Why a profitable company laid off 1,400 people

In February, 1,400 employees of Carrier Air Conditioner in Indianapolis were told their jobs were being transferred to Mexico to cut costs.

It turns out that, according to the annual report of United Technologies, its parent company, that Carrier was a profitable and growing business segment.  In 2015, it was UT’s best-performing division in the company.

So why mess with it?  UT management hoped to boost the company’s stock price by cutting costs.  Managers say they plan to keep on cutting costs for the indefinite future, evidently without regard to

All this runs contrary to the way I was taught in college that a capitalist free enterprise system is supposed to work.

I was taught that the duty of corporate management is to ensure that the corporation survives and is profitable into the indefinite future.  This goal is achieved by making good products and at a reasonable price, and provide good customer service.  To do this, it is necessary to re-invest a good portion of the profits in the business.

UT management’s philosophy is evidently the opposite—to take money out of the business and give it to the passive shareholders.

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The New York Times evidently had a good article on this, which unfortunately is behind a pay wall.  David Dayen summarized its conclusions in an article for Salon.

Last year, Carrier produced a significant chunk of total profits for its parent company, United Technologies.  Of $7.6 billion in earnings in 2015, $2.9 billion came from the Climate, Controls & Security division, where Carrier resides.  Profits from this division have expanded steadily in recent years, which is not what you’d expect from a unit desperate to cut labor costs.

A look at United Technologies’ annual report reveals even more good news: Commercial and industrial products, Carrier’s category, make up over half of UTC’s $56 billion in net sales. Climate, Controls & Security had 3 percent growth in 2015, the highest in the company; it was the only division to increase its profit margin year-over-year.

“Organic sales growth at UTC Climate, Controls & Security was driven by the U.S. commercial and residential heating, ventilation and air conditioning (HVAC) and transport refrigeration businesses,” according to page 14 of the report. In other words, air conditioners – what the workers are making in Indianapolis – drove the growth of the best-performing facet of United Technologies’ business.

So why would a profitable, growing business need to ship jobs to Mexico?  Because their shareholders demanded it.

United Technologies hides behind statements about remaining globally competitive and maintaining its market position. But the truth is that the company felt pressure to boost the stock price, a key measure of executive performance.

“Wall Street is looking for United Technologies to post a 17 percent increase in earnings per share over the next two years, even though sales are expected to rise only 8 percent,” according to the Times story.  Moving jobs from Indiana, where workers get $20 an hour, to Monterrey, Mexico, where they get $2-$3, is a way to grow earnings per share.

The responsiveness to shareholders doesn’t end with cutting labor costs. Last year, United Technologies “returned approximately $12 billion to our shareowners in dividends and share buybacks,” according to the annual report.  Shareholders extracted around 75 percent of the company’s profits, which hampers the company’s ability to stay competitive through investment.  (Research and development went down 13 percent last year.)

United Technologies has promised investors they would cut $500 million in costs every year for the foreseeable future.  The president of the Climate, Controls & Security division told investors on a conference call recently that two-thirds of their manufacturing has already shifted to low-cost countries, and that “there’s some opportunity there” to shift more. This is entirely driven by the stock price, disassociated from United Technologies’ robust sales and profits.  Executive compensation tied up in stock options or stock performance leads to a loyalty to shareholders that far exceeds loyalty to workers.

Via Salon.com

I doubt that the long-range survival of Carrier’s air conditioner business is best achieved by laying off experienced, skilled and loyal employees and replacing them with new employees who will work cheap because they are motivated by fear.

The reason I doubt it is not based on any specific knowledge of UT or Carrier, but on the fact that UT management is not quoted as saying anything about long-range strategy for survival and growth, only about extracting money from the corporation.

Cutting costs is not the same thing as increasing efficiency.  There are sayings about “penny-wise and pound-foolish” and “killing the goose the lays the golden eggs”.

This transfer of wealth, from hard-working employees who create value to passive shareholders who take checks out of envelopes, is a redistribution of income.  

Most of us Americans don’t see this because we’ve swallowed a neoliberal philosophy that causes us to think of upward redistribution as part of the natural order of things.  Freeing ourselves from this mental shackle is the first step in reform.

Here are some possible next steps.

The actions of Carrier and the rest of corporate America reflect a system in which investors come first, and the primary goal of business is to maximize profits.  We need a system in which investors are just one of many constituencies, and the financial goal is to maximize the probability of remaining profitable over an extended time horizon.  Profit has to become a means, not an end.

The socialist agenda, as I understand it, is about the many reforms that move us closer to such a world. It includes worker participation in corporate governance, but also representation of other community interests.  It can include measures to broaden ownership, including a role for public and social ownership vehicles along with private ones. 

Financial reform also has a large contribution to make, especially if it expands the role of public and cooperative banking.  Consideration should also be given to measures that would alter the incentives to issue preferred rather than common stock or otherwise attenuate the connection between ownership and control. [snip]  

And this is just the beginning: once you start thinking about it, you can see the agenda is enormous, especially because it’s been in mothballs for generations.

Source: EconoSpeak

Stockholders aren’t really owners in the way that the individual or family owners of a restaurant or a laundry are owners.  Corporate person-hood and limited liability shield them from any individual responsibility or liability for the companies they supposedly earn.  So they’re not entitled to say that they are their corporate owners and their interests come before everyone else.

LINKS

Snapshot of a broken system: How a profitable company justifies laying off 1,400 workers and moving their jobs to Mexico by David Dayen for Salon.

The Lesson of Carrier by Peter Dorman for EconoSpeak.

Hundreds protest Carrier layoffs outside Indianapolis plant by James Garibaldi for WTTV Indianpolis.

Tags: Carrier Air Conditioners, Layoffs, United Technologies, Wall Street