UTX and Carrier in the Context of Isolationism and International Trade
United Technologies Corp should consider the increasingly isolationist tendencies in the current US political climate that are leading to increasing pressure for American jobs to be reshored/repatriated from Asia and Mexico to the US, as illustrated by the Carrier Trump Mexico controversy in 2016.
United Technologies Corp should consider the increasingly isolationist tendencies in the current US political climate that are leading to increasing pressure for American jobs to be reshored/repatriated from Asia and Mexico to the US, as illustrated by the Carrier Trump Mexico controversy in 2016.
Before we examine UTX specifically, let’s dive a bit into the context of the US manufacturing landscape and the wider trend toward globalization and free trade. In the early 2000’s, American firms moved a significant number of manufacturing jobs to China and other lower production cost southeast Asian nations. This geographic change made sense primarily because of lower wages in these less developed countries, making the extra transit costs and longer transit waiting times worth it. As a consequence, the number of US manufacturing jobs fell dramatically in the early 2000’s and bottomed out in the midst of the financial crisis (see footnote source for chart).[1] US manufacturing jobs have increased a bit since 2009[2], but much of that change could likely be attributed to a bit of economic recovery from an overcorrection of jobs during the depths of the financial crisis.
In more recent years, as labor costs in less developed countries have risen, companies have begun to reassess the cost benefit analysis of outsourcing (or outsourcing to closer countries) and have started to shift production from Asia to Mexico and then back to the US. However, this reshoring trend has accelerated due to an increasingly protectionist/isolationist political climate characterized by broad dissatisfaction of dislocated manufacturing workers across the United States and the election of President Donald Trump.
The most stark signals of today’s political realities in the US were illustrated by Donald Trump’s widely publicized rhetoric about United Technologies Corp needing to keep its Carrier plant in Indiana instead of moving it to Mexico. President Trump made several public demands that the move be stopped and even went so far as to announce that he would charge the company a 35% import tax on the goods it produced in Mexico but sold in the US.[3] In the end, with a sweetened $7mn tax incentive,[4] UTX saved some of the jobs at the Indiana Carrier plant while letting some of the people go and replacing many of them with automation.[5]
Given the political pressures and economic realities of competitive production, United Technologies Corp is working to ensure the company can provide the most value to its shareholders while remaining respectful to its other stakeholders by making smart decisions in the near term (i.e. next two years) and the medium term (3-10 years out).[6] In the near term, the company’s management is working to operate in the most efficient manner possible at its US facilities and that means introducing more factory automation. In the medium term, management is seeking reduced corporate tax rates and fewer regulations which it believes might be stifling US manufacturing growth. The company is also working to educate its workforce and potential employees with a large number of scholarships so that it can draw from a larger talent pool in the US.
On the whole, I agree with the strategic choices that UTX is making to support its business as it deals with this political uncertainties of offshoring compared with onshoring. However, given that a lot of these issues are more about optics than not (UTX has many offshore facilities but Trump only fixated on one plant), I would suggest that management work to build an improved reputation for itself by launching a big PR campaign with commercials focusing on UTX’s support of American jobs and American production. In addition, I would suggest that UTX work with the government to implement large-scale training programs that would improve the professionalism of the lower skilled workforce in the United States (note: this point harkens back to the above footnoted UTX CEO interview video in which he mentions that Mexico’s workers are more reliable with better attendance records and lower turnover despite being paid less than their US counterparts, making Mexican labor relatively more attractive).
UTX’s Carrier controversy leads me to wonder the following: How realistic are protectionist actions like on-shoring production to save jobs; will this trend continue or will it be short-lived and only be relevant during the Trump presidency? Where do we go from here?
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[1] Long, H. (2017). U.S. has lost 5 million manufacturing jobs since 2000. [online] CNNMoney. Available at: http://money.cnn.com/2016/03/29/news/economy/us-manufacturing-jobs/index.html [Accessed 15 Nov. 2017].
[2] Fred.stlouisfed.org. (2017). All Employees: Manufacturing. [online] Available at: https://fred.stlouisfed.org/series/MANEMP [Accessed 15 Nov. 2017].
[3] Washington Post. (2017). Trump promises not to lose Carrier jobs to Mexico. [online] Available at: https://www.washingtonpost.com/videopolitics/trump-promises-not-to-lose-carrier-jobs-to-mexico/2016/11/30/c449af80-b6c8-11e6-939c-91749443c5e5_video.html?utm_term=.2a6405c0febb [Accessed 15 Nov. 2017].
[4] Washington Post. (2017). Analysis | Trump said he would save jobs at Carrier. The layoffs start July 20.. [online] Available at: https://www.washingtonpost.com/news/wonk/wp/2017/05/24/here-is-the-number-of-jobs-carrier-is-moving-to-mexico-after-trump-said-hed-save-them/?utm_term=.7f3fefc869d1 [Accessed 15 Nov. 2017].
[5] YouTube. (2017). United Technologies CEO Greg Hayes: Trump’s ‘No Quid Pro Quo’ Request | Mad Money | CNBC. [online] Available at: https://www.youtube.com/watch?v=7q6v0yd9eRE [Accessed 15 Nov. 2017].
[6] YouTube. (2017). United Technologies CEO Greg Hayes: Trump’s ‘No Quid Pro Quo’ Request | Mad Money | CNBC. [online] Available at: https://www.youtube.com/watch?v=7q6v0yd9eRE [Accessed 15 Nov. 2017].
This post does a great job of highlighting the context of the protectionist movement going on today, particularly in the US. I think an important point that was touched on is the changes that have to happen within manufacturing facilities in order for companies to make themselves more competitive while defending themselves against protectionism. Specifically, the decrease in workforce, the introduction of automation, and the education of their current and future workforce. The education portion of the equation will be essential in the company’s success, as these updated facilities will function much differently than they did previously, and companies making these changes cannot afford to underinvest in education.
