The Underlying Force in the Area's Economic Turbulence
David Beal - Senior Business Editor, St. Paul Pioneer Press
Published September 1, 1991 | September 1991 issue
In an annual survey, the St. Paul Pioneer Press, a Twin Cities daily newspaper, charts Minnesota's top 100 publicly traded companies. In the following stories, Pioneer Press senior business editor David Beal analyzes the economic "churning" that occurs when companies join or drop off the list; he also discusses the relationship between Minneapolis/St. Paul and the rest of the Ninth District, as well as the efforts of small towns to recover from large employment setbacks.
The Minneapolis-St. Paul area's strong, growing economy often masks the rapid, jarring changes that are part of its prescription for success. Look to the sharp rise of the area's medical technology businessescentered on Medtronic Inc.and the steep decline of its computer hardware industryfocused on Control Data Corp., for the most striking signs of the turbulence today.
Jobs get created and destroyed fast around the Twin Cities. The process helps the economy to renew itself and retain its vibrance, but often inflicts hardships on the people whose lives are disrupted.
The churning underscores the provocative views of economist Joseph Schumpeter, who described capitalism as a disruptive system that constantly undermines the status quo. New technologies, commodities, products, processes, sources of supply and organizational arrangements lead to new competition, which in turn fuels economic upheaval. Some people win. Others lose.
We've taken a measure of the churning at the St. Paul Pioneer Press since 1982, through an annual list that charts the performance of Minnesota's largest publicly held companies. University of Minnesota geographer John Borchert has traced the turbulence in the Twin Cities area and its hinterland more broadly by mapping economic and demographic changes at 10-year intervals all the way back to 1870.
"Business development and growth in the Twin Cities area has been a chaotic process," Borchert says. "Changes in company ownership have been an important source of the churning. After the companies were sold, the founders and employees often remained in the area and started new enterprises. Other companies have given up and been liquidated.
"Yet overall, the number of companies and jobs has continued to grow. The causes of this remarkable regeneration of business are largely a mystery, but the process probably has been part of the distinctive cultural development of the region."
At the Pioneer Press, we rank Minnesota's largest firms according to their market value. We believe that over time, this kind of a ranking captures shifts in the long-term prospects for these companies, more so than would a ranking by sales or some other measure.
The list also reflects the degree to which wealth and corporate headquarters are concentrated in the Twin Cities area. Only 10 of the 100 companies on the 1991 roster are based in parts of Minnesota beyond the metro area. Had we included the Minneapolis Fed's region beyond Minnesota, we wouldn't have gotten many more. Adjusted for population, it's doubtful that any other large metro area in the country has such a strong, diverse collection of companies. These corporationsled by national pacesetters such as 3M, General Mills, Dayton Hudson, Honeywell and Medtronichave showered jobs, taxes and philanthropy on the metropolitan area.
Yet perusing past lists is like peering into a kaleidoscope. Twenty- one of the top 50 companies on the first list were nowhere to be seen on the 1991 list. Most were merged into companies based beyond the state or, more recently, beyond the country. The two most striking trends are the increasing troubles plaguing the computer hardware companies, which had been an engine of new jobs and income during the 1960s and 1970s, and the emergence of the medical technology companies as the new stars of the list.
The pace of the churning apparently quickened in the 1980s, when corporate restructuring was in fashion. Yet Borchert's work suggests that this chaotic process has produced upheavals for years in the Twin Cities. Borchert looked at the companies listed in the Corporate Report Factbook, a directory of publicly held companies based in the Ninth Federal Reserve District. Most of these companies were in the Twin Cities area. He found that of 275 companies in the 1968 directory, only 142 had survived by 1975 and only 88 by 1983.
Studies of where the Twin Cities area ranks on the turbulence scale vs. other metropolitan areas provide mixed conclusions. But one yardstick, noted by analyst Don Hilber of the Minnesota Department of Jobs and Training, suggests plenty of churning. Hilber cites a U.S. statistic that showed 5,308 Minnesota workers lost their jobs in large-scale layoffs last year, then failed to find new jobs before their 26 weeks of unemployment benefits ran out. That number ranked the state second highest in the country, trailing only Massachusetts. Hilber believes most of the Minnesota workers affected were in the Twin Cities' ailing computer industry.
Steve Rothmeier, the former Northwest Airlines CEO who now heads venture capital activities for Investment Advisers Inc. in Minneapolis, sees more churning in the Minneapolis-St. Paul area than in most others. He cites the area's unusually large concentration of venture capitalists, some of whom do seed and early-stage funding close to home, as a factor working to constantly create new jobs.
