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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 the historical circumstances and things get a bit murkier. In today's video, we discuss how Westinghouse Electric lost its way. This video is brought to you by the Asianometry Patreon. 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. It's truly revolutionary device. 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 nor 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 and 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 overleveraged 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. After George's departure, the bankers, led by chairman Guy Tripp, took over. They cleaned up Westinghouse's finances and capital structure and remade its management styles to be more like rival General Electric. The company also benefited 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 Zorkin. Sorkin 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 caused 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. The company hit an air pocket in the 1930s due to the Great Depression. Thus in 1935 they consolidated their existing R and D efforts into a central industrial lab. Kind of like Bell Labs. They sought to do groundbreaking 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 and the fight against communism. CEO Gwilym price oriented Westinghouse deeper into defense and as a result, revenue 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 U.S. 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 RD can eventually lead to profitable commercial products. More benign circle stuff. 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 executions 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 the 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. 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 the 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 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. 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 and so that we can 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 in April 1956. After the strike, Westinghouse understandably decides to concentrate on expanding production capacity at the cost of doing less R and D. Annual R and D spend declines in the six years after 1957, leaving them unprepared for the major technological changes to come in their industry. As this was happening, a major scandal racks 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 oversupply 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 no. 3 Alice 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 C.A. parsons. But the foreigners quoted prices 30 to 40% cheaper than what the Americans did then. In early 1961, the US government caught GE, Westinghouse and others over their unfair competitive prices. 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 of 1961 smashed prices allowed in foreign competition and forced out the no. 3American turbine maker Alice Chalmers. GE and Westinghouse had to find a different way forward. In 1963, Donald Burnham succeeded Mark Kressep 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. So 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. OK, 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? 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 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. And 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 slogans. 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 electrically for the city. They went into ocean engineering in partnership with the famed explorer Jacques Cousteau because Burnham felt it could 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 like a stretch at best and cope at worst, a top executive at the time recalled. We had this conviction that we could manage anything. 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 and D so that they can work through the big backlog? That insufficient R and 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 to 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 on. 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 late 1960s 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 and they knew catching up would be a mighty task, they were fishing for a new hit. 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 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 Wittenauer. 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 Wittenhauer's books and records mail order business for for their growing broadcasting segment. 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 French 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 reminisced in 1976. We learn to our horror that these companies had gone totally hog wild in committing the corporation to various substantial projects that were costly to complete. They later stabilized that business and sold it to the Finnish company Cohn, which renamed it to Kohn Westinghouse. This all took a great deal of time from the executives, as well as an emergency $500 million credit line over the next 10 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 begin their path to financial crisis. But I get ahead of myself. Interestingly enough, one of the acquisitions that did do well was the 7Up soda bottler buy, generating substantial cash for them. Tactical win strategic loss. Because what does selling soda have anything to do with nuclear reactors? Burnham retired for good in 1975, forced out, essentially, and was succeeded by Robert Kirby. Kirby attempted to pivot back to Westinghouse's core turbine, electrical equipment and nuclear reactor businesses. But back to the basics. So they say. But those basics 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 and D that I mentioned earlier. It's 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, and 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, and 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 being 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. So 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 them to lose only about a billion dollars. Ha. Only a billion. 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 electronic 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 McClister 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 Credits 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 single handedly 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 Powell ran the division like it was their own fiefdom. And they looked like geniuses. 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, in effect, made worse by the fallout of the first Gulf War. Suddenly, Westinghouse Credit found itself in big trouble. Incoming chairman Paul Leggo came from the industry side and knew nothing about Credit's operations. Credit themselves had no idea what they were doing. Powell 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 the advice of his 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, Westinghouse 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 rec 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, and they eventually chose Michael H. Jordan. 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 about $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 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 thermoking, and some industrial defense contracting stuff. Jordan and first announced that the conglomerate would split into a Westinghouse Electric with the other stuff 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 thermoking 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 and as CBS Corporation. 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 today? I covered in another video, but 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. And that's where we end. Alright, that's it for tonight. Thanks for watching. Subscribe to the channel, sign up for the Patreon and I'll see you guys next time.