(Bloomberg Opinion) -- Who’s ready to make a Friday escape? Or put it this way: After another week of trade taunts and market convulsions, who isn’t?
The Trump administration announced late Thursday that it would slap tariffs as high as 25% on Mexican goods in an effort to force it to curtail illegal immigration. This is the same White House that two weeks earlier agreed to roll back levies on steel and aluminum imports from Canada and Mexico, and this week started the clock on its push to ratify a renegotiated version of the North American Free Trade Agreement. That deal would seemingly bar the kind of tariff bullying President Donald Trump is now implementing. Meanwhile, China says it will blacklist “unreliable” American entities and reportedly has prepared a plan to restrict exports of rare earths in retaliation for Trump’s efforts to stifle Huawei Technologies Co. and the threatened expansion of tariffs to all Chinese goods bound for the U.S. The temporary ceasefire that the Trump administration agreed to on proposed tariffs for European car imports seems fragile, at best. Trump’s recent visit to Japan ended with more jabs at Democratic presidential candidate Joe Biden than progress toward a trade deal. So yeah, things are going really well.
The tariffs on Mexico – which start at 5% on June 10 and then escalate in increments from there – will have direct implications for the automotive industry, which has relied on the unimpaired flow of goods across the border to keep costs low. Automakers will likely have to raise prices to accommodate the financial hit of tariffs, and that will further dampen already weak demand. It’s a low blow to a part of the industrial economy that had already been a notable blight on companies’ results. The automotive industry accounts for only about 10% of Rockwell Automation Inc.’s business, but sales plunged by 20% in its fiscal second quarter, dragging down the company’s overall results and forcing it to amend its guidance. If the tariffs on Mexico continue to escalate, that may make 3M Co.’s already heavily reduced outlook for its automotive-linked businesses still seem too optimistic. Mexico is taking a more tempered response to Trump’s tariff escalation right now, perhaps in the hope that this is a tantrum he will be talked out of by the slump in U.S. stocks and admonishments from the likes of Republican Senator Chuck Grassley. To me, the bigger risk to manufacturers from this latest trade salvo is what it signals about Trump’s mindset toward tariffs and his true goals in these negotiations.
Most industrial companies and investors would agree that the U.S.’s economic relationship with China is imbalanced, with the former opening up its markets to foreign companies, while the latter only does so half-heartedly. There is a need for greater intellectual-property protection and a frank discussion around the damage wrought by forced technology shares. But I find it increasingly hard to believe that the Trump administration cares nearly as much about those things as it does fostering a public perception of toughness. Rather than fighting for American economic interests, the White House has now veered sharply toward using manufacturers as political pawns. The biggest issue with the trade war is that it’s never been clear to anyone, least of all the parties on the other side of the negotiating table, what the U.S.’s endgame is. Canada, Mexico and the EU might have thought they had a role to play in helping the U.S. hold China to account, but instead they themselves are lambasted as national security risks. On Friday, Trump tweeted that the tariffs would force companies to relocate plants from Mexico to the U.S., comments that would seem to imply a renegotiation of trade policy despite protestations that this is exclusively about immigration. If there is a method to this madness, it’s getting lost in incoherent strategies and tenuous legal arguments. This bodes poorly for manufacturers in both the short and the long-term.
BOEING’S BALANCE OF POWER
One of the more interesting things about Boeing Co.’s 737 Max crisis is the relatively contained impact on its stock price. You could make the argument that investors are under-appreciating the damage the controversy has done to Boeing’s reputation and the risk that the scrutiny forces the aerospace giant to work on building a successor to the 737 model sooner than planned. But generally speaking, investors are wagering that the benefits of Boeing’s duopoly with Airbus SE will shield it from too harsh a reaction to both the Max and escalating trade tensions with China. That’s hardly the kind of dynamic that’s going to force a company to make real, meaningful change. CEO Dennis Muilenburg told CBS News that he hadn’t considered resigning, and why would he when Wall Street seems content to let the company bumble its way through this? This raises interesting questions about Boeing’s aspirations for vertical integration and whether it’s in anyone’s best interest to allow Boeing to control even more of the aerospace market. I’ve been skeptical of the strategic and financial payoff of United Technologies Corp.’s $30 billion takeover of Rockwell Collins Inc., in large part because of Boeing’s push to take the associated cost savings for itself and its efforts to build its own auxiliary power units, seats and avionics. But at the heart of the Max’s challenges sits flight-control software for which Boeing bears responsibility. Suppliers like United Technologies may not be so easily replaced and may have more leverage than previously thought.