"If you go to Chicago, you can't find a venture capitalist willing to do seed and early-stage investments," says Rothmeier.
However much the churning around the Twin Cities, the area's large number of publicly held companies tends to make the process more visible than in other metro areas.
The area also has an outsized concentration of the population, wealth and income of the Minneapolis Fed region, which stretches from Michigan's Upper Peninsula west to Montana. Worldwide air connections and strong entrepreneurial support services enable metro area businesses to quickly introduce new products, investment and innovation. This kind of climate has tended to foster constant change at many companies. Their turbulence can be catching; sometimes they move their business around, jolting the ad agencies, law firms, accounting offices, financial institutions and other entities that sell services to them.
Since 1982, the market value of the companies on our list has more than tripled to $78 billion. Newcomers constantly rocket up to replace companies that leave the list. Ten of this year's top 50 have gone public since 1982. The newcomers' success has consistently surfaced in national lists of small and growing companies. Business Week's ranking of the 100 fastest growing companies this year includes six from the Twin Cities area.
Were it not for the successes of such newcomers, the decline of the computer hardware companies might have flattened the Twin Cities. Consider what's happened to them over the last nine years.
- Control Data's market value, $1.11 billion in 1982, has been cut in half. As a result, the company plunged to 24th on our list this year from 5th in 1982.
- Values at Cray Research and Network Systems both rose, but not enough to keep them from slipping in the rankings. Cray dropped to 16th from 11th, Network Systems to 28th from 21st.
- CPT Corp., which had ranked 14th, fell off the list entirely.
Minnesota's computer manufacturing employment, which peaked at 38,000 in 1984, had fallen to 23,000 by 1990. Most of the decline has come in the Twin Cities area since 1988, mainly at Control Data and Unisys. More than a score of Twin Cities computer companies, including Cray, Network Systems and CPT, were founded by employees who left Control Data or Sperry, Unisys' predecessor.
Situations vary considerably at these companies. Cray remains the world leader in supercomputing, though more of its workers are in software jobs today than in hardware-related tasks. Little-known Digi, much newer and growing rapidly, is actually a hardware company, making microprocessor- based circuit boards for personal computers. Digi was worth almost a third as much as Control Data this year. CPT, which makes office automation equipment, completed a reorganization in bankruptcy court this year.
One of the biggest shocks of the new era for computer hardware producers came in 1987, when Unisys announced it would shut down its semiconductor plant in suburban Eagan, just south of the Twin Cities. The factory, which employed 900 workers, had been built only four years earlier at a cost of $50 million.
Another came in 1989, when supercomputer-maker ETA summoned its entire work force to the World Theater in St. Paul one morning. The news was not good: Too little capital and too much competition would force the company to close its doors. More than 800 workers, many highly skilled and extensively educated, suddenly found themselves out of jobs. Unlike Cray and Network Systems, this seedling of Control Data never blossomed on its own.
But even as computer hardware companies shrunk or went out of business, medical technology ventures were on the rise. So far, they have not generated nearly as many jobs for the metro area as Control Data, Unisys and their spinoffs did. But many of the med-tech newcomers show considerable promise. The leading edge of the baby-boomer generation is in its mid-40s now. As that group and those behind it age, markets for the products and services of medical-tech companies are certain to grow.
For the Twin Cities, Medtronic is the new Control Data. Both companies were founded in 1957. Both trained waves of employees who left to start other companies. Medtronic's sales, profits and employment have grown much more slowly than Control Data's, but its market value is soaring. This year, it gained 110 percent to move up five notches, to fifth place, on the Business Twin Cities 100. That followed a 45 percent gain last year.
St. Jude Medical, a second med-tech star, cracked the top 10 for the first time this year with a 115 percent increase in market value that moved it into 9th place. Since 1982, when it ranked 32nd, St. Jude's value has shot up to $2.29 billion from just $75 million.
SciMed Life Systems chugged into 19th place with an 88 percent gain. Its market value has soared to $695 million from $6.6 million in 1982, when it ranked 91st.
Seventeen of the 100 companies on our latest list are primarily medical technology enterprises, up from seven in 1982. This year, five of the 17 were newcomers to the list. Eleven more made repeat appearances, but turned in single-year gains ranging up to 177 percent. Only one of the 17 suffered a decline in market value.
