,

and defense electronics businesses to raise  $5.5 billion. This paid off the debts. Jordan then identified the company's  cable TV and broadcasting business as   its biggest profit centers. He also may  have harbored some notions of becoming

a media baron. He spent a staggering $9  billion ($18 billion today) to acquire TV   broadcaster CBS and radio broadcaster  Infinity Broadcasting to add to that. By now, the conglomerate known as Westinghouse had  little left. In addition to the broadcast assets,

there was a traditional power generation  division - involving both conventional and   nuclear energy. A valuable train and  truck refrigeration business called   Thermo King. And some industrial  and defense contracting stuff. Jordan at first announced that the  conglomerate would split into two,

a Westinghouse Electric and a CBS corporation.   But the heavy debt from acquiring all  the broadcast assets weighed on them. So in the end, Jordan nixed that and just  sold off the industrial businesses. The   Thermo King business was packed off  to Ingersoll-Rand for $2.5 billion.

And in 1997, they sold their  power generation and turbine   business to Siemens for $1.5 billion  - a price that was probably too low. With this, the traditional Westinghouse company's   journey ends. The entity now  moves forward as CBS Corporation.

## Conclusion Before we close, I want to  note that Westinghouse's   1950s to 1970s was not a very well covered period. So I want to especially refer you  to the work of Kenichi Miyata at the   school of Business Administration  at Meiji University. It wasn't the

only source I consulted for this  video, but it was by far the best. What happens to the nuclear engineering  entity that bears the Westinghouse name,   I covered in another video. I  shall summarize as an epilogue.

CBS/Westinghouse’s nuclear engineering  division was eventually bought by the   British state-owned energy company  British Nuclear Fuels Limited in 1998. BNF intended to build a full stack nuclear  energy company but a lack of government support

led them to sell the division to the Japanese  conglomerate Toshiba in 2006 for $5 billion. Lifted by favorable conditions in the nuclear  energy industry amidst a global oil price crisis,   Westinghouse announces two new builds based  on their AP1000 nuclear reactor design.

However, the two builds go horrifically  over budget in time and cost. In part   due to poor design choices and  new regulations instituted after   the Fukushima tragedy. One gets canceled entirely. The financial burden is so great that in 2017  Westinghouse files for bankruptcy. In so doing,

nearly taking down their parent  company Toshiba along with them.