Enter John D. Rockefeller

Enter John D. Rockefeller

Building railroads made a major change in the Oil Regions, which started in Pennsylvania and later spread to Ohio, West Virginia, and Indiana. Oil could now be more cheaply transported to Cleveland in barrels on railcars, and later in railroad tank cars, than loading barrels onto barges bound for Pittsburgh. Railroads made Cleveland the new world refining center, where John D. Rockefeller, a bookkeeper, happened to reside.

Rockefeller shaped the oil industry like nobody else. As with many movers and shakers, he started life under trying circumstances. His father, William “Big Bill” Rockefeller, was an itinerant trader taking advantage of price disparities that arose in a world of stationary buyers and sellers who did not know the price of goods over the next hill. Thus it was possible to buy eggs in one valley and sell them for a bit more in the next just by crossing a hill. But to survive, a good trader had to know where goods could be acquired cheaply and sold dearly. Big Bill augmented his knowledge of the market by being a bit of a conniver playing deaf and dumb when it suited his purposes. Considering his questionable business practices and his attitude toward women, it is strange that Big Bill would hate tobacco and liquor. It is stranger yet that he ended up marrying a strict Baptist, Eliza Davison, who shared his disdain for liquor, but not tobacco (she smoked a corncob pipe). John Davison Rockefeller, their first child, born in 1839, would pick up their mutual aversion to liquor.

The newly wedded couple moved into Bill’s cottage where his long term housekeeper Nancy Brown also lived. Both women gave birth to their first babies about the same time. The Davison family eventually prevailed on Big Bill to send Nancy away. As an itinerant trader, Big Bill was away from home for months at a time. His trading activities had to be fairly successful so that he could support one family with his Rockefeller name at one end of his travels and another family under a pseudonym (Dr. William Levingston) at the other. John D. did not know that he had half-siblings until late in life.¹³ Although a bit niggardly in supporting his families, Big Bill always had enough money lining his pockets to pay grocery and other bills that had piled up while he was gone. He also had enough money to help finance his son’s first commercial ventures. During his short visits, Big Bill spent time to teach John D., a toddler, valuable lessons in business such as picking him up and dropping him to the floor with the stern admonition never to trust anyone, not even one’s father!¹⁴

From his earliest days, buying and selling flowed through John D.’s veins. After Big Bill moved his family to Cleveland, Rockefeller enrolled in a commercial school without completing high school. Like his mother, Rockefeller was a strict Baptist and, as a 15-year-old teenager, taught Bible class and sang in the choir. He would be an active churchgoer all his life. At 16, Rockefeller was beating the pavement looking for his first job. He eventually found one at a wholesale firm dealing in everything from grain to marble. He earned a reputation for being a meticulous bookkeeper and a persistent collector of unpaid invoices. After three months of working from six in the morning to ten at night, the firm thought well enough of Rockefeller to put him on salary—a singular life’s achievement in Rockefeller’s mind!

From the start, Rockefeller showed two seemingly contradictory character traits that would be with him throughout his life: frugality and philanthropy. He was frugal in the conduct of business; absolutely nothing went to waste. Yet he was generous with those in need. Rockefeller must have believed that his ability to make money was a gift from God that was not to be neglected without suffering God’s damnation. He must have emblazoned in his mind the parable of the talents where God severely punished one who did not put his talent to use, took it away and gave it to the person who had made the greatest use of his talent. Rockefeller also believed that money earned was a gift from God and would eventually have to be given back to Him through philanthropy. Rockefeller seemingly never had an inner personal conflict between being a model family man at all times and a model churchgoer on Sundays, including teaching Sunday School and singing in the choir, with his role as an utterly ruthless businessman for the rest of the week. His approach to business was to unmercifully crush his competition, bringing unChristian-like suffering, misery, and distress to many. In his mind, his business practices were ultimately beneficial to humanity by bringing order out of disorder and eliminating waste inherent in an unfettered free market economy replete with untrammeled counter-productive competition.

