About Thomas A. Vanderslice
In 1980, Dr. Thomas A. Vanderslice was President and Chief Operating Officer at GTE.
The interview covers Dr. Vanderslice’s opinions about equipment depreciation rates and capital reinvestment in American industry, particularly in telephone operating companies. Vanderslice contrasts depreciation in the communications and computer industries, and hopes that deregulation will encourage productivity, competition, and an expanded job market. Vanderslice predicts higher telephone rates for residential customers and argues this is necessary in order to provide newer equipment and more efficient customer service. The interview concludes with Vanderslice’s call for greater capital investment in U.S. industry.
About the Interview
THOMAS A. VANDERSLICE: An Interview Conducted by Carol Lof, Center for the History of Electrical Engineering, 1980
Interview # 038 for the IEEE History Center, The Institute of Electrical and Electronics Engineers, Inc.
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Thomas Vanderslice, an oral history conducted in 1980 by Carol Lof, IEEE History Center, Hoboken, NJ, USA.
Interview: Thomas Vanderslice, former President and Chief Operating Officer at GTE
Interviewer: Carol Lof
How do you feel about the recent FCC rulings in favor of more rapid capital recovery?
I think it's great. That's hopefully the beginning of a new look.
Do these rulings fulfill your objectives? Or, what remains to be done?
I'm not quite sure yet. We've been pushing heavily for faster depreciation for American industry in general because our plant is getting more and more obsolete. Not just telephone plants but American industry. The result of not having capital to reinvest in equipment is to make our factories less productive. We're getting further and further behind across the total U.S. industry. Of course, the depreciation schedules for the telephone operating companies are worst of all. We keep equipment around for an average of sixteen years—except for office switching, which is kept for a twelve-year minimum. Really, the phone system is a glorified computer system, and nobody keeps a computer system for sixteen years. So we need the same kind of depreciation scales as IBM.
How do your depreciation rates compare to those of IBM?
Oh, they are woefully inadequate. In fact, the utility industry as a whole has roughly half the depreciation reserves that a normal industrial firm would have. The rate commissions in the past have taken the position that if you depreciate slowly over, say, forty years, you'll have less charge to operations and the rates will be kept down. That may have been true fifty years ago, but with the cost of capital and with accelerating technology, what is needed is to put in the best technology as quickly as you can. This lowers maintenance costs and increases reliability. If you don't do that, you're going to wind up with older and older equipment which is progressively harder to maintain. Actually, the one who is paying the price is the consumer because the cost of operations stays up and is passed along. We have a chart showing the exact relationship, communications versus computer industry, in terms of depreciation time. Right now, if you take an old central office, which most of us are trying to replace, it's big because it's mechanical. It requires a great deal of cleaning and maintenance. However, if you go into a computer store program controller operation, it's quiet and the maintenance is done off line. It's worlds apart. So, fundamentally, it costs less to run a modern operation. But, you have to get the capital to buy it.
How do the views of GTE agree or disagree with those of AT&T regarding capital recovery?
GTE has taken the lead in pushing for this, but AT&T endorses our position. But this is just the beginning. Don't forget that the local commissions need to realize that by holding rates down, they are really impacting on the customers. They must allow the depreciation. We can write all our equipment off in one day if we want, but we have to get rate commissions to agree that we can do it. Also, they must give us the rates to go with it.
