The key to Trump’s Carrier deal: Next-generation manufacturing

In his speech at Carrier yesterday (video embedded below), Donald Trump revealed some information that should comfort those market purists worried about America insulating itself from global markets and thereby falling behind overseas competitors.  He revealed that the reported $16 million is likely to end up a much higher figure because the company is committing to next-generation manufacturing.

It is quite understandable that a lowball figure has been used by Carrier, as they want to limit what they may be on the hook to spend.  They can always spend more, and the banter Trump threw at the company’s president indicates that he and Trump did discuss the nature of the reconceptualization of manufacturing that the company had (obviously) already studied and compared with the financial results of moving the Indy factor to Monterrey.  Until Trump put his thumb on the company’s scale, that calculus favored Monterrey. 

Unlike Barack Obama, Trump understands how businesses make their decisions: on the margin.  Undoubtedly, the $7 million in tax relief that the State of Indiana applied to Carrier (which, but the way, is a common sort of thing for states to do to recruit or keep factory jobs) helped in the calculus.  But if I were a betting man, I’d wager that Trump discussed the regulatory costs the factory, Carrier, and its parent United Technologies bear and stated bluntly that those costs will go down.  And it would not surprise me if he also mentioned tax reforms, including perhaps investment tax credits and other measures that will make the $16-million (or whatever the final bill is – much higher, I would wager) investment much cheaper.

In economists’ terms, this means substituting capital for labor, but the abstract language does not fully reveal what is going on.  There will be much more automation and less hand labor (which means that remaining jobs will be higher-skilled and more pleasant), but there is likely to be just-in-time manufacturing (meaning less inventory and ultimately better quality), and much greater flexibility in changing models and adding features, for instance.  Capable, intelligent, and numerate workers can be highly paid, and you don't need low-paid manual labor.

Trump promised in his Cincinnati speech that there will a “Buy America” provision for companies taking advantage of such programs.  This means that a lot of other manufacturers of things like machine tools will be expanding, hiring, and making money.  A virtuous cycle of prosperity replacing the utter stagnation of the last eight years, outside the high-tech and shale extraction sectors.  This is an economic driver that should not be underestimated.

Some are criticizing the inclusion of 300 jobs in headquarters and technology operations in the total of jobs staying in Indy, because those jobs were not currently on the block.  But in fact, once manufacturing leaves, ultimately, those jobs would be imperiled.  In my consulting work I have seen exactly this process operate.  Shipping engineers from Indy to Monterrey to work on the production system takes time and is expensive and ultimately is less effective than having technical people accessible nearby or on site constantly.  

Over a quarter-century ago, one of Carrier’s global competitors in the HVAC business moved its entire air-conditioning headquarters to a third-world manufacturing base where it had long been employing manual labor.  Executives there explained to me that highly capable and educated local engineering gradates were thrilled to work for a major foreign company, whereas at home in their expensive highly advanced economy, air-conditioning was regarded as an old-fashioned and unglamorous sector.

But that was then; this is now.  The new wave of manufacturing technology is hi tech-intensive.  And after a generation of decline, American engineers and workers are probably more eager than a quarter-century ago to tackle the challenge.

Trump's speech at Carrier:

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