The President Battles It out with United Technologies CEO over Globalization

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This article from today’s Wall Street Journal gives the reader an unparalleled opportunity to see how issues of globalization get played out at the highest levels of government and industry. We see what issues of national and international importance CEOs wrestle with and how labor responds (or doesn’t) to their decisions.

By JOSEPH RAGO, May 6, 2017 for The Wall Street Journal

United Technologies Corp. is a multinational manufacturing conglomerate, with subsidiaries like Pratt & Whitney and Otis Elevator that were founded 90 and even 160 years ago, that makes everything from escalators to jet engines. Last November UTC’s Carrier unit, which makes heating, ventilation and air conditioning equipment, became a symbol of how Mr. Trump claimed trade and globalization had undermined American workers. . . .

Gregory-Hayes-CardCEO Gregory Hayes

Mr. Hayes played football at Cornell, transferred to Purdue, and then joined Sundstrand, which was acquired by United Technologies in 1999. He rose through management and took over in late 2014. He had a rough first year, with shares slipping 18%. In 2015 UTC rolled out a restructuring plan to shed $1.5 billion in costs over three years.

The plan included closing two high-cost campuses in Indiana. One, outside Indianapolis, made gas furnaces. The other, in small-town Huntington, made electronic circuit boards. About 2,100 jobs would be lost in total, while furnace production would shift to Monterrey, Mexico.

Most of the furnace industry—both UTC’s competition and suppliers—has already moved to low-cost Mexico. The Indianapolis plant is an old-fashioned production line, where a component moves every couple of seconds and an operator performs a rote task, like installing fasteners in a handle. The jobs are relatively low wage and low skilled

.Pratt & Whitney jet engines

Mr. Hayes and his board concluded that closing the plants “was the right thing to do for the business long-term” to remain competitive in the market. If the larger business wasn’t profitable, then nobody would have job security. He thought UTC “could tell a story” about the higher-wage, higher-skilled domestic jobs it was creating in aerospace.

United Technologies also offered workers a yearslong lead time to plan their next steps, generous severance, and its 20-year-old Employee Scholar program, which pays full freight for two or four years of college education or vocational technical training for all employees, even after a plant shuts down.

“Look, we know there’s a dislocation associated with trade,” Mr. Hayes says. “There will be people left behind, and it’s the measure of how we treat those people and how we deal with those people that’ll determine whether or not we are ultimately successful.” Combined with globalization’s benefits—such as reducing the share of the world’s population that lives in poverty to 10% from 42% in 1981—he thought all this would be enough to gut out the politics.

“My political prognostication skills are about zip,” Mr. Hayes concedes. A familiar business terror struck in February 2016: a cellphone video that outraged the internet and then hit cable news. The 3½-minute recording, now viewed 3.9 million times on YouTube, showed a Carrier executive informing workers on the shop floor that their jobs would be moving to Mexico. “I want to be clear, this is strictly a business decision,” the executive said, amid jeers.

Botsford161201TrumpIN9161President Trump visits the Carrier Air-conditioning plant

History records hardly a campaign stop where Mr. Trump failed to assail Carrier. . . .

The candidate [Trump] promised to call the CEO [Gregory Hayes]: . . .  “OK? We will have a real border, the illegals will not be able to carry those air conditioners in.” Goods that crossed the border, “every single one, you’re going to pay a 35% tax on, OK?”

Nine months later, when Mr. Hayes received Mr. Trump’s postelection call, “He said, ‘Greg, you’ve got to help me.’ I’m like, ‘Sir, you know, we have looked at this, this is a cost—there is just no way. We got the plant already built down in Mexico.’ He goes, ‘No, Greg, you don’t understand. You got to help me. You got me elected. . . . I didn’t have a great campaign, a great focus on the campaign early on, but once I got this Carrier thing I used it everywhere.’ I said, ‘Yeah, I noticed.’ ”

carrier-bigpic-600x392Inside the plant of Carrier Air-conditioning

Mr. Hayes agreed to “take a hard look.” His “biggest fear,” he says, wasn’t tariffs but reputational damage. Carrier air conditioners are among UTC’s few consumer-facing products, and “having Mr. Trump tarnish the brand—there was a huge cost to that.” Then again, the president also didn’t have to make the same 35% threat personally that he’d made in public hundreds of times.

UTC stayed, and also left. Indiana gave the company $7 million in tax incentives over a decade, and Carrier will invest $16 million to modernize the gas-furnace factory. The decision saved about 800 factory jobs in Indianapolis, as well as 300 HQ and engineering jobs, but the Huntington facility closed. . . .

