Unless you live under a rock, you must have heard how Carrier made national news over a pending plant closure. Whether you sell Carrier, or not, and whether you like Carrier, or not, you should defend the manufacturer because that’s defending the industry, your industry.
What Happened?
Carrier announced the closure of its Indianapolis plant with production transferred to Monterrey, Mexico. During a meeting where the closure was announced to employees, one employee whipped out a smart phone and recorded three and half minutes of the announcement, posted it on YouTube, which was picked up by Drudge, and went viral. It’s horrible “optics.” However, we don’t know what preceded the 3 – ½ minutes or what followed it. In short, we do not have context.
This is the same Donald Trump who has (or had) a clothing line that was manufactured in Mexico and China. This begs the question, which is bigger, Trump’s ego or his hypocrisy?
We do know that the move begins in 2017 and will take three years. Give Carrier executives credit for giving people plenty of notice. It’s more than most manufacturers would offer. And give them credit for offering to pay for employee books, tuition, and fees for up to four years through their Employee Scholar Program. Of course, none of this is being pointed out by the media.
The nightmare for Carrier executives took a turn for the worse during last Saturday’s Republican debate. Donald Trump brought up the pending plant closure, demagoguing…
I would go right now to Carrier and I would say I am going to work awfully hard. You’re going to make air conditioners now in Mexico. You’re going to get all of these 1400 people that are being laid off — they’re laid off. They were crying. They were — it was a very sad situation. You’re going to go to Mexico. You’re going to make air conditioners in Mexico, you’re going to put them across our border with no tax. I’m going to tell them right now, I am going to get consensus from Congress and we’re going to tax you when those air conditioners come. So stay where you are or build in the United States because we are killing ourselves with trade pacts that are no good for us and no good for our workers.
This is the same Donald Trump who has (or had) a clothing line that was manufactured in Mexico and China. This begs the question, which is bigger, Trump’s ego or his hypocrisy?
Anyone desiring American made air conditioning systems should take heart. They are all American made.
After the brouhaha, I’m pretty sure Carrier executives just want the nightmare to end. They probably decided that the best course of action was to lie low and let it blow over. It’s not a bad strategy. By April, most consumers will have forgotten all about it because, unfortunately, the public doesn’t think about us much unless the weather’s extreme and something breaks.
Why This Matters to You
If you compete with Carrier, you might have greeted the company’s misfortunes as good news. It’s not. It’s bad news for the entire industry.
First, it’s horrible when a leading presidential candidate says he’s going to single out and target one particular company, no matter what company, simply because he doesn’t like a perfectly legal management decision. When this happens, we sacrifice the rule of law for the rule of whim and create an uncertain environment that’s hostile to business. We all know businesspeople love uncertainty.
Second, Carrier isn’t the only manufacturer with production off shore. If the government starts throwing up tariffs (i.e., taxes) and trade barriers, they will end up affecting everyone. Even companies with domestic manufacturing will be impacted by higher component prices. The net will be that you will pay more for products and will have to raise prices again on a public already suffering sticker shock due to the higher prices necessitated by mandated efficiency levels.
If the government starts throwing up tariffs (i.e., taxes) and trade barriers, they will end up affecting everyone. Even companies with domestic manufacturing will be impacted by higher component prices.
Third, executives in other companies might hesitate to make the best decisions for their shareholders in the future if they perceive the potential for a political backlash. The result is less optimal performance, which can manifest in lower quality, poorer availability, and higher prices.
Finally, the entire industry is stained. In six months, consumers won’t remember what company moved to Mexico, but will remember it was an air conditioning company. Everyone will be suspect. It’s like a TV station running a contractor sting. Consumers will forget who was caught, but they will remember that contractors are untrustworthy.
Should Carrier Move to Monterrey?
I don’t know if Carrier should move production to Monterrey, or not. Neither do you. Neither does Donald Trump. I know this was not a lightly made decision. Shuttering a factory and moving manufacturing to another location, whether it’s around the corner or around the world is anything but simple. It’s expensive. It’s disruptive. Count on the fact that lots of careful analysis and consideration was involved. I’m certain the people who made the decision feel like they made the best decision for the long term interests of the company.
The stewardship of the Carrier executives affects more than the workers in a single manufacturing facility. Carrier employs 50 thousand people across 180 countries. So, there are other factories to think of, such as Carrier’s massive Collierville, TN plant. There’s also a sales force, service force, engineering, and office staff. There’s a network of company owned and independent distributors and all of the people who work in distribution. And, of course, there’s a dealer network to sell, install, and service the products.
Carrier’s labor costs at the Indianapolis plant were destined to fall over time anyway. The Indianapolis plant operates with a two-tier wage structure. This is what happens when the union sells out younger workers to benefit existing workers . . . So much for solidarity.
Upstream, there are the shareholders to consider. Carrier is part of United Technologies Corporation, one of the country’s blue chip corporations. According to Yahoo Finance, 83% of the stock is owned by 1,571 institutions and mutual funds. In other words, a whole lot of 401Ks are affected.
Manufacturing is Not a Static Game
Every couple of years an HVAC manufacturing facility closes and not necessarily because production is moving overseas. Sometimes several plants are consolidated for greater economies of scale. For example, in 2002, Carrier relocated manufacturing operations from Lewisburg, TN to Indy and Collierville, TN for largely the same reasons cited for the move to Monterrey. I suspect the 2,000 Lewisburg employees who lost jobs felt similar to the Indianapolis employees. The difference is there are more job prospects in metropolitan Indianapolis than rural Lewisburg.