Rockefeller carried out his pledge to God that money earned as a gift of God would have to be returned. By the time of his death, he had given away much of what he had earned estimated at $540 million, worth today in many tens of billions, except for a nice little kitty of $26 million to provide for his old age and be passed on to his only son, John D., Jr. This implies that Rockefeller gave away about 95 percent of his accumulated wealth before his death, but a better estimate may be one third. Other estimates of Rockefeller’s wealth are bandied about such as $900 million in 1920/1930’s dollars making him the richest man on earth for all time, particularly if his wealth is measured not in dollars per se but in terms of the nation’s economic activity of his time.¹⁵ Major beneficiaries of Rockefeller’s philanthropy were the first college for African-American women, Spelman College in Atlanta, Georgia (which says a lot about the man), Rockefeller Foundation, Rockefeller University, founding of the University of Chicago, and building of Rockefeller Center in New York City during the Great Depression by his son John D., Jr. His son would continue returning his father’s largesse by funding restoration of Versailles and Rheims Cathedral and founding Rockefeller Archaeological Museum in Jerusalem, creating Acadia and Grand Teton National Parks, donating land for United Nations headquarters in New York, and restoring Colonial Williamsburg.¹⁶ He faithfully followed his father’s dictum to spend a third, save a third, and give a third away.¹⁷ Despite these generous gifts, the Rockefeller family remains rich and influential to this day as residual shareholdings over time have multiplied many times in value. In full turning of the wheel, the $860 million Rockefeller Brothers Fund announced its intentions to complete its divestment of fossil fuel investments (coal and tar sands had already been eliminated) in favor of alternative and clean energy sources just prior to the 2014 UN climate change summit meeting held in New York City.¹⁸

After Rockefeller served his apprenticeship in a trading firm, he formed Clark and Rockefeller with his friend Maurice Clark assisted by a loan from Big Bill. The firm successfully traded in grain and other commodities. In the early 1860s, with Cleveland hosting twenty refineries, oil began to draw Rockefeller’s attention and he visited the Oil Regions. An early photograph of the movers and shakers of the oil industry shows them in a group except for a solitary figure standing far off to the side in the middle of an empty field. It is a very curious photograph that a single person would get away with separating himself from the group by such a large distance forcing the photographer to position himself far from the group to include the solitary figure in the photograph. Obviously the photographer felt obliged to have this individual in the photograph, but was not able to cajole him to join the group. It is not known whether this is Rockefeller, but it is thought to be Rockefeller because only Rockefeller would have the force of personality to get away with this behavior. Not only was Rockefeller a force to be reckoned with, but he also stood alone in creating the oil industry.

Rockefeller first recognized the four principal facets of the oil business. One was production, the world of speculative drillers who, collectively, were unable to exercise self-restraint spawning a world of boom and bust depending how supply and demand lined up. Rockefeller correctly assessed that this was one aspect of the oil business that was beyond his ability to control and showed no interest in drilling, at least in the beginning. The second part of the oil industry was transporting crude from oil fields to refineries and oil products from refineries to market. While oil transport first depended on canals and rivers, railroads had taken over much of the transport business by the time Rockefeller arrived on the scene, and railroads did not interest Rockefeller. The third part was oil refining and the fourth, marketing. Refining is what attracted Rockefeller’s attention. Refineries were relatively few compared to the number of drillers, and combining refineries under one corporate umbrella was possible, whereas combining drillers under one corporate umbrella was not. By creating a horizontal monopoly, a monopoly that controlled only refining, Rockefeller realized that he could control the entire oil industry. Of course marketing could not be disassociated from refining, but still, as sole refiner, he would become the sole buyer of the nation’s supply of crude oil and the sole seller to satisfy the nation’s thirst for kerosene and lubricating oils.

Big Bill did not lack the cash necessary to make yet another contribution to allow Rockefeller to form Andrews, Clark, and Company in 1863 and acquire his first refinery for $8,000. Andrews knew little about the oil business, his expertise was in building and operating what would become large capacity oil refineries and creating new products. In 1864 Rockefeller married Laura Spelman, a woman as strong in character and as firm in her religious beliefs as his mother. By 1865 Rockefeller no longer wanted Clark and his two brothers in the firm as there were major differences of opinion as to which path should be taken. There are two stories about the parting of ways. The first displayed Rockefeller’s nascent duplicity concerning business matters when Rockefeller off-handedly asked Clark what it took for Clark to sell his interest in the firm to Rockefeller. Clark did not sense the trap; and unwisely responded thinking that Rockefeller was either bluffing or at least kidding. Rockefeller was not bluffing or kidding. He immediately paid Clark his asking price in cash. In the second version, the partners agreed that all would sell their interests to whoever submitted the highest bid, which Rockefeller made sure was his. Regardless of which story is true, with Clark gone, Rockefeller was free to pursue the path he had chosen.