The Twin Cities area's medical device makers are particularly strong in cardiovascular applications. Their best-known products are Medtronic's heart pacemakers, St. Jude's heart valves and SciMed's catheters. Many of these companies are pushing the envelope in electronic technologies related to those that fueled the area's computer industry growth years ago. It has not been uncommon to find former computer industry entrepreneurs or technicians eventually turning up at med-tech companies.
A growing support system is strengthening the med-tech manufacturers. The Mayo Clinic at Rochester and the University of Minnesota's medical school provide entrepreneurs, research and readily available expertise. Two trade groups, Medical Alley and the Minnesota Emerging Medical Organizations, started up in the 1980s. A monthly newsletter, Minneapolis- based BioMed Alert, began publication in 1989 to follow medical device manufacturers.
The surge in med-tech has attracted millions of dollars of investment by Twin Cities venture firms. One, Medical Innovation Capital, backs only medical companies based, for the most part, in the Twin Cities area. Incubators have been commonplace for more than a decade now to back startup businesses by helping them to share costs and services. Last year, Medical Innovation added a new wrinkle when it opened a specialized incubator in suburban Roseville for med-tech startups.
The med-tech and computer hardware trends are the most obvious signs of "creative destruction" today in the Twin Cities area. Yet the turbulence has reached deeply into other sectors represented in the top half of our Business Twin Cities/100 list since 1982. Northwest Airlines swallowed Republic, then a group led by Al Checchi acquired Northwest. Diversified Energies acquired Dyco and E.F. Johnson, then was itself taken over by Arkansas-based Arkla. Out-of-state companies also acquired Modern Merchandising, McQuay-Perfex, Gelco and Peavey. Tonka and Golden Valley Microwave, acquired this year, will fall off the list next year.
British acquirers bought Pillsbury and Webb. A Canadian company acquired Soo Line. A Japanese firm bought much of Minnetonka Inc. A German company acquired Data Card.
Then there were the headquarters shifts. Kroy moved its headquarters to Arizona. Amhoist renamed itself as Amdura, moved to Denver and filed for reorganization under Chapter 11 of the federal bankruptcy law. Apache also went to Denver. Conversely, Metropolitan Financial moved its home office to the Twin Cities from Fargo.
Throughout the latest list, the names of many of the companies that remain bring to mind more churning, past and possibly future. Dayton Hudson, ranked third by market value, seemed about to be taken over four years ago; arguably, only the 1987 stock market crash enabled the company to stay independent. Yet the battle goes on. Now Dayton Hudson faces rugged fights in its own backyard from Wal-Mart and three retailers entirely new to the Twin Cities marketMacy's, Nordstrom and Bloomingdale'sat the soon-to-open Mall of America in Bloomington, as well as from Saks Fifth Avenue and Neiman-Marcus near its flagship store in downtown Minneapolis.
Honeywell, ranked fourth, has announced that it intends to cut its Twin Cities employment substantially. The company says it can get some of its work done as well, and at less cost, by doing elsewhere what it has been doing in Minnesota.
Norwest, ranked eighth, and First Bank, 14th, survived sweeping restructurings, but not without cutting thousands of jobs in the Twin Cities.
The churning creates a need for more safety nets, thus services for dislocated workers have come into their own in Minnesota. In 1990, state legislators funded a $33 million, two-year program with a new payroll tax. This was an unprecedented commitment for the state, one made at a time when there was no recession. The programs, which provide resume-writing, job counseling and retraining, have been particularly popular with refugees from the computer industry.
The turbulence may have quickened in recent years, but Borchert notes that it is nothing new for the Twin Cities economy. Gone today or now much smaller are the meat-packing, refrigeration, farm equipment, flour-milling, brewing and apparel industries, to name just a few. They have been replaced by service businesses and manufacturers in such newer industries as electronic controls, specialty printing and leisure-time products.
Inflation-adjusted assets of the companies in the Corporate Report Factbook grew faster than the national average during the 1968-83 period, Borchert notes. "In fact, new job generation and growth in the Twin Cities area has always had to offset attrition and decline,'' he says. "But turnover increased in the auto era, with more firms, faster technological change, and greater intensity and range of movement of information, people and capital."
Through it all, the Twin Cities has had special advantages. Among those listed by Borchert are: a steady influx of capable workers no longer needed on farms; early capital and mechanical talent from European immigrants; wealth from the resources of farms, forests and mines; good transportation and communications networks that tied the Twin Cities to its hinterland and later to the world; close links between the University of Minnesota and the region's top business leaders, thanks mainly to their unusual proximity to one another.
