Sun. Nov. 16, 2003. | Updated at 08:32 AM
Nov. 15, 2003. 01:00 AM
Rochester is a rare mid-sized city that boasts five Fortune 1,000 companies but the economy has suffered due to problems at Kodak, Xerox and Bausch & Lomb.
Rochester: Smug no more
Marquee firms pay high price
for complacency


"I want to make Rochester the best city in which to live and work."

—George Eastman (1854-1932), founder, Eastman Kodak Co.


ROCHESTER, N.Y.— "It's been a busy year," says Carol Silver Elliott, CEO of Career Development Services, a job placement centre located a few doors from George Eastman House, the world-renowned film and photography museum.

And it's going to get busier, with Eastman Kodak Co.'s recent announcement of plans to cut its local workforce by as many as 3,000 jobs.

Last summer, Kodak said it would close a Rochester plant that churns out its trademark yellow film boxes, shifting 900 jobs outside the United States to save on labour costs.

In the past two decades, Kodak has already cut its Rochester workforce by two-thirds, shedding almost 40,000 jobs in the city of its birth.

Xerox Corp. and Bausch & Lomb Inc., the other members of this upstate New York city's so-called "Big Three" manufacturing employers, have also made deep cuts in their local workforces.

All three giant firms, victims of complacency arising from the near monopolies they enjoyed at the zenith of their fortunes, have been struggling for several years to beat back low-cost foreign competitors, and more recently some technological threats to their flagship products.

Kodak's lucrative film business is fast fading with the increased popularity of digital cameras, which outsold film cameras in the United States for the first time last year. Kodak acknowledges that its U.S. film sales will drop 10 per cent to 12 per cent in each of the next three years, and will fall almost twice that much in Japan, a key export market.

Rochester-born Xerox, which is emerging from recent accounting scandals and a brush with bankruptcy, has cut 22,000 jobs worldwide in the past two years.

Anne Mulcahy, the firm's turnaround CEO, has sold or closed manufacturing operations, outsourcing much of the work once done in suburban Webster, a sprawling industrial park that rivals cross-town Kodak Park in size.

Thomas Mooney, CEO of the Rochester Business Alliance (RBA), is stoic about the changes.

"The patriotic thing, keeping jobs in the U.S., is overcome by thoughts of survival among these companies," he says. "They haven't been able to raise prices. So they have to cut costs. They simply have to become more efficient."

But Elliott, the outplacement expert, is less sanguine.

"We've had some growth in small business, but no huge manufacturing companies have come in here to pick up the slack in high-skilled jobs," she notes.

Many of Elliott's clients are engineers and scientists. "They have very specific skill sets," she says. "They're not suited to, for instance, the boom in health-care jobs." These clients "often have to set their idea of a dream job aside, or relocate from Rochester."

In the past, Elliott was able to place 90 per cent of her clients in new jobs locally. Now that's down to 75 per cent. "It bothers me to see jobs going offshore," she says. "Who's going to buy? What happens to local consumers?"

In his 1957 book Smugtown USA, local author Curt Gerling wrote that life in Rochester was as "unburdensome as getting a job at Kodak and learning to pat the proper posteriors."

In the corridors of the Kodak Tower, the Art Deco landmark built by Eastman not long before his death, an arrogant complacency has ruled for years.

"I can remember meetings where we'd talk about how to achieve our numbers," says Larry Matteson, a Kodak executive for 26 years and now a business professor at the University of Rochester. "We essentially controlled the market, so the decision was that we'd just raise our price. That was our marketing strategy."

Rochester is a rare mid-sized city (regional population 1.1. million) to boast five Fortune 1,000 companies. Besides the Big Three, there's rapidly growing Paychex Inc., whose founder, Tom Golisano, recently bailed out the nearby Buffalo Sabres.

And Constellation Brands Inc. is a $3 billion (U.S.) leader in beer, wine and liquor distribution, with brands like Black Velvet and Corona.

Rochester has also benefited from the model of enlightened capitalism set by Eastman, who said, "We are running a very complicated and difficult business. I know of none more dependent on the good feeling and faithfulness of its employees."

Besides profit-sharing, free medical care and other pioneering benefits for his employees, Eastman's $100 million in personal donations to the University of Rochester, the Rochester Institute of Technology, and toward the creation of one of the United States' top music schools, among other benefactions, laid the foundation for the city's reputation for outsized academic prowess.

At the mid-century, Xerox founder Joseph Wilson, a University of Rochester graduate, set his own company on the same course of progressive enterprise, and donated more than $20 million to local non-profits.

"Those in the inner city have derived little benefit from technology and no profit from it," said Wilson, who died in 1971. "Technological companies are at the centre of social change and therefore have a responsibility."

Billionaire Golisano has upheld the tycoon-philanthropist tradition, donating more than $38 million (U.S.) to local colleges and hospitals in recent years.

But if it was a hotbed of innovation in the first half of the 20th century, inventing amateur photography, contact lenses and revolutionary office equipment, Rochester by the 1980s had become a case study in missed opportunities.

It was Kodak that invented the critical piece of the digital camera, the high-resolution sensor, back in 1986. But its sclerotic management let such innovations languish, choosing to seek growth instead with dubious forays into copiers, lithium batteries, drugs and Lysol distribution.

Competitor Fuji Film beat a sleepy Kodak to the disposable camera market, and well into the 1990s was catching Rochester off-guard with price wars.

Bill Gates learned first-hand about the lack of urgency in the Kodak Tower during a meeting to discuss a Photo CD project, when Kay Whitmore, then chief executive of Kodak, indulged his habit of nodding off during presentations.

