Back in 1987 the rock band Bon Jovi was top of the pops and the world's third-largest firm by value was Tokyo Electric Power Co. (TEPCO), a utility in Japan few outside that country had heard of. Today Bon Jovi is still churning out No. 1 albums but TEPCO's value has fallen by 90 percent as it teeters on bankruptcy. It is now known around the world for the disaster at its nuclear power plant at Fukushima.
Like pop charts and Olympic medal rankings, corporate league lists are both silly and compelling. They reflect the ups and downs of firms, which investors amplify by buying or dumping their shares with less fealty than a teenage music fan. But they also are a crude test of economic virility.
In 2009, the message was that American capitalism had lost its way. Only three of the world's 10 most-valuable listed firms were from America: Exxon Mobil, Wal-Mart and Microsoft. It was the country's weakest showing since Japan's bubble in the late 1980s. A new species of big beast had reared its head: vast state-controlled oligopolies from emerging markets.
PetroChina (an energy firm), China Mobile (telecoms), and ICBC and CCB (two Chinese banks) were all in the top 10 that year. Brazil had a star in the form of Petrobras, an energy company. The year before, Gazprom, a Kremlin-run racket masquerading as a corporation, had graced the list. Suddenly it seemed as if the best way to create a giant firm was not to innovate or win customers but to adorn a government bureaucracy with some of the trappings of a private firm, such as a stock market listing, and sit back while investors lapped it up.
Today the picture is once again transformed. Nine of the world's 10 most-valuable firms are American. America's share of the top 50 also is rising. Why? A perky stock market is partly responsible. The euro crisis has killed off any hope that more firms from the eurozone might scale the rankings: the currency block has just four firms in the top 50.
U.S. firms are resilient as they renew
Two deeper factors also are at play, though. First, America's mix of resilience and renewal. Three of its nine biggest firms have their roots in a 16-year period in the late 19th century — Exxon, General Electric and Johnson & Johnson. Their durability reflects their powerful corporate cultures. But the country still does creative destruction, too. IBM and Intel have slid down the rankings to be replaced by Apple and Google. Chevron, an energy firm, has gone from a laggard to a worldbeater. Success has been anything but parochial: Six of the nine biggest firms sell more abroad than at home.
Second, the old rule that buying shares in state firms is investment suicide has reasserted itself. The world's 10 biggest state firms in 2009 have lost $2.2 trillion of value, or 60 percent, from their peaks. Investors now award most state firms stingier valuations than their private peers. Gazprom is worth three times its profits, vs. Exxon's multiple of 11. And although emerging economies have slowed, nimble private firms are doing fine. In 2007 investors gorged on shares in PetroChina when it listed in Shanghai, briefly making it the only firm ever to be worth over $1 trillion. Now China's hottest corporate property is Alibaba, a private Internet firm plotting a huge flotation.
Government firms are unloved again. That is how it should be. The shortcomings of cozy state capitalism never went away. PetroChina's ex-boss is under investigation, probably for graft. Gazprom wastes $40 billion a year through corruption and inefficiency, according to the Peterson Institute. In China the conflict between investors and officials is stark, with the big banks riddled with bad debts thanks to a government-sponsored lending boom. Minority investors in Brazil protest that Petrobras is building unprofitable oil refineries and favoring local suppliers, at politicians' behest.
These vast organizations are not going away; most still make huge profits. But governments must recognize that the slump in their valuations is a sign they are allocating capital badly. That is in no one's interest. Petrobras has made a baby step by allowing outside shareholders to appoint a director, while China sometimes mutters about modest reforms of its industrial fiefs. But the hybrid model of a firm beholden to both investors and politicians is as full of contradictions as Karl Marx said capitalism was. Privatization is the best way to resolve these tensions.
Businesspeople, at least, can now be a little less dazzled by state firms. To outlast the average pop star's career, companies need a culture of innovation, financial discipline and, increasingly, global reach. These are things only a few managers are able to deliver — and which no government can.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.