"Most of these factors are not unique or even unusual, but the combination of them in one region in one time has been unique," Borchert says.
"The metropolitan area used to be the center of an empire in a world that was much less accessible and more segmented. Now it is more like the center of a neighborhood, part of a world that is much more interactive and seemingly even more uncertain."
Joseph Schumpeter saw capitalism eventually evolving into socialism, something that isn't happening. But the creative destruction that he envisioned seems alive and well in the Minneapolis-St. Paul area, where Schumpeter might have felt right at home.
The region used to envy the Twin Citiesno more
Less than a century ago, the prosperity of the Twin Cities stirred strong populist emotions in the cities' hinterland. Today the populist strains have faded.
The bankers, grain merchants, wholesalers, railroad barons and others who built companies in Minneapolis and St. Paul once were viewed in much of the vast region beyond as colonial powers who vacuumed up profits and hauled them back to the Twin Cities.
Al Olson, former governor of North Dakota and now head of the Twin Cities-based Independent Bankers Association of Minnesota, remembers that kind of talk persisting into the 1950s. "Whenever things got tough, from the time I was old enough to think about the world and the development of the Great Plains, people would blame the money and grain interests of the Twin Cities,'' Olson says.
But Olson says times have changed.
Patrick Coleman, a librarian for the Minnesota Historical Society, attributes the decline of populism in the region to the falling farm population, the emergence of agricultural co-operatives and more political conservatism on the part of many of the farmers who have remained.
The wealth and population of the vast northern interior that stretches from Michigan's Upper Peninsula to the Rocky Mountains in Montana long has been unusually concentrated in the Twin Cities area. Once-booming mining districts have worked through an agonizing diversification process that has taken decades. New equipment and modern techniques have led to a steady exodus of people from the farms.
The region's population is unusually clustered into a 35-county core based in the Twin Cities. Geographer John Borchert notes that these counties now account for about three-eights of the entire population of the region he studied for his recent book"America's Northern Heartland." Borchert says this regionMontana, the Dakotas, Minnesota, Iowa's northern tier, northern Wisconsin and Michigan's Upper Peninsula"ranks with parts of Australia and western Siberia as one of the most sparsely populated areas of the developed world." The core's population as a share of the region's dropped slightly during the 1970s, reversing a long-term trend, but edged up again in the 1980s.
For the most part, the region defined by Borchert covers the district assigned to the Federal Reserve Bank of Minneapolis, which has a district with a difference. The Minneapolis Fed territory's population density of just 18.5 people per square mile is easily the lowest for any of the Fed's 12 districts; the Kansas City district, at 27.3, is the only one that comes even close. Another characteristic that sets the Minneapolis district apart: The Twin Cities metro area's population is roughly 20 times that of the district's next largest metro area; runnerup metro areas in each of the other 11 districts have far larger populations.
Decades ago, this concentration of population, along with its wealth, made business interests there an easy target for populists. James J. Hill, whose Great Northern Railroad had pushed across the northern plains and mountains from St. Paul to Seattle by 1893, was a particular target.
Wheat farmers in North Dakota, often squeezed by cyclical economic conditions, charged that the railroads, grain millers and bankers in the Twin Cities exploited them. The farmers' complaints led to the birth of North Dakota's Nonpartisan League, which laid the historical roots for today's Democratic Farmer Labor Party in Minnesota. In 1919, the North Dakota Legislature authorized the state to go directly into a variety of businesses through the Bank of North Dakota. To this day, that institution remains the only state-owned bank in the country.
In Montana, Anaconda Copper and Montana Power were seen as having too much influence in political and economic affairs.
Plenty of disparities remain between the Twin Cities area and its vast hinterland. Average poverty levels are higher beyond the Minneapolis-St. Paul area, most notably on Indian reservations where unemployment rates can range up to 50 percent and beyond. In airline travel, it costs nearly half as much to fly from Billings to Minneapolis-St. Paul as from the Twin Cities to London. Yet the domestic trip takes only about a seventh as long as the Twin Cities-London journey. Most experts believe the exodus from the farms of the northern prairie has a good way to go yet; If so, countless small towns throughout the region will continue to lose people and wealth.