Exercising his God-given penchant for making money, Rockefeller bought and sold oil as profits rolled in. He brought his brother Will into the firm and opened up the firm’s second refinery, the Standard Works. The word standard was purposely selected to evoke in the minds of customers the image of a steady and reliable source of oil products made to a consistent standard. Rockefeller knew how to market oil and, via Andrews, developed new products. Refineries of the day produced only three: lubes or lubricating oils for machinery, kerosene for lighting, and naphtha. Naphtha is lighter and more volatile than kerosene and could not be used in kerosene lamps without risk of exploding. Hundreds were injured or died and many homes burned to the ground from defective kerosene lamps and naphtha-spiked fuel. The Standard label meant that consumers could trust Rockefeller not to adulterate his kerosene with life-threatening naphtha. Rockefeller also had kerosene lanterns built that could be safely operated and sold them at cost. Now that consumers had a safe Standard-backed lantern, from whom would they buy their kerosene? In a way, Rockefeller introduced the marketing concept of selling a quality product to generate brand loyalty that would provide profits through repeat sales.

Rockefeller abhorred waste. While most refiners dumped naphtha into the nearest stream and burned the heavy end of the barrel for fuel, Rockefeller developed products for the heavy end of the barrel such as special locomotive lubricating oils and asphalt and burned naphtha to fuel his refineries, a sign of his frugality and aversion to waste. In so doing, Rockefeller drew more revenue from a barrel of crude than his competitors, which he would work to his advantage in his ascent to control an entire industry. It is ironic that what is now considered the most valuable part of a barrel of crude oil, gasoline, which is primarily naphtha, was for four decades a waste product of the refining process before the advent of the automobile.

People were awed by Rockefeller’s rapid ascent to business prominence. His overwhelming impression was one of power. His blank eyes revealed nothing, yet his eyes seemed to penetrate and read the minds of others. He knew everything going on in the oil business as if God had given him special powers to see “around the corner.” Seeing around the corner was a special knack that Rockefeller had developed by posting paid observers who reported to him all that was happening in the oil patch. Rockefeller was secretive in nature and devised a code for internal communications. His contracts contained secrecy clauses that voided a contract if its contents were revealed. With or without God’s help, Rockefeller knew everything happening around him and those around him knew nothing about what Rockefeller was doing and, more importantly, what he was intending to do.

Rockefeller provided his family with the accoutrements of success and gave to charities and to deserving individuals in need. Outside of that, he plowed every penny the company earned back into oil. He believed and practiced frugality in business to an extreme. He knew that a penny saved a million times over was a lot of money that could also be plowed back into the firm. Rockefeller understood the power of compounding money. In addition to generating cash, he also knew how to tap bankers’ money and borrowed heavily to finance expanding his business. Banks were willing lenders to Rockefeller because Rockefeller followed the sage advice of his father never to default on a loan. In 1867 Rockefeller and Andrews became Rockefeller, Andrews, and Flagler, and by 1869 the three partners employed 900 workers producing 1,500 barrels per day of oil products. With 10 percent of the global refining capacity, they were the world’s largest refinery operators. This implies a total global refinery capacity of 15,000 barrels per day, which is about one-tenth to one-twentieth the capacity of a typical modern refinery.

Rockefeller was a trust maker compared to Theodore Roosevelt, a trust buster. In Rockefeller’s mind, a trust had real benefits. It dealt directly with the one principal fault of the free market was its lack of stability marked by boom and bust. When supply is short of demand, prices shoot up, bringing on a boom, encouraging overenthusiasm for increasing productive capacity. This lasts until there is excess productive capacity on stream, which transforms a shortage into a glut, causing prices to collapse and firms to fail. The ensuing bust lasts until demand catches up with supply, fueling the next boom.

A trust brings stability to an industry in chaos. A trust would never overindulge in building excess productive capacity to bring on a bust because the decision to expand productive capacity would be in the hands of a single individual, or a small group of individuals acting as a cartel. Even if market conditions resulted in underutilized capacity, a trust has the power to cut back on refinery outputs throughout the system preserving price rather than ruthlessly competing against one another by cutting price with production kept at full throttle. An oil trust, as sole buyer, would be able to purchase supplies and raw materials at a cost that ensured the suppliers’ financial viability for continued operation, but not allow them to become rich. Crude oil prices would be contained within a narrow trading range and prevented from spiraling out of control as occurs in a free market environment when supply lags demand. This controlled price of oil would work for the long-term advantage of suppliers and consumers alike. Only a few large capacity refineries would be allowed and their inherent economies of scale would further lower costs, something that could never be achieved by many independent producers each operating a small refinery. An oil trust would set prices for its products at levels that ensured the industry’s profitability. Steady profits would be able to pay for an adequate supply of oil at a fair price, which, in turn, would provide a livable wage and job security for all workers in the oil industry. Steady profits would ensure sound bank loans, an adequate flow of dividends for shareholders, and reasonable prices for consumers. In essence Rockefeller wanted to set up a system that outlawed the business cycle with its uncontrollable and severe price fluctuations along with wasteful investments in excess capacity and inefficient plants. A trust would essentially outlaw these twin banes of capitalism and relegate layoffs, bankruptcies, stock market plunges, and banking crises to the dustbin of history.