To the question of the sustainability of these protectionist actions, I think they are only as sustainable as the forces driving them. That is, if the only force driving them is threats from Trump, then they will be short-lived. On the other hand, if corporate tax rates are lowered and companies are properly incentivized, the protectionist movement could in fact be much more sustainable. We’ll see where the votes fall on the tax bill soon!
Thanks for sharing this interesting update. The steps the company is taking seem to most focused on improving the cost basis and efficiency of U.S. operations (e.g., automation, reduced corporate taxes, fewer regulations, and a better educated workforce). I wonder, though, whether the company should be more heavily focused on thinking through any change that need to be made to the global parts of its supply chain given isolationist pressures. My fear for UTX would be that the U.S. actually does go through passing more protectionist trade policies in which case UTX’s imports from China and other countries would become much more expensive. While focusing on improving production processes in the U.S. solves one part of the problem, it seems like more can be done to either cut costs and redesign parts of the supply chain that are currently overseas. I’d be curious to learn more about what actions, if any, the Company has taken in this respect.
Thank you very much for writing this interesting essay!
I’d be interested to know more about how partisan politics play into this equation: to the exact same extent that nationalism has been on the rise in the right wing in the US and UK, there is an equally vibrant and opinionated left-leaning group that promotes globalism. As partisan politics become more divisive, I’d be interested in knowing whether this nationalism trend is a long-running expectation, or a 4-8 year cyclical trend.
Very interesting! I think you have laid out well the outsourcing vs. insourcing of american jobs over the past 17 years. I am no political expert, and can not say if this is a trend that will have as much stamina after the Trump presidency. However, I do see a tension in UTX’s strategy with the Indiana facility you referenced. In order to keep costs competitive in the US with higher wages, it seems a key point here is to invest in automation. How is that bringing about US jobs? Will that anger the current administration? As technology advances for companies like UTX, the effects of “outsourcing” will still happen in this case, with American’s still being put out of business. I think there is a tension in your strategy of investing in your workforce and education, and at the same time automation. I think the company needs to clearly lay out its long term automation strategy, and invest in education for the workforce that will be around longer. A big PR campaign in this case might not be effective, and could potentially backlash on them. I think the best course of action is to continue to be in continuous conversation with the current US administration, and to let Trump and other’s know that you are actively involved in the conversation, and are looking to participate in stimulating American jobs growth as much as possible, but while still maintaining your responsibility to your shareholders of creating long term value for your company.
I was most struck by your point regarding this being more of an issue of perception/optics rather than actual insourcing, most exemplified by the fact that President Trump chose to only focus on a singular plant in Indiana while UTX operates many outsourced facilities. While your proposals of improving the brand of the corporate entity through advertising efforts and engaging in a public-private partnership with the US government make sense from a public relations play, should UTX quietly move forward with the plant relocation regardless given the length of time it takes to get a plant up-and-running, by which time this fervor would have subsided?
Very interesting article.
I agree that determining a coherent policy on outsourcing is difficult in today’s political environment. However, as I recently heard in an interview on NPR’s “Marketplace,” tariffs and temporary trade barriers are often overcome by other factors in the market environment, such as prices, wage differences, and transportation costs. Thus, I wonder if companies would be best off simply ignoring President Trump’s rhetoric and instead basing their decisions on the current trade laws.
Companies can also consider the “long arc of history.” Even though isolationist trade movements have flourished in the past, and even become widespread, the relentless march of capitalism across most of the world in the 20th century shows that it does have its distinct advantages. I believe that companies should invest for the long term, assuming that free trade will exist – and then lobby to make that a reality.
Thank you for sharing your thoughts on this dividing topic. I believe it would be interesting to think about this problem from a CSR perspective. We always talk about how doing the right thing creates additional value to the companies on the long term (e.g., environmentally friendly production processes in factories, stronger workforce safety in mines). Maybe the companies can consider hiring US workforce as a way to support a local community and educate the local people. The additional costs due to higher salary would be considered as CSR expense, which ideally would make the workforce more attached to the company and result in higher performance and loyalty.
The issue with hedging manufacturing for these policies is both what would work in the long term, and what is possible to change/be overturned in the long term. I like the suggestions but I feel you need an option out as well if policies swing back the other way.
This essay makes some great suggestions for UTX in the context of increasing isolationism in the US. Not only can the company work with the government in order to increase training of low-skill manufacturers, but I believe they could also use this opportunity to coerce the US government into providing even more incentives for the company to keep manufacturing sites in the US. For instance, they can use the threat of moving factories overseas to get more tax benefits when they build sites in the US.
Great article Anonymous!
For me, the most interesting part of the article is the fact that the government had to give UTX a tax incentive in order for them to keep the Indiana plant open. What this signals to me is that governments with protectionist trade policies will have to do more, and provide more incentives to companies to prevent them from moving their plants to countries with more open trade policies. How sustainable is this? Will the government always have to give companies “sweetened deals” as you mentioned?
From UTX’s perspective, I agree with you that keeping the Indiana plant was primarily about optics. I would also argue that it made some economic sense as they were still able to reduce the workforce and replace it with automation. Currently UTX continues to quietly lay off workers at the carrier plant and other plants in the US [1]. This signals to me that the company never actually changed its plans to outsource and automate jobs, but rather accepted the deal from Donald Trump last year to avoid a PR disaster.
[1] http://www.chicagotribune.com/business/columnists/ct-biz-comment-trump-carrier-jobs-20171130-story.html