GE’S BREAKUP WORK IS NEVER DONE
General Electric Co. CEO Larry Culp presented at a Bernstein conference this week and made some interesting comments about future strategic options. Management had previously implied the health-care businesses that will remain after $21.4 billion divestiture of its biopharmaceutical arm to Danaher Corp. will eventually be sold off. But Culp this week said health care was one of four businesses that make up the “industrial heart of GE” and a unit that will “help us get through this period.” On the one hand, health care is one of the company’s better sources of cash flow and would be helpful to have around if there’s a recession. But that wouldn’t seem to preclude taking a minority sliver of the unit public in the near-term to raise cash with which GE could further tend to its debt, pension and insurance liabilities. The GECAS jet-leasing arm is another asset for which Culp seems to have slightly changed his tune. While the unit still isn’t for sale, GE is open to the best ways to create value, Culp said. He yet again brought up the idea of going on offense via M&A. He caveated that it’s more of an intellectual exercise at this point, as the company is still working to complete existing asset-sale plans. “We're not going to talk names. We're not going to talk about structures,” Culp said. And that tells me the company is very much thinking about names and structures when it comes to the aviation and health-care divisions that Culp said would be a priority for such moves. Also this week, GE proposed to cut as many as 1,044 French jobs in its struggling power unit. With French finance minister Bruno Le Maire vowing to “fight for each job,” GE will likely have to settle for a more modest reduction. Therein lies one of the fundamental challenges of its aggressive restructuring plan. On the positive side, the U.S. Government Accountability Office denied a protest from a Honeywell International Inc.-United Technologies joint venture over the selection of GE’s T901 engine for a revamp of Apache and Black Hawk helicopters.
DEALS, ACTIVIST AND CORPORATE GOVERNANCE
Fiat Chrysler Automobiles NV this week proposed a combination with Renault SA that it bills as a merger of equals. My Bloomberg Opinion colleague Chris Hughes points out that label is a bit of a stretch. The contortions the two companies will go through to achieve a 50-50 equity split implies a premium for Renault’s share, while Fiat may end up getting to retain more of its management team. That may be a reflection of a need to walk a fine line in managing political interests in France and Italy. The deal has won support from both governments for now, but Lionel Laurent points out that this peace is hostage to the fortunes of the car market and the companies’ ability to follow through on a pledge to not close plants. The recent trade standoffs likely make sticking to that promise even more challenging. Chris Bryant says the deal is born out of desperation and is a bet that bigger car companies will be better positioned to weather the costs of developing electric vehicles and complying with increasingly strict emissions targets. The wager could pay off, but it’s complicated by governance questions and market risks. On the positive side, Renault’s existing partners Nissan Motor Co. and Mitsubishi Motors Corp. seem cautiously optimistic that the merger plan could benefit them as well.
Occidental Petroleum Corp. shareholders won’t get to vote directly on the company’s purchase of Anadarko Petroleum Corp., but they’re still finding ways to express their displeasure. Activist investor Carl Icahn filed a lawsuit against Occidental this week seeking documents and records related to the takeover. He didn’t wait for the material to lambast what he sees as a series of bad decisions, including Occidental’s pursuit of $10 billion in expensive financing from Warren Buffett and its efforts to box out shareholders from having a say in all this. “There are limits to what corporate managers and directors can put past shareholders, and one of those limits is Carl Icahn,” writes Bloomberg Opinion’s Matt Levine. Icahn is trying to rally other shareholders to call for a special meeting where they could vote out board members. He says Occidental could have gotten a nice premium for its own investors by trying to sell itself instead and urges management to consider seeking bids for the combined company after the deal closes. Occidental may not have a choice on that front if the oil gods disrupt the company’s plans to pay down debt and deliver cost savings, as Bloomberg Opinion’s Liam Denning notes.
Wesco Aircraft Holdings Inc., a distributor of aerospace parts, is exploring options including a sale, according to Reuters. Wesco could fetch as much as $17 a share if suitors are willing to compensate shareholders for the potential benefits of the company’s plan to cut costs and reduce its debt load, says Suntrust analyst Michael Ciarmoli. That would be a 75 percent premium to the company’s price before the sale report. Recall that Boeing last year acquired KLX Inc.’s aerospace parts distribution business for $4.25 billion, a move that created a much stronger competitor for Wesco. It’s possible that Airbus SE may see value in that kind of vertical integration as well. Personally, I think it’s more likely that Wesco draws interest from a private equity firm. Carlyle Group LP acquired the company in 2006 and retains a 23% stake. The private equity firm recently acquired airplane maintenance provider StandardAero from Veritas Capital, reportedly beating out interest from Blackstone Group LP and Warburg Pincus.
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To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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