Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Donald Trump can't micromanage his way to a manufacturing revival in America.

The president-elect celebrated a decision on Tuesday by United Technologies Corp.'s  Carrier heating and air-conditioning unit to save about 1,000 Indiana jobs that had been slated to move to Mexico. This reversal -- just weeks after United Technologies CEO Greg Hayes said lower labor costs were necessary to make Carrier competitive -- is the best PR Trump could ask for as he looks to follow through on a pledge to protect U.S. jobs that helped win over voters in manufacturing states.

But good PR and 1,000 grateful Carrier employees are probably the only things this agreement truly achieves.

Unfazed
United Technologies shares were largely unchanged on Wednesday. The decision to keep jobs in Indiana won't have much of a financial impact.
Source: Bloomberg

For one, while Carrier's Indianapolis employees have received a helping hand from the president-elect, it's not clear that the same can be said for the 700 workers whose jobs will be moved to Mexico if United Technologies moves forward with a plan to shut down another plant 100 miles away in Huntington, Indiana. Trump's team has promised more details when he appears in Indiana on Thursday. 

But state and local officials often make such trade-offs in negotiations with companies. They offer big tax breaks and other economic incentives to claw back a few of the jobs on the chopping block but can only slow the erosion of U.S. manufacturing in the face of technological advancements and lower-cost countries. It's a Pyrrhic victory, and a successful negotiation with one company won’t necessarily help politicians when the company down the road wants to send jobs to Mexico. That's why U.S. presidents tend to not get involved in these talks -- they don't translate nationally.

In many ways, United Technologies was an easy target; its huge size and global operations created a trifecta of leverage opportunities. The company stands to save hundreds of millions of dollars should Trump follow through on a plan to knock the corporate tax rate down to 15 percent. There's also the prospect of being able to bring home the roughly $6 billion of cash it has stockpiled overseas under Trump's proposed repatriation holiday and put that money to work on share buybacks and U.S. deals. It's not as if United Technologies is strapped; Bloomberg Intelligence estimates its debt capacity may exceed $13 billion in 2017. But for a company that's faced calls to rev up growth with a significant acquisition, extra money can be quite helpful.

Third, United Technologies receives a significant chunk of its more than $55 billion in annual revenue -- about 10 percent -- from the U.S. government. Senator Bernie Sanders had called on Trump to threaten to blacklist United Technologies from future military contracts.  When you add all that up, the $65 million in annual savings United Technologies was reportedly targeting with the shutdown of the Indiana plants starts to approach irrelevant. But what about the many other manufacturing companies that have moved or are planning to move jobs offshore? They don't all share the same broad trigger points.

Consider Rexnord Corp., for example. The maker of industrial machinery parts and drainage equipment officially decided this month, after the election, to close an Indianapolis factory and move the work to Mexico, eliminating about 300 jobs. But Rexnord doesn't have as significant of exposure to military contracts that Trump can exploit. It had about $175 million of earnings stashed abroad as of March 31, roughly 36 percent of its total cash holdings at the time. That's not insignificant, but perhaps not enough to persuade the company to give up on the initial $15.5 million in savings it's reportedly expected to reap.

United Technologies CEO Hayes wasn't bluffing about the uphill battle industrial companies face on labor costs. After years of moves to cheaper places, manufacturers that decide against relocations and plant closings may find themselves at a disadvantage, tax breaks or not. Many shutdowns and job cuts also aren't about greed and boosting the share price, but rather are in response to weak demand or the extra capacity created by mergers. That's the free market at work, and those aren't the kinds of trends you can stop with a few extra tax breaks.

LMI Aerospace Inc., for example, announced plans in June to shut down a Wichita, Kansas, facility that makes sheet metal for jets that just aren't selling like they used to. It will move the remaining work to Mexico. Caterpillar Inc. and Joy Global Inc., meanwhile, have eliminated hundreds of jobs in Wisconsin alone in response to the continuing erosion in sales of their mining equipment. 

Struggling Through
Revenue at Caterpillar and Joy Global has tumbled as low commodity prices and slow global growth reduced demand for their products
Source: Bloomberg

None of these moves have received as much attention as Carrier's in part because there wasn't a viral video to drum up public outrage. It's worth wondering whether something that's not generating traffic on Twitter will receive as much attention from the Trump administration. Appearing to protect U.S. jobs is a lot easier than doing it again and again through one-on-one negotiations with companies about specific facilities in individual states.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. As of Sept. 30, United Technologies said about 89 percent of its cash was held by foreign subsidiaries. The company reported $7.1 billion in cash and equivalents. 

  2. Because the U.S. taxes all global income once it comes home to America, companies pay a hefty levy to bring back overseas cash. Indeed, United Technologies took a $274 million charge in 2015 related to the planned repatriation of foreign earnings.

  3. It's not clear how successful such an effort would have been against such an instrumental military supplier whose products in some cases don't have equally appealing replacements, but it's probably not worth United Technologies waiting to find out.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net