“The rhetoric on trade is not helpful,” Mr. Hayes says, but he thinks Mr. Trump is “trying to move in the right direction” on deregulation and tax reform, plus he’s a better listener than his predecessor.

The drawback of the tumultuous Trump presidency so far, Mr. Hayes says, is uncertainty: “It’s bad for business, and there’s certainly a lot of uncertainty being created on a daily basis that is not helpful for us. For my people, they’re looking and say, ‘What do we do?’ I say, ‘Well, just relax, they’ll all be fine, right?’ You need to take everything with a bit of a grain of salt that comes out of Washington these days, and understand that there is a process, things will work themselves out.”

elevatorOtis Elevators

A populist might say that a company expecting sales of between $57.5 billion and $59 billion in 2017—more than Goldman Sachs or Coca-Cola —can afford to pay more for American labor. The Carrier deal cost UTC about $25 million a year over the original plan, or about two cents a share. “We’re a big company,” Mr. Hayes says. “We can certainly deal with that kind of financial headwind.”

Still, there’s a cost. “I truly believe that if you have open markets, and you have the ability to let capital flow to most efficient uses, you are going to get better results than if you try to direct capital,” he says. But he admits: “I got it completely wrong, in terms of the political sentiment in the U.S., and I—you know, frankly I should’ve known better, because there is a large portion of the population that has been disenfranchised by globalization.”

Mr. Hayes’s solution is to improve education, specifically with a national apprenticeship program that would guide local public-private partnerships to train and prepare the workforce better. He knows the problem firsthand: “I’ve got thousands of job openings.”

Do you really?

“Thousands,” he replies. “A lot of this is because we’ve got growth in business on the aerospace side, but we’ll be adding thousands of jobs in the next three years, and right now I cannot hire mechanics who know how to put together jet engines. But it’s not just jet engines. We also make fan blades, other products, very sophisticated things. These are the high-value manufacturing jobs that America can actually support.”

Pratt & Whitney  machinist at work

A Pratt machinist earns $34 to $38 an hour, which with overtime works out to more than $100,000 a year—“pretty good money,” Mr. Hayes says. The positions can be filled by high-school graduates with “basic competencies in math and English” sufficient to, say, read a blueprint.

Mr. Hayes’s apprenticeship idea is about teaching such candidates the technical skills they need for the manufacturing jobs of the future—the kind that aren’t becoming obsolete due to automation and artificial intelligence. Labor arbitrage, like moving to Mexico, can only work so long, as rising wages in China show. But humans can’t compete with robots, which, as he says one of his Chinese managers put it, “never get sick, never ask for a raise, and they work 24/7.”

Labor mobility is another concern. People are less willing to move to where jobs are. UTC recently built a factory in Lansing, Mich., to make engine housings for a new type of titanium-aluminum fan blade and needs to bring on about 1,000 new people. The work pays $23 an hour on average, yet some workers in Huntington, who earned $15 on average, “won’t move two hours north to Lansing.”

Mortgages, kids in school and cultural attachments can lead to such mismatches, but Mr. Hayes worries because labor mobility used to be “just a given.” His own career took him from Rockford, Ill., to San Diego to Valparaiso, Ind., to Hartford, Conn., over the years.

Whatever the obstacles, “we have to migrate from these very low-skill manufacturing jobs to the middle-skill and the higher-skill jobs,” Mr. Hayes says. His model is the 19th-century transition to an industrial economy from a rural one, in which 97% of American workers were farmers.

The irony is that for someone cast in 2016 as a villain, and despite U.S. law instructing executives to maximize shareholder value, Mr. Hayes believes companies are also accountable to other parties, including employees, consumers and the communities where they’re based—an obligation that extends to financial support for academic research and the arts. “You try and balance these things without saying, ‘Hey look, it’s just business, we are just going to do what’s right for us,’ ” he says. “You have to at least understand and have some empathy for the other stakeholders in this.”

Over the long run, the danger is that the Carrier ruction won’t be an isolated incident but part of a populist trend. “I think that we have to as a society face the reality that the jobs that we have today aren’t going to be here 20 years from now,” Mr. Hayes says, “and if we don’t do something fundamentally different soon, we are going to have class warfare, and that’s a scary thing.”

For business leaders, Mr. Hayes has a suggestion: “We have to defend what we think is right, what we think is the better course for the country, and I think it’s OK to speak up—you know, you’re going to get smacked down—and will the president and I be friends?” He lets the thought trail off.

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