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.

Romney, Fiorina, Trump: who did the most harm?

Last week a friend of mine wondered out loud who ruined more lives—Donald Trump, Carly Fiorina or Mitt Romney?

After doing a little Internet research, I would say—probably Mitt Romney, possibly Carly Fiorina, but not Donald Trump.

Mitt Romney was CEO of an investment firm called Bain Capital.  It started out in 1984 as a venture capital firm; its most successful investment was the Staples chain of office supply stores.

But from 1989 to 1999, it adopted a new strategy—borrowing money to buy existing companies, saddling the companies themselves with the debt while meanwhile giving Bain big consulting fees.

Some of the companies collapsed under the burden of debt, some survived.  Having to service a big debt obligation probably tipped many into failure.  Nobody would argue that it helped.  But Romney and the other Bain partners did well whether the companies succeeded or not.

Carly Fiorina became head of Hewlett-Packard in 1999.   Her most notable accomplishment was aquisition of Compaq Computer, which by most accounts didn’t pay off.  The H-P board of directors fired her in 2005.

The Boston Globe estimated that 30,000 employees were laid off during her tenure.  On the other hand total jobs at H-P when she left were roughly equal to the combined H-P and Compaq employment in 2009.

Donald Trump took his companies into bankruptcy—that is, reorganization under Chapter 11 of the U.S. Bankruptcy Code—four times.  These were Trump Taj Mahal in 1991, Trump Plaza Hotel in 1992, Trump Hotels and Casino Resorts in 2004 and Trump Entertainment Resorts in 2009.

In each of these reorganizations, Trump took a loss and gave up control.   The businesses continued, and evidently there weren’t any big layoffs at the time.   Trump Taj Mahal filed again for bankruptcy last year, but Trump no longer controls it.

When downsizing hurts profitability

When I reported on Eastman Kodak Co. for the Rochester (NY) Democrat and Chronicle in the 1990s, I talked to stock analysts who really did think that layoffs were a key to profitability, and applauded each of Kodak’s layoff announcements.  It is true, of course, that you can get a short-term kick to profitability by laying off some workers and making the rest work harder.  But you can’t, in the long run, have a profitable company that is understaffed, and whose workers are exhausted, resentful and scared.  This certainly wasn’t true in the case of Kodak. [1]

The New Yorker recently reported on Uniqlo, a Japanese retailer who recently opened a store on Fifth Avenue.  Uniqlo hired 650 people and pledged to keep employment at a minimum of 400.   The store chain is highly profitable just because it is fully staffed with a well-trained sales force.  This approach has wider application, the writer said.

A recent Harvard Business Review study by Zeynep Ton, an M.I.T. professor, looked at four low-price retailers: Costco, Trader Joe’s, the convenience-store chain QuikTrip, and a Spanish supermarket chain called Mercadona.  These companies have much higher labor costs than their competitors.  They pay their employees more; they have more full-time workers and more salespeople on the floor; and they invest more in training them. (At QuikTrip, even part-time employees get forty hours of training.)  Not surprisingly, these stores are better places to work. What’s more surprising is that they are more profitable than most of their competitors and have more sales per employee and per square foot.

The big challenge for any retailer is to make sure that the people coming into the store actually buy stuff, and research suggests that not scrimping on payroll is crucial.  In a study published at the Wharton School, Marshall Fisher, Jayanth Krishnan, and Serguei Netessine looked at detailed sales data from a retailer with more than five hundred stores, and found that every dollar in additional payroll led to somewhere between four and twenty-eight dollars in new sales.  Stores that were understaffed to begin with benefited more, stores that were close to fully staffed benefited less, but, in all cases, spending more on workers led to higher sales.   A study last year of a big apparel chain found that increasing the number of people working in stores led to a significant increase in sales at those stores.

The reasons for this aren’t hard to divine.  As Fisher, Krishnan, and Netessine show, customers’ needs are pretty simple: they want to be able to find products, and helpful salespeople, easily; and they want to avoid long checkout lines.  For a well-staffed store, that’s no problem, but if you don’t have enough people on the floor, or if they aren’t well trained, customers can easily lose patience. 

One of the biggest problems retailers have is what is called a “phantom stock-out.”  That’s when a product is in the store but can’t be found.  Worker-friendly retailers with more employees have fewer phantom stock-outs, which leads to more sales.  And happy workers tend to stick around, which saves the costs associated with employee turnover, like hiring and training.

Some 10 years ago, Darrell Rigby of Bain & Co. (Mitt Romney’s old company), wrote an article showing the stocks of downsizing companies perform worse than equivalent companies.   You might say, of course, companies that are in trouble will lay off workers.  But Rigby compared similar companies with equivalent sales growth, and the downsizing companies on average did worse.

That’s not to say layoffs are never justified.  Companies that are reorganizing, especially after a corporate merger, may need to eliminate duplicate jobs.  And of course a company that’s in trouble may have no choice but to lay off workers.  But normally downsizing for a company is like surgery for an individual.  You may have to do it, but you would avoid it if it wasn’t necessary.

Click on How Hiring Makes Uniqlo a Successful Retailer for the full New Yorker article.

Click on Look Before You Lay Off for the full Harvard Business Review article by Darrell Rigby.  The link will give you the main points of the article; to read it in full, you have to register with HBR.

Click on Ted Rall’s Rallbog for more Ted Rall cartoons and commentary.

[1]  To be clear, I don’t claim that layoffs were the source of Kodak’s problems and I don’t say layoffs are never necessary.

Working class is middle-class no more

It is a proud boast of the United States that we were the first country, and for a time the only country, in which members of the working class could enjoy a middle class income and standard of living.  Unfortunately this is becoming a thing of the past.

What’s happening is well-described in an article by Andy Kroll on the Tom Dispatch web site.  Here are some highlights.

Sometime in early June — he’s not exactly sure which day — Rick Rembold joined history. That he doesn’t remember comes as little surprise: Who wants their name etched into the record books for not having a job?

For Rembold, that day in June marked six months since he’d last pulled a steady paycheck, at which point his name joined the rapidly growing list of American workers deemed “long-term unemployed” by the Department of Labor. In the worst jobs crisis in generations, the ranks of Rembolds, stranded on the sidelines, have exploded by over 400% — from 1.3 million in December 2007, when the recession began, to 6.8 million this June. The extraordinary growth of this jobless underclass is a harbinger of prolonged pain for the American economy.

This summer, I set out to explore just why long-term unemployment had risen to historic levels — and stumbled across Rembold. A 56-year-old resident of Mishawaka, Indiana, he caught the unnerving mix of frustration, anger, and helplessness voiced by so many other unemployed workers I’d spoken to. “I lie awake at night with acid indigestion worrying about how I’m going to survive,” he said in a brief bio kept by the National Employment Law Project, which is how I found him. I called him up, and we talked about his languishing career, as well as his childhood and family. But a few phone calls, I realized, weren’t enough. In early August I hopped a plane to northern Indiana.