After taking over a market by wiping out the competition, Rockefeller did not take advantage of being the sole supplier and set an exorbitant price, as one might expect. Rather, he set a price where he could make a profit, but not a profit high enough to tempt new entrants into building a refinery. Rockefeller could maintain a monopoly by not being too greedy. Too high a price would only invite a new competitor to build a refinery, which Rockefeller would then have to crush by lowering prices below the competitor’s costs, forcing sale of the refinery to Rockefeller. Even so, some individuals were not above building a refinery just to provoke Rockefeller into buying it.

In 1870, the company was renamed the Standard Oil Company, with Rockefeller, now 31 years old, having the largest share (29 percent) of the company’s stock. By 1879, in less than a decade, Standard Oil Company owned 90 percent of the nation’s refining capacity, having removed most, though not all, of its 250 original competitors. His rise to power entailed:

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  Rockefeller’s God-given (as Rockefeller interpreted it) talent for making money when others failed.
  
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  Rockefeller’s abhorrence of waste that generated greater revenue per barrel than his competitors and reduced his costs.
  
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  Rockefeller’s realization of the inherent economies of scale of a few large refineries before anyone else. Rockefeller had the best operated, most efficient, and largest refineries, making him the low-cost producer (principal contribution of Andrews). He concentrated his refining at three plants, which at one time represented 75 percent of global refinery capacity. His refining costs were half those of his competitors. Being the low-cost producer was a major card to hold in the corporate game of King of the Hill since Rockefeller could lower his price to a point where his competitors were losing their shirts while he was still making money. Rockefeller was not above buying a refinery from an independent, closing it, then adding an equivalent amount of capacity to one of his three refineries to replace the scrapped capacity, benefiting from further gains in economies of scale.
  
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  Rockefeller’s penchant for secrecy prevented others from knowing what he was up to, but through “his men” he knew everything going on in the industry. For instance, railroads had to tell Rockefeller the details of shipments by his competitors including the volume, destination, and shipping rate. Corporate intelligence was a major weapon in Rockefeller’s business arsenal for vanquishing his foes.
  
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  Rockefeller, as the largest refinery operator, was able, through the efforts of Henry Flagler, to get the railroads to offer a secret rebate for Rockefeller’s business.¹⁹ Railroads, as common carriers, were at least morally, though not legally, bound to charge the same rates for everyone. With the cost of shipping crude oil about the same as its value, shipping was an important component in determining profitability. As the industry’s largest shipper and also the owner of a fleet of railroad tank cars, Rockefeller through Flagler, “the brains of the organization,” took advantage of the intense competition among three railroads serving the Cleveland refineries to negotiate a secret rebate. This rebate cut Rockefeller’s shipping cost by nearly half. Then, on top of this, Flagler negotiated a drawback, a kickback, of the shipping rates charged to his competitors. Rockefeller’s competitors had to pay not only twice his shipping rate, but, to add insult to injury, part of what they paid to the railroads also flowed to Rockefeller through the innocuous-sounding South Improvement Company.
  
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  Rockefeller was first to sell his products in Europe and Asia. From the beginning, a large portion of US kerosene production, about 25 percent, was exported and Rockefeller made Standard Oil the first multinational oil company, the US the world’s largest oil exporter, and Philadelphia the world’s largest oil exporting port. With widely dispersed markets throughout the US and the world, Standard Oil was the only company so positioned that profits in one area subsidized losses in another. This was a great advantage for Rockefeller when it came time to give a competitor a “good sweating.” Rockefeller could bring any competitor to heel, domestically or internationally, through discriminatory price cutting in the competitor’s marketing region without suffering an overall loss. Considering his profit margin from greater revenue per barrel and lower costs from efficient refinery operations and shipping rebates, he probably never suffered a loss even in the market where a competitor was getting a “good sweating.”
  