It’s Not Labor
Indiana Senator Joe Donnelly thinks the move is all about labor. He said, “What this is really about, is the difference, I think, in labor costs….It’s a crying shame.”
I don’t think so. There’s not that much labor involved in manufacturing unitary equipment. If labor costs were critical, why isn’t Carrier moving all manufacturing operations to Mexico?
Frankly, Carrier’s labor costs at the Indianapolis plant were destined to fall over time anyway. The Indianapolis plant operates with a two-tier wage structure. This is what happens when the union sells out younger workers to benefit existing workers. Those hired before a certain date earn $26 per hour. The 25% of workers hired after that date earn $14 according to a report in the Indianapolis Star newspaper. So much for solidarity.
Factories with a two-tier wage structure lower labor costs two ways. One is to load the plant, hire more lower wage workers, and drive average labor costs down. The other is to wait for older employees to retire or incent them to retire early. By 2019 when production is fully transferred from Indianapolis to Monterrey average labor costs for the Indy plant would be sharply lower.
Labor costs are insufficient to explain the move. It’s possible that there are environmental issues with the plant that necessitates closure, but the most likely reason is the simplest. It’s what Carrier’s president of HVAC Systems and Services for North America, Chris Nelson said in a press release. He cited, “ongoing cost and pricing pressures driven, in part, by new regulatory requirements. Relocating our operations to a region where we have existing infrastructure and a strong supplier base will allow us to operate more cost effectively.”
The regulatory requirements that result in cost and pricing pressures aren’t specified, but I suspect they are the minimum efficiency mandates, which result in more expensive systems for homeowners. The minimum efficiency mandate made high efficiency the new base efficiency. The base efficiency products, as the lowest price options, are always subject to commoditization.
It’s also noteworthy that Carrier isn’t the first company to establish operations in Mexico. As Nelson noted, the move is part of “the continued migration of the HVAC industry to Mexico, including our suppliers and competitors.” In short, the infrastructure and component suppliers are already in place. Carrier’s existing factory in Monterrey is state-of-the-art and was the first HVAC manufacturing facility to earn LEED® Gold certification.
Do not assume that quality will suffer. In the last part of the 1990s, I consulted with a steel company located in Monterrey that was considering entry into the U.S. metal building and roofing industry. Their problem was their quality exceeded the quality of U.S. metal building manufacturers. They couldn’t compete on price. Ultimately, they shifted to architectural metal roofs where they could command a premium.
Trade Reactions
I doubt there will be much of a backlash against Carrier in the trade, though there may be some heated rhetoric. For example, an HVAC salesperson told a friend of mine that he would no longer sell Carrier. Nice bluster. He works for a company that only sells Trane.
Carrier dealers tend to be larger and more established. They will be less likely to react emotionally, though some might be more likely emphasize their own brand over the manufacturer’s. I suspect few will boycott the company. There are many very good reasons to sell one brand over another. Unless you are an Indianapolis contractor, the closure of the plant is not one of them.
If contractors drop the brand it will not change the manufacturer’s decision. It will only punish your distributor who, whether independent or owned by Carrier, had nothing to do with the decision to move production south. It will also hurt the Carrier factory workers still employed in the U.S.
We Compete in a Global Market
Today’s anger over an Indiana plant closure was yesterday’s celebration when companies like Honda and Toyota opened factories in Indiana. A Toyota press release quoted Governor Mike Pence saying, “Hoosier-built products like the Toyota Highlander are known around the world for their precision and quality. And with suppliers in all corners of the state, Toyota is helping to strengthen and grow Indiana’s economy.”
It’s a global economy. You win some. You lose some. To win more than you lose, make it attractive to do business in your country or state. Erecting tariffs is the wrong way to go. A tariff is ultimately a tax on consumers who pay higher prices. Worse, tariffs lead to retaliatory tariffs, hurting exports, destroying trade, and ruining economies.
In 1930 the Smoot-Hawley Tariff Act called for stunningly high tariffs on a broad range of goods. Exporters retaliated with their own tariffs on U.S. imports. Because of the tariffs, imports dropped 66%. Exports fell 61%. The economy went from recession to depression with unemployment soaring from 8% to 25%.
The world is much more interrelated today than in the 1930s. Smoot-Hawley like legislation today would be a true disaster. It’s better to increase incentives and lower barriers than to raise barriers. Start by slashing the U.S. corporate income tax, which is the highest in the world. Next, eliminate the taxation of foreign earnings when they are repatriated into the U.S. Continue by cutting the capital gains tax, which reduces the amount of capital formation. Finish by applying reason to the onerous regulations emerging from the unelected bureaucracy, such as the EPA. Do these and domestic jobs won’t be a problem.
An Answer for Displaced Carrier Workers
Maybe it’s time for factory workers who have been building products to learn how to fix them. Take advantage of Carrier’s Employee Scholar Program to go to trade school and learn installation and service. The industry desperately needs service technicians. A factory worker who becomes one will gain real job security without fear of the job moving offshore.
100% American Made
Anyone desiring American made air conditioning systems should take heart. They are all American made. Condensing units, heat pumps, air handling units, and furnaces are all components of the final system, which is custom assembled at the jobsite by the contractor. They are not plug and play, like refrigerators or window units. Just as a compressor is a part in a condensing unit, a condensing unit is merely a part in a comfort system. The comfort system does not exist prior to the installation. Thus, every comfort system in the country is American made.