Deregulation and Competition
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Play (038 - vanderslice - clip 1.mp3)
How do you think the new conservative mood in Washington is going to impact? Vanderslice: I have to believe that the thrust toward productivity and tax reform will be designed to the supply end, like in job formation. I think it's ridiculous to keep carving up the same sized pie, and this is what's been going on. We've got to get Americans more competitive, more productive, more progressive, and more aggressive in more markets. That includes utilities. It includes American industry in total. I believe that Reagan and the new Senate, in particular, generally recognize that we can't continue to let American industry get less and less productive, with less and less job formations, and then correct the problem by transfer tax. Our standard of living is not the highest in the world now. I think there has been a general recognition, even by some of the major union leaders, that unless you build factories and create jobs, and compete at home and in the world environment, there will be fewer jobs available and a lower standard of living. I always tell these nongrowth advocates that if you are black and on 125th Street in New York, you are interested in a job. You want the economy to grow so that you can get a chance to get out of that environment. It's our white liberals in the suburbs who lead the charge for nongrowth. It's ridiculous. Lof: There was recently a ruling that GTE does not have to create a separate subsidiary. How does this affect you? Vanderslice: Well, I think it's a fair ruling. It would have been a very big handicap had we been required to break up into a bunch of embryo businesses. It would have meant going to money markets to raise money. Bell, who was ruled the dominant carrier, breaks into a ten billion dollar subsidiary. We would have had to break into a couple of fifty million dollar operations. It's very hard to go to the money markets with an operation like that. Most small companies do it through stock growth. It's a very complex subject, but it would have been a very big handicap. We would have been singled out as the only independent with the problem. I think Bell and the other independents saw that we were getting the short end of the stick. Lof: When you accelerate the depreciation of your equipment, won't that be inflationary? Vanderslice: It would be if you don't put in more productive equipment. I believe that, other than the horrendous spending in the federal government, our lack of productivity causes inflation. So to me, to replace an old piece of equipment with a new piece not only creates jobs when buying equipment, but the increased productivity should also help reduce inflation. Lof: Charles Brown of AT&T said that almost everyone agrees that real competition is going to cause increases in rates. Do you agree, and, if you do, how much do you think it's going to affect them? Vanderslice: What he's probably referring to is that, due to the nature of the rate setting process, the local little rate commission tries to keep the homeowner rates down. They do that by insisting it gets priced under cost. I know of one company that loses five dollars per phone in each house. It's subsidized, if you like, by the business phone and the long distance toll rates. Toll rates are high. What Brown is saying is that if you get competition in toll, those rates are going to come down. The local homeowner is going to look at some increased rates. Competition is going to force a more cost-justified pricing. Lof: How will the local homeowner feel about that? Vanderslice: I think that if you look at the cost of a phone against the consumer price index, the phone is flat. On the other hand, electricity is going up exponentially. There's no short term solution to that. Phone service is priced so low now that I don't think there will be that much of a problem. Today, installation is not paid by the individual. It's paid by all the other consumers who have lived in their house for X period of time. In the future, the individual will pay. So, if for instance, you are a frequent mover, you will bear the full installation at each new location. Lof: You said, in a speech, that rates have been kept low by technological advances. Since you are doing such a good job of keeping rates down without capital recovery, how are you going to convince people you really need it? Vanderslice: Because it's all changing now. What's changed in the last five years, maybe the last ten years, is the inflation rate. You have to carry that equipment. You have to have a big building, you have to have more employees. The cost tradeoff is in favor of new equipment which takes less room, needs less personnel, and less maintenance. Also, newer equipment allows more services—call forwarding and the like. Lof: When you have accelerated depreciation you will have to borrow less from the banks. Do you see this favorably improving your Wall Street viability? Vanderslice: Sure. The bankers may not like this, but the shareholders should. And the customer will. Lof: You have a program to make your managers more aware of the capital recovery program. Would you like to describe it?
We have a series of training classes. Already, 6000 people have attended. We've prepared a book. It's a dull subject in many ways, but it's extremely important. I think engineers always push to have the latest technology used, but don't understand the financial implications. You have to have capital to work with. The percent of disposable income saved by Americans and the percentage of plant and equipment that we reinvest every year, when compared to Germany and Japan, are different by factors of two and three. As a percent of the gross national product, we spend less than any other major industrial nation on plant modernization. That's appalling. The reasons for that are very much tied to capital recovery. Look at what General Motors has done. I think they have done a major job restructuring an entire company.
But, they had to be flat on their backs before they took any corrective measures. Do you think we're really frightened enough to take the bitter medicine needed to swing the economy around?
We're frightened enough because we think that without adequate capital, a capital intensive business like ours is heading for serious problems. The number one handicap to implementing technology is the lack of capital. Really, all the developing process, from basic research and development through engineering, is ten percent of the total. Ninety percent of the entire investment is when you start to build a plant and get ready to ship a product.
Thank you, Dr. Vanderslice.