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  Rockefeller was not above sabotaging a competitor’s refinery if necessary to bring him to heel. Usually this was accomplished by blowing up the main gate as a not-so-subtle warning that the refinery might be next if the refinery owner did not quickly come to terms with Rockefeller. He practiced corporate espionage by paying employees of competitors to spy for him while they were still on the competitors’ payroll. He was also a master at corporate deceit. One time Rockefeller purchased a refinery on the condition that the seller would not reveal the transaction. The ex-owner continued to operate the refinery as an “independent” and combined with other independent refinery operators in order to better combat Rockefeller’s ruthless takeover of the refining business. The sellers learned too late that they were now firmly within the grasp of Rockefeller’s octopus.
  
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  Rockefeller knew how to handle bankers and was always able to cajole, when he could not convince, bankers to finance his acquisitions. The bankers were willing lenders because Rockefeller never defaulted on one penny of his borrowings, a valuable piece of business advice from his father.
  

On the other hand, this assertion may not be entirely true because independents were dedicated in defeating Rockefeller even if they had to sacrifice making money to do so. To them, it was a life and death struggle with the Rockefeller octopus. Even though Rockefeller held all the cards to totally take over the American refinery industry, it may not have been possible for him to do so. American independents were just as determined to escape from Rockefeller’s grasp, survive, and come back to fight again as Rockefeller was to subdue them. It was a battle of wills where American independents were utterly determined and dedicated to not ending up as Rockefeller property just as, a few years later, Russian independents would be equally determined and dedicated to not ending up as Nobel brothers or Rothschild property.

To illustrate the fighting spirit of the American independents, they started building a pipeline to connect the Oil Regions with the east coast market to combat Rockefeller’s control over the railroads and his favorable shipping rates.²⁰ Rockefeller, true to spirit, put every legal impediment in their way that his lawyers could devise. He bought land through which the pipeline would pass with the intent to deny permission for its passage. The independents, consecrated to defeating Rockefeller, would reroute the pipeline around Rockefeller’s land. Then Rockefeller convinced railroads not to grant right-of-way for the pipeline to cross their tracks. Unable to cross a railroad track, the pipeline ended on one side of the track and started on the other side. Oil from the pipeline was loaded on wagons to cross railroad tracks at public crossings and then be put back into the pipeline. Rockefeller could not legally stop oil from being carried in wagons across a public crossing, but he could instruct a railroad to park a train across a track crossing to disrupt transfer operations. Railroads were not keen participants in blocking their track and idling their revenue generating assets to keep Rockefeller happy.

Despite this towering wall of opposition, the independents managed to complete the pipeline. Pumping oil through a pipeline is far cheaper than shipping by railroad. For one thing, railroad tank cars have to be taken back empty for another shipment—an expense not relevant to a pipeline. Another voided cost of a pipeline is moving a locomotive and tank cars along with the oil. Moreover, the capital cost of a pipeline is less than a railroad. With lower capital and operating costs, completion of the pipeline meant that Rockefeller had not only lost his logistical advantage, but was now at a logistical disadvantage. With the completion of the pipeline, Rockefeller did an about-face and became a pipeline builder. He eventually built 13,000 miles of pipelines connecting Oil Regions with east coast markets and took over nearly 90 percent of pipeline traffic, amply demonstrating what it was like to cross his path.

Having established a horizontal monopoly in refining that stabilized the price of oil, he then strove for a vertical monopoly by acquiring oil-producing properties. By 1879 Standard Oil’s oil fields from Pennsylvania to Indiana pumped one-third of the nation’s oil. This was also the year that Thomas Edison invented the electric light bulb, the harbinger of the inevitable demise of the kerosene lamp. Now an oil producer, Rockefeller discovered that natural gas associated with oil production was flared or vented to the atmosphere. With his aversion to waste, Rockefeller started plowing oil profits into building a natural gas business. Natural gas could supply streetlights, buildings, and factories as a substitute for coal gas if there were a means to get natural gas from oil wells to towns and cities. Along with other companies in the natural gas business, Standard Oil became active in building natural gas pipelines and obtaining municipal franchises to supply communities with natural gas, which was cleaner burning, cheaper, and had higher heat content than coal gas. The higher reservoir pressure of natural gas fields could drive gas over longer distance pipelines than the pressure within in large holding tanks at manufactured gas plants, but natural gas fields still had to be reasonably close to consuming centers to maintain an adequate level of service.

Sometimes Rockefeller had to pay a bribe to get a municipal franchise and sometimes he resorted to corporate duplicity. One municipality decided to split a franchise between two independent firms so that consumers could benefit from competition. Although two companies winning the split franchise appeared to be rivals; in reality, both were subsidiaries of Standard Oil.