Rochester still sees itself as an `industrial intellectual town' unlike Buffalo

Xerox similarly ignored the breakthroughs at its own Palo Alto Research Center, letting others reap the gains of its invention of the fax machine (exploited by Ricoh), the laser printer (Hewlett-Packard), and the computer mouse and graphical user interface (Apple Computer Inc. and Microsoft Corp.). Xerox also diversified, quite unhappily, with insurer Crum & Forster, long since sold which is now a headache for Toronto-based Fairfax Financial Holdings Ltd.

Now that Kodak and Xerox are fighting for their survival, "We have to take responsibility for the success of our economy," says Thomas Richards, chairman of Greater Rochester Enterprise (GRE), a private-sector economic development group.

"It used to be that the economy was assigned to Kodak," he says.

Rochester is the last of the string of once-thriving cities along the Erie Canal to succumb to the Rust Belt era, after more than a century and a half of prosperity dating from the construction of that gateway to the Midwest.

The chain of upstate New York communities from Schenectady to Buffalo began to suffer heavy losses of manufacturing jobs in the 1970s.

Rochester's prodigious industrial ingenuity and the benevolence of its major employers left it ill-prepared for upheaval.

"Ours was a steady, slow decline," says Richards, "because of the benign nature of the layoffs. Kodak and Xerox offered such generous layoff packages that in the first rounds of job cuts, the high-skilled employees they cut were often able to launch their own businesses.

"It wasn't like the devastation for steelworkers in a place like Bethlehem, Pa., where 6,000 people would suddenly lose their jobs with two weeks' pay. The absence of those kinds of shocks lulled us, and allowed us to ignore the problem for a long time."

Only in recent years has Rochester begun to make a concerted effort to attract new businesses, focusing on its strengths in optics, photonics, digital imaging, biotech and fuel cells.

Virginia Cronyn, community relations officer at Xerox in Webster, says the repeated, severe rounds of layoffs in the area, while painful, have helped diversify the economy.

Like Kodak, Xerox has cut its local philanthropy as judiciously as possible — "it's only the fair thing to do when you're taking jobs out of the community," Cronyn says. And Xerox executives still serve on the boards of local non-profit groups. "But we've told people they can't expect as much help from us," Cronyn says.

"And that's healthy, that you don't have a situation where Kodak or Xerox sneeze and the city gets pneumonia. The non-profit groups have learned to broaden their base of support, to prove themselves to a wider community of donors."

That may be true, but many of the non-profits would rather have been spared the adjustment.

"The Big Three support to non-profits is nothing like their extreme generosity of the past," says a local businesswoman. "The pain is deep and widespread."

Matteson at University of Rochester says the city is finally emerging from denial, "from waiting for Kodak to make everything the way it was."

The first major Rochester layoffs at Kodak and Xerox were in the 1980s. But "as recently as five years ago, you didn't talk about the facts, you didn't read about it in the paper," says Matteson.

"Now we're facing up to the decay in manufacturing. We had to go through this stage of mourning. You don't make progress till you get past that."

Rochester has been slow to adjust to new circumstances. The GRE is only a year old. And only in the past year did the city's two leading business groups unite under the banner of the business alliance, after some 90 years of frequently being at loggerheads.

The alliance's Mooney says author Curt Gerling would not recognize today's Rochester as Smugtown. "It isn't insular or complacent," he says.

But in the next breath, Mooney draws a distinction between Rochester — "an industrial intellectual town" — and Buffalo or Syracuse, the latter having just suffered the blow of learning its mainstay Carrier air-conditioning company is pulling up stakes.

"We're a white-collar town, they're blue-collar towns," says Mooney, explaining his reluctance to join other upstate cities in a joint effort to promote the region to prospective new businesses.

"We don't have their huge pockets of poverty. Buffalo and Syracuse are in a more desperate mode."

Talk of joining forces with Buffalo or Syracuse on a big regional airport, or a combined symphony, or a new performing arts centre to compete with Toronto, is often undermined by local civic pride.

A proposed fast ferry from suburban Rochester to Toronto scheduled to begin service next spring was cause for lengthy debate between city and county officials. And skeptics like Matteson still dismiss the ferry venture as "the wrong kind of political economic stimulation."

The fact Toronto appears to have made scant preparation for the ferry service has resulted, the RBA's Mooney says, from "our folks not doing as good a job as they should have in getting all the elements in place in Canada."

In its candid strategic plan, the GRE concedes that "the region is quickly falling behind the nation's top 75 metropolitan areas in economic standing. ... This stagnation marks the continuation of a 30-year decline in relative economic performance and outlook."

The GRE development group is convinced that other cities "with lesser assets are realizing better performance" than Rochester. So it's aggressively promoting Rochester's above-average number of scientists and engineers, and its abundance of first-class colleges and hospitals, cultural and sports amenities, and house prices that average $92,000. In the upscale suburb of Pittsford, mansions can be had for $500,000 or so.

It's a perverse fact of life, complains Richards of the GRE, that while Buffalo has a national reputation for being snow-bound much of the year, "We have no reputation. We have to get our message out, about our high quality of life in a city that has a small-town feel."

Like many people in town, Richards doesn't blame the Big Three for Rochester's predicament.

"There's not a city that wouldn't kill for 20,000 Kodak and 8,000 Xerox jobs," he says. "Look at what those companies did for their community at the height of their success."

And are still doing. In the past two decades of their decline, the Big Three still managed to generate a combined total of $665 billion in revenues.

"But, you know, China is now more important to Kodak than Rochester," says Richards. "We have to be careful not to lament that. Success for us will now occur in an entirely different world.

"So let's be proud of the heritage, but get moving. Nostalgia is not a good policy."



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