Still, the trade centers that dot the region have developed strong economies, dimming the anti-Twin Cities feeling once more prevalent in those areas. Such communities have generated a solid population growth rate that has been comparable, collectively, to that of the Twin Cities core counties in recent decades. Among them: Eau Claire and La Crosse in Wisconsin; Fargo, Grand Forks and Bismarck in North Dakota; Sioux Falls and Rapid City in South Dakota; Billings in Montana; and a number of Minnesota urban areas.
The river town of Winona has renewed itself partly on the strength of its composites industry. That sector has given Winona a microcosm of the spinoff activity that the large computer companies once generated for the Twin Cities area.
Modern communications technologies, lower labor costs and good workers have made it practical for companies to establish large processing centers far from their headquarters. One of the first was Citicorp's credit card center, opened in 1980 in Sioux Falls. In 1988, the Philadelphia-based Rosenbluth Travel Agency, one of the nation's largest, established a data- entry center at tiny Linton, N.D., near the North Dakota-South Dakota state line. Today, the company employs 105 workers there and at a conference center nearby.
Olson believes many people in North Dakota have come to see the Twin Cities area more as a place to use than to vent anger at. Growing amenitiesprofessional sports teams, cultural attractions, shopping and entertainmenthave helped.
He adds that greatly increased international ties, notably in the Red River Valley, have led more companies in and near the trade centers to develop international business. Often, these companies build their links to overseas companies through lawyers, accountants, consultants or other specialists based in the Twin Cities.
International events unite the outlying areas more with the Twin Cities and the world beyond. When the anchors on the nightly network newscasts report that the demise of the Iron Curtain may mean military spending cuts, workers dependent on North Dakota's Strategic Air Command bases worry right along with defense workers in the Twin Cities. Montana farmers ship their cattle to Japan. Consumer electronics products from Japan line the shelves of stores throughout the region.
Borchert's research suggests that the Twin Cities area is far less dependent on its hinterland for business ties than it once was. He estimates that about 35 percent of the Twin Cities area's business came from the rest of the region in 1975, down from 55 percent a half-century earlier.
In 1986, two large Minnesota foundations built from Twin Cities corporate wealth, McKnight and Northwest Area, launched five-year programs that have transformed them into important forces in rural economic development. McKnight has set up six decentralized funds in non-metro Minnesota and given them $57 million to support a wide variety of initiatives. Northwest Area has granted or committed $23 million in an eight-state region that runs from Minnesota to the Pacific Northwest. This year, both foundations decided to extend these programs on a comparable scale for another five years. The Northwest Area shift is not without ironyits money comes from the wealth created by James J. Hill's railroad empire.
Officers at the Northwest Area Foundation say many people in the outlying parts of the region have become more sophisticated than Twin Citians in understanding the international economy and the need to diversify their local economies. Terry Saario, president of the foundation, attributes that change to a "new mind-set" that has led many in the trade centers and rural areas to cast aside the boom-bust mentality that framed their outlook for decades. No longer do they simply assume that life will go on as it did in the past, when their fortunes invariably fluctuated with prices for the commodities produced by the farms, mines and timber mills.
"They're beginning to say that the only people who are going to save our economies are ourselves," she says.
Small town proves diverse when it comes to job replacement
Large company shutdowns don't always hit workers in outlying areas harder than their counterparts in the Twin Cities area. Consider the rocky aftermath of computer industry closings at Unisys in rural Jackson, Minn., and at supercomputer maker ETA in St. Paul.
The ETA workers would seem to have a better chance of landing new jobs without relocating, since they live in a far larger job market. For many of them, however, that has not proven to be the case.
In 1989, the ETA closing threw 800 workers, many of them highly paid and well educated, out of jobs. Today, estimates are that about a tenth of the 800 former workers remain unemployed and another 25 percent are underemployed. For the Twin Cities, the ETA shutdown led to a brain drain. Carl Ledbetter, one-time CEO at ETA, has estimated that more than 80 percent of the 150 most talented technicians who worked for the company have left the state. They couldn't find comparable jobs in Minnesota.
In Jackson, a county-seat town in southern Minnesota with about 3,500 residents, the shutdown led to sorely needed diversification. At its peak, Unisys' printed circuit board factory there employed 900 workers. Late in 1986, when the plant still had 280 employees, the company announced it would have to close the place. Community leaders launched an intense, persistent drive to broaden their job base.
They persuaded companies to expand or start new operations in Jackson by stitching together financing from banks, government agencies and the McKnight Foundation's Southwest Initiative Fund. Motivated by a crisis atmosphere, they talked up their location close to Interstate 90 and their pool of skilled, available workers.