Is there anything that can be said in favor of the way Rockefeller conducted business? Actually there was one—when a competitor was crushed and had no choice but to sell to Standard Oil, Rockefeller would offer either cash or shares in Standard Oil. Interestingly Rockefeller’s cash offers were not as low as one might imagine—Rockefeller probably reasoned that this would be an inducement for a rival to surrender quickly rather than prolong the struggle. In making his offer, Rockefeller would recommend that the seller exchange his refinery for shares of Standard Oil stock rather than accept the cash offer. Most refinery operators took cash rather than stock in order to avoid further entanglements with Rockefeller. This was indeed unfortunate because the value of stock would, in time, vastly exceed the cash offer.

Ida Tarbell, a journalist-author of a series of magazine articles starting in 1902 in McClure’s Magazine entitled “The History of the Standard Oil Company,” exposed the company’s nefarious business practices. These articles turned public opinion against Rockefeller and fueled Theodore Roosevelt’s aversion to monopolies. Ida was a perfect person to write such a series of articles. Her father was a joiner, or barrel maker, who profited in the early days of oil by being among the first to build wooden tanks for storing oil rather than pits dug in the ground. He built a house for his family by scavenging lumber from an abandoned hotel in Pit Hole. His days of prosperity ended abruptly with the advent of metal tanks. Throughout his life, he was a strong advocate of American independents and was allied with an American independent along with Frank Rockefeller, another brother of John D. Both shared the same fate when the company was crushed by Standard Oil.

By 1882 Standard Oil, a conglomerate of subsidiaries created by Rockefeller’s numerous acquisitions, was becoming difficult to control. Rockefeller reorganized the company as the Standard Oil Trust, whereby control of forty-one companies was vested in nine trustees including Rockefeller, who operated out of Standard Oil’s New York office at 26 Broadway. As years went by, Rockefeller controlled less of the company’s operations and spent time grooming his successors plus time in court fending off victims seeking restitution and at hearings fending off government inquiries into his business practices. Rockefeller was moving into the public limelight and the public did not like what they saw. Rockefeller’s business practices did not fit the image of America as a land of opportunity for pioneers and family owned businesses. Forcing competitors to sell against their wishes, even if the price were fair, was not considered a fair business practice.

Rockefeller’s practices, while not technically illegal at the time, inspired legislation that made them illegal. The Interstate Commerce Act of 1887 required railroads, as common carriers, to charge the same rates for all customers and outlawed secret rebates and kickbacks and established the first federal regulatory watchdog agency, the Interstate Commerce Commission. In 1890, Congress passed the Sherman Antitrust Act, which banned trusts and combinations that restrained trade and sought to control pricing through conspiratorial means. In 1892, Ohio Supreme Court ordered a local Standard Oil company to leave the Standard Oil Trust, but Rockefeller instead dissolved the Trust and set up a new corporate holding company, Standard Oil of New Jersey (New Jersey was selected for its lax corporate laws). Standard Oil Trust as a legal entity lasted only 10 years, but its name would last forever. Independent of his involvement with Standard Oil, and later in his business life, Rockefeller got involved in investing in railroads by financially backing E. H. Harriman, a railroad magnate. He also made investments in mining iron ore and even tangled successfully with Andrew Carnegie. Rockefeller bought iron ore mines that Carnegie dismissed as useless because he had better sources of iron ore for his steel mills. He rebuffed Rockefeller’s overtures to buy his iron ore. But Rockefeller was not so easily cast aside and identified logistics as a weak spot in Carnegie’s operations. Carnegie chartered Great Lakes ore carriers to ship ore from Minnesota mines to his steel mills. One day Carnegie awoke and discovered that Rockefeller had surreptitiously chartered the entire Great Lakes ore carrier fleet. Maybe Rockefeller had contemplated this logistics stratagem before he invested in the iron ore mines. After all he had a great deal of experience on how to use logistics to his advantage when he took over the refining business. Anyway bereft of transportation, and hence raw materials for his mills, Carnegie learned to his dismay what it was like to deal with Rockefeller.²¹ While Rockefeller’s investment in copper mines in Colorado was also profitable, a bitter labor strike that ended in violence besmirched his name. His investment in a bank turned out to be a predecessor to Chase Manhattan, eventually run by his grandson, David Rockefeller. In the Rockefeller “tradition,” all his investments made money.

