Corporate risks + rewards of breakthrough R&D

Corning’s Biggest Bet Yet? Diesel-Filter Technologies
By SARA SILVER, March 7, 2008; Page B1, Wall Street Journal

Corning, which went public in 1945 and has a market capitalization of about $36 billion, has survived — and often thrived — in recent decades by following a playbook that Wall Street and corporate America deems outmoded. While companies like Xerox Corp. scaled back long-term research, Corning stuck with the old formula, preferring to develop novel technologies than buy them from start-ups.

An investment 25 years ago has turned Corning into the world’s largest maker of liquid-crystal-display glass used in flat-panel TVs and computers. But another wager, which made it the biggest producer of optical fiber during the 1990s, almost sank the company when the tech boom turned into a bust.

Corning Inc. has survived for 157 years by betting big on new technologies, from ruby-colored railroad signals to fiber-optic cable to flat-panel TVs. And now the glass and ceramics manufacturer is making its biggest research bet ever.

Under pressure to find its next hit, the company has spent half a billion dollars — its biggest wager yet — that tougher regulations in the U.S., Europe and Japan will boost demand for its emissions filters for diesel cars and trucks.

“This is the biggest cash hole we’ve ever been in,” says Corning President Peter Volanakis.

In Erwin, a few miles from the company’s headquarters in Corning, the glassmaker is spending $300 million to expand its research labs. There, some 1,700 scientists work on hundreds of speculative projects, from next-generation lasers to optical sensors that could speed the discovery of drugs.

Corning’s roots go back to 1851, when Amory Houghton, a 38-year-old merchant, bought a stake in a small glass company, Cate & Phillips. For most of Corning’s history, a Houghton was either chairman or chief executive. Even today, Corning, population 12,000, is very much a company town. The original Houghton family mansion, still used for company meetings, overlooks the quaint downtown, which is punctuated by a white tower from one of Corning’s original glass factories. Most senior managers have spent their entire careers at Corning.

“Culturally, they’re not afraid to invest and lose money for many years,” says UBS analyst Nikos Theodosopoulos. “That style is not American any more.”

Corning also goes against the grain in manufacturing. While it has joined the pack in moving most of its production overseas, it eschews outsourcing and continues to own and operate the 50 factories that churn out thousands of its different products.

Corning argues that retaining control of research and manufacturing is both a competitive advantage and a form of risk management. Its strategy is to keep an array of products in the pipeline and, once a market develops, to build factories to quickly produce in volumes that keep rivals from gaining traction.

But because Corning often depends heavily on a single product line for most of its profit — 92% of last year’s $2.2 billion profit came from its flat-panel-display business — it is vulnerable to downturns. Even small movements in consumer demand for or pricing of its LCD-based products can cause gyrations in its stock price. During the dot-com meltdown when the market for fiber-optic cable crashed, Corning was brought to the brink of bankruptcy and by 2003 was forced to lay off half of its workers. Today it has 25,000 employees.

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