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As trade wars rage, Emerson plots new U.S. expansion

By Timothy Aeppel

Ferguson, Mo. (Reuters) - In 2009, the chief executive of Emerson Electric Co. bluntly told investors at a Chicago conference what many of his counterparts at other manufacturing firms would only say privately.

“I’m not going to hire anybody in the United States. I’m moving,” David Farr said as he blasted U.S. taxes and regulations and called it an easy decision to expand in India and China.

Farr’s flash of candor was emblematic of an era of free trade, globalization and offshoring of U.S. jobs – one that has now come under attack in the trade wars launched by U.S. President Donald Trump.

A decade later, Farr has made a stunning reversal: Emerson now plans to build at least three new U.S. plants and is already expanding existing domestic operations. Farr saw a new era of U.S. protectionism coming before Trump’s election – and started planning accordingly, he said in an interview with Reuters at the company’s sprawling headquarters near St. Louis, Missouri.

“For the first time now, I’m looking for best-cost U.S. locations” to build factories, he said.

Trump’s election, Farr said, accelerated a political shift against free trade policy that is now transforming many U.S. firms’ domestic investment strategy. Protectionist policies — especially toward China — are now a rare point on which many Democrats and Trump agree, relegating formerly bold Republican free traders to the sidelines.

Emerson has committed $250 million for new U.S. facilities through 2021, part of a larger domestic investment in existing operations, including a new headquarters and a factory renovation at its Wisconsin garbage-disposal business. Emerson spent $407 million on U.S. capital projects last year, a 38 percent jump from the year before, and plans to spend $425 million this year.

Those investments have added 2,500 employees, Farr said. Emerson declined to say how many jobs the new factories would create.

Emerson, a diversified manufacturer with $17.4 billion in sales last year, provides dozens of industries with thousands of products, from tools and large industrial valves to refrigeration, lighting and climate control systems. Its best-known consumer brand may be the InSinkErator garbage disposal.

Farr’s new take on U.S. investment reflects a broader questioning of overseas expansions, especially in China, for both political and operational reasons. A survey of top managers at 500 U.S. companies conducted in December by investment bank UBS AG found that 31 percent have moved or are moving production facilities to avoid tariffs. Fifty-eight percent said they expect tariffs to “have a positive impact on domestic investment.”

It remains unclear, however, whether and how much the trade policy upheaval will benefit U.S. workers. Many firms fleeing China to avoid U.S. tariffs are not moving to the United States, often choosing locations in Southeast Asia. Those that are expanding U.S. operations are trying to maximize automation to minimize labor costs, and some U.S. industries - such as consumers of steel - have said they plan to cut jobs because tariffs have raised their costs.

The renewed domestic focus by Emerson, a major employer of high-skilled workers, nonetheless stands out as a victory for Trump’s protectionism. Emerson has been a poster child for globalization, and its CEO is among the nation’s most influential manufacturing executives. Farr just completed a two-year term as chairman of the National Association of Manufacturers, the sector's main lobbying organization.

Emerson once had an overwhelming U.S. and European focus. But that changed as it joined the stampede of manufacturers moving to emerging markets. When Farr became CEO in 2000, 8 percent of Emerson’s sales were in Asia. Last year, that hit 22 percent, and Emerson now has 26,000 employees in the region, slightly more than in the U.S. and Canada. Most of the company’s 215 factories sprinkled around the globe are now outside the U.S.

But one of Farr’s first moves after Trump’s election was to assign a task force of top managers to adapt the firm’s investment plans to a less certain trade environment. The group has produced a top-ten list of potential U.S. locations for new plants.


TURNING AGAINST TRADE

Free trade deals once had almost universal support among Republicans and broad support among Democrats. Farr noted that it was Democratic President Barack Obama who negotiated the Trans-Pacific Partnership (TPP), which Democratic presidential candidate Hillary Clinton once called the “gold standard” of trade agreements. But Clinton turned against the deal during the campaign as Trump’s attacks on trade deals drew applause across the industrial Midwest.

Trump withdrew the United States from the sweeping Pacific accord immediately after his election, and many Republican free-traders have since gone silent on the issue or adopted variations of the president’s rhetoric.

“You have a growing number in the Republican party aligned with what the President calls ‘America first’ – what others call isolationism,” said Andrew Downs, director of the Mike Downs Center for Indiana Politics at Purdue University Fort Wayne.

The tax reform passed by Republicans has also made the U.S. a better place to invest by slashing taxes on businesses, Farr said, saving Emerson $189 million last year. The tax cuts enabled Emerson to grant a 2.9 percent general wage increase worth $42 million and better benefits.

Some decisions remain in flux as trade disputes simmer. Emerson had long planned a new factory in Mexico to serve North America, but broke construction into two phases pending the outcome of a revised U.S. trade agreement with Canada and Mexico that awaits congressional approval. The first phase is underway, but the second will only be built if the trade deal goes forward.

Forces beyond politics are pushing manufacturers like Emerson to reconsider investments in China, including rising labor and logistics costs there; worries about transferring intellectual property to state-run Chinese firms; and emerging technology to automate factories in high-wage countries.

Farr said his meetings with candidate Trump during the campaign convinced him he was serious about overhauling U.S. trade relationships. But Emerson’s renewed commitment to U.S. manufacturing is also part of a larger move by global manufacturers to produce more goods in the regions where they are consumed to save on transportation costs.

Foreign companies are also recalibrating, including Dutch multinational Koninklijke Philips NV, one of the world’s largest electronics companies, which last year relied on the United States for 35 percent of its sales. CEO Frans van Houten told investors on a call in January that he is stepping up efforts — like Emerson — to produce more goods where they sell them, moving away from a model of factories specializing in products that are then shipped globally.

The push is visible in trade data, said Susan Lund, a partner at McKinsey & Company who studies trade flows. In 2007, 28 percent of global production of goods was traded — moving from one country to another. That share has dropped to 22.5 percent.

Emerson’s industrial valve and controls business is one area where Farr plans to move factory capacity to the United States to serve customers there. Emerson produces valves used in everything from fracking to oil refineries and has sprawling research and production facilities in Marshalltown, Iowa, which this fiscal year will receive a $22 million capital investment and three dozen new jobs.

U.S. valve factories produced only about half the goods it sold domestically in 2017. Emerson plans to push that to 90 percent by 2021.

“We’re looking at two new facilities in Texas,” Farr said. “That will mean taking capacity, and jobs - out of Europe and some out of China - and bringing it to Texas.”


(Reporting by Timothy Aeppel; Editing by Joseph White and Brian Thevenot)