With all these successful achievements in business, Rockefeller had one more favor from God awaiting him: Theodore Roosevelt. Rockefeller the trust maker fought Roosevelt the trust buster for years before Roosevelt won in 1911 with the Supreme Court decision that forced Standard Oil to dissolve itself into 34 separate and distinct companies. Rockefeller, rather than holding shares in Standard Oil, now held equivalent shares in 34 companies including what would become Exxon (Standard Oil of New Jersey), Mobil (Standard Oil of New York), Amoco (Standard Oil of Indiana), Sohio (Standard Oil of Ohio), Chevron (Standard Oil of California), ARCO (Atlantic Refining), Conoco (Continental Oil), Marathon (Ohio Oil), Pennzoil (South Penn Oil), and 25 others.

Before the divestiture, and with Rockefeller exerting less control, Standard Oil was becoming bureaucratic and lethargic, the twin banes of large successful organizations. After the breakup and an initial period of cooperation among sister companies, each went their separate way, opening up and exploiting new markets that Rockefeller had not envisioned. The net impact of splitting up Standard Oil was to invigorate the company with a host of new management teams and new ideas that multiplied the stock value of Rockefeller’s original holding in Standard Oil many times over. Rockefeller, fully retired after the Standard Oil breakup, became far wealthier than when he was actively engaged in business. Rockefeller died in 1937 at age 98, 2 years shy of his goal and, by all accounts, well pleased with the course of his life. He had made and given away a vast amount of money—whether God was pleased with him is not known.

Walmart—Modern Version of a Rockefeller Octopus

Most people feel that what Rockefeller achieved could not be replicated today; particularly in light of the anti-trust legislation in place. Most believe that it is impossible for one company to gain such a competitive advantage that there is literally no way for competitors to survive. How wrong can one be! Sam Walton started his business life with two small department stores. He quickly realized that a competitive advantage can be achieved if he had the lowest prices in town. His version of Rockefeller’s unbeatable competitive advantage of the economies of scale of just a few well-run refineries coupled with a 50 percent railroad rebate was sole sourcing his goods from China. Once he reached a critical mass, he could tell his American suppliers that if they wished to continue having his business, the next shipment would have to come from China. The Walmart account was just too large to ignore such a demand. Substituting labor costing a buck or two a day for $15 per hour did wonders in lowering prices of Walmart goods far below his competitors.

However substituting cheap Chinese goods for relatively expensive American goods was just the start. At some point, Walton no longer negotiated price with his suppliers; but dictated price.²² He could negotiate lower shipping rates—dare we say dictate?—than his competitors by virtue of being one of China’s largest exporters, far larger than most individual nations. (Walmart accounts for about 10 percent of China’s exports and only about eight leading trading nations exceeds its volume.) Walton developed an extremely efficient warehouse distribution system including cross-docking where trucks carrying containers filled with suppliers’ goods would meet empty Walmart trucks on the opposite side of a warehouse dock. Goods from containers would be exchanged among the trucks using only the docking facilities rather than the storage capacity of the warehouse, after which Walmart trucks would proceed to individual stores. Walton pushed inventory carrying costs back to the supplier by not paying the supplier until after goods were sold. This reduced Walmart’s need for capital by having suppliers finance their goods while Walmart waited for customers to buy them. Slow moving goods were lowered in price without much discussion with suppliers, who bore the full brunt of arbitrary price cuts and potential losses. In this sense, Walmart acted more like a giant commission house than a traditional retailer who bought and owned and held goods to be sold to the public assuming the risk of stocking goods that might not be saleable.

Walmart’s information system allowed suppliers to know their inventory in various Walmart stores and distribution centers to enable them to forecast demand and replace goods within the Walmart system before they stocked out. In this way, Walmart passed reordering and its associated costs to the suppliers and generated more savings. Walmart’s information system kept track of turnover and culled products as sales weakened and replaced them with higher volume products. Of course, any unsold merchandise was the supplier’s problem, not Walmart’s. Walmart excelled in forming a smooth supply chain of goods in containers from suppliers’ factories to ports in China and then by container vessels to US ports with intermodal transport, a combination of rail and truck, to move containers from ports to distribution centers and thence to stores and finally to customers with a minimum of unwanted interruptions or inventory buildups. The system was run as close as possible to a never-stopping conveyor belt carrying consumer goods from factories in China to awaiting customers in the US and in recent years to customers in other nations. With regard to labor, Walmart depended heavily on part time workers paying minimum wage with very limited benefits while its fulltime employees worked for modest salaries also with minimum benefits. Walmart was not alone among US retailers in telling prospective employees that their low pay qualified them for social welfare benefits; and that these benefits should be considered part of their compensation package. Walmart provided assistance for employees claiming these benefits. Thus the US taxpayer was on the line to help Walmart meets its payroll expenses.

Sam Walton built an octopus as encompassing as Rockefeller’s. An opening of a Walmart store was preceded by closure of neighborhood department stores within a radius of 5–10 miles as they were at a decidedly competitive disadvantage for every aspect of retailing. The presence of a Walmart store inhibited opening of new department stores in its marketing area. In essence this was no different than Rockefeller causing the closure of many refineries and inhibiting the building of new ones. It is ironic that stores owned by Sam at the start of his career would not survive the Walmart onslaught any more than Rockefeller’s first refineries.

The Walmart paradigm of funneling everything through China played a major role in stripping the US of its consumer product manufacturing base. It is strange that the unemployed unable to find a job who go to Walmart to stretch their meagre dollars are incapable of drawing a line through the dots connecting why they have no jobs with their buying Walmart goods. The business strategy of Sam Walton, expertly crafted and carried out with great competence and precision, made Walmart the nation’s largest revenue generator and largest employer, all without manufacturing one item. Its revenue is a bit less than that of the GDP of Taiwan and a bit more than the GDP of Norway, making Walmart the 25th largest economic power in the world. Walmart’s workforce outnumbers individual populations of nearly half of the world’s two hundred nations. Walmart’s retail space, not counting distributions centers or its parking lots, is 1.5 times the area of Manhattan Island. Walmart’s truck drivers annually log enough miles to encircle the earth 30,000 times.²³

As with Rockefeller’s commanding control over the nation’s oil business, Sam Walton’s commanding control over the nation’s retail business made him exceedingly rich. As with Rockefeller, Walton’s path to success was by selecting the right business strategy and creating an operation and organization to carry it out. Sam was worth $80 billion in Walmart stock at the time of his death, nearly the combined fortunes of Bill Gates and Warren Buffet, and, unlike Rockefeller, Sam passed most of this on to his children (whose net worth has subsequently doubled since Sam’s death).²⁴ Also unlike Rockefeller who was one of the most maligned individuals in America, Sam Walton is considered a benign businessperson deserving of our respect and admiration.

The only danger to Walmart’s highly successful business model is weakness in the dollar that affects the exchange rate with the Chinese currency, renminbi (RMB or “people’s currency”), also referred to as yuan, in relation to the US dollar. A sharp markup in the exchange rate for yuan would hike Walmart prices. It is ironic that Walmart itself, in stripping the cupboard bare of consumer goods manufactured in good ol’ USA, is an important contributor to the weakness of the US dollar by worsening the nation’s balance of trade deficits. Another factor stalking Walmart’s prospects are rising labor costs in China; the Chinese no longer work for a buck or two a day. In a way, Walmart has helped to bootstrap China much as exports from Japan, Korea, Taiwan, Singapore, and Hong Kong to the US helped bootstrap these nations into modern day economies with a large middle class. But Walmart, by the sheer volume of its imports, has contributed greatly to the pauperization of the American middle class. In early 2014, Walmart sales suffered from cutbacks in unemployment insurance and food stamp programs. How many of these recipients have been placed in this dire situation by Walmart’s buy-only China business strategy? Perhaps in recognition of its impact on the American economy, Walmart has set up a recruiting effort to encourage formation of US suppliers. Walmart buys the output of 52 suppliers with 50 or more employees located near the company headquarters in northwest Arkansas, whose products range from clothes, cleaning supplies, and food to IT support services. Including smaller companies, Walmart’s US suppliers number 1,400.²⁵ US suppliers do not have an enormous impact in the grand scheme of Walmart purchasing practices, but they are an acknowledgement of the unintended consequences of sole sourcing from China.

Directory: documents.routledge-interactive -> 9781138858374
documents.routledge-interactive -> Publication: New Yorker Cover Date: 1972-01-01 Creator
documents.routledge-interactive -> Secondary turns, = 96 turns 2
documents.routledge-interactive -> Gifted and Autism Educational Strategies: Individual Savant Skill Programs
documents.routledge-interactive -> Phonetic resources, games and useful links Phun with Phonetics
documents.routledge-interactive -> Chapter 20: Smart Toys and Life-Like Robots Recent History of Intelligent Toys
documents.routledge-interactive -> Looping: the Voice of Violence on Film By Rocco Dal Vera
documents.routledge-interactive -> Chapter Quiz Introductory
documents.routledge-interactive -> C:/R/functions txt
9781138858374 -> Hydrogen Economy Historical Background
9781138858374 -> Environment us clean Air Acts

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