No U.S. Manufacturer Asked for More Tariffs

(Bloomberg Opinion) -- President Donald Trump’s trade tantrum now threatens to become an all-out war with painful repercussions for U.S. manufacturers. Trump began the week by vowing to increase tariffs on $200 billion of Chinese goods to 25 percent and ended it by following through on that threat. He also said a process has begun to place levies on an additional $325 billion of imports, which would mean virtually everything that passes into the U.S. from China would be subject to a tax. China has said it will retaliate. In just a few quick days we’ve gone from wondering whether industrial companies may get a little extra margin and order boost in the back half of the year as tariffs get rolled back to debating just how bad things might get.

Technically, China and the U.S. are still talking. But one of the bigger lessons of this abrupt tariff about-face is that for all the fixation on a deal, it’s not clear that a true rapprochement was ever really possible in the first place. It increasingly feels like tariffs are themselves the end game for Trump. China, meanwhile, has no reason to abandon efforts to remake itself as a leader in emergent industrial technologies, as my colleague Anjani Trivedi writes. In some ways, Trump’s tariffs actually push it further toward that goal by de-emphasizing China as a country of choice for lower-margin assembly work, David Fickling writes. There’s the most room for compromise on China’s foreign investment requirements. Removing structural barriers to competition is really what corporate America cares about. Tariffs aren’t “the right medicine for the illness we’re trying to resolve,” Cummins Inc. CEO Thomas Linebarger told Bloomberg TV Monday. But making China a more attractive place to do business is arguably at odds with a “Make America Great Again” mindset. Not that escalating tariffs helps either: Scott Wine, CEO of snowmobile-maker Polaris Industries Inc., feels like he’s being punished for building a plant in Alabama because it now costs more to get many of the products he needs. 

Trump continues to inaccurately insist that China is somehow paying tariffs to the U.S. Treasury, but it’s manufacturers and their customers that will bear the added costs. At least one strategist recommends buying German stocks and industrials right now, which is certainly one way to go if you like headline risk. Some companies have already included a ramp-up to 25% tariffs in their guidance, but few, if any, have given estimates of how a full-blown trade war might play out. The inventory hangover that Emerson Electric Co. and others have called out in their latest results may bleed into the rest of the year if companies try to buy goods ahead of possible tariffs on the remaining $325 billion of Chinese imports. The question is whether demand is strong enough to absorb those stockpiles and whether industrial companies will be able to push through yet another round of price increases to offset the higher costs. The industrial economy is starting to wobble, as evidenced by Fastenal Co.’s April sales slowdown and weak Institute for Supply Management manufacturing data. But don’t fret because Trump says there’s “absolutely no need to rush” on trade talks.

HOW DO YOU MEASURE A RECOVERY?
The mood at General Electric Co.’s annual meeting this week was one of cautious optimism. Gone were the pomp and circumstance of the past: the event was held in a Marriott ballroom with ugly carpet in Tarrytown, New York. Many of the protesters who gathered at last year’s meeting worked in GE’s transportation unit and they are now airing their grievances with Wabtec Corp., which officially acquired the business in February. If there were picketers this time, I didn’t see them. There were still angry shareholders and retirees, but they saved their venom for former CEO Jeff Immelt and were generally encouraging of new leader Larry Culp. It was another reminder of how badly investors – from the conference attendee lamenting the cut in the dividend to just a penny a share to Trian Fund Management, whose chief investment officer Ed Garden was re-elected to the board – want Culp to be GE’s savior. About three-quarters of voting investors opposed taking power away from him by naming an independent chairman. Just over 70 percent backed GE’s executive pay packages, down from 92 percent last year but still a feeble protest vote. That got me thinking about accountability. Part of the reason GE’s struggles have been so catastrophic is that both Wall Street and the media allowed the previous management team to get away for far too long with using wonky financials and marketing hype to obscure poor capital-allocation decisions and operational mismanagement. Renewed faith among investors is a positive signpost on GE’s road to recovery, but there’s a danger in it as well if left unchecked.

DIGGING A DEEPER HOLE
Speaking of accountability and the lack thereof, Boeing Co. had another rough week amid ongoing scrutiny over the development of its 737 Max jet and the anti-stall software system that contributed to two fatal crashes. A cockpit alert meant to notify pilots when erroneous sensor data was being fed into the software system only functioned properly for customers who had paid extra for additional features, contrary to past messaging that indicated the so-called disagree warning was standard. Boeing says this wasn’t intentional, but while its engineers discovered the bug “within several months” of the first Max deliveries in May 2017, operators including Southwest Airlines Co. weren’t notified until after the first crash of the Max in October. It remains unclear why Boeing allowed the software system to rely on readings from only one sensor in the first place in a seeming disregard of lessons from past accidents. But the fact that we are only just now hearing about this – two months after a second Ethiopian Airlines crash prompted global regulators to ground the plane – makes a mockery of Boeing’s pledge to be more transparent, as David Fickling writes. What really caught my attention, however, was Boeing’s claim that senior leadership also wasn’t aware of the glitch until this fall. This breakdown in communication would seem to confirm various employees’ characterization of Boeing as a place where bad news can’t be shared and delivering planes as quickly and cheaply as possible is paramount. The focus on turbocharged cash flow that helped CEO Dennis Muilenburg earn $23.4 million last year is also being accused of contributing to lax safety standards and shoddy work in Boeing’s 787 program. In light of this, I found it mystifying that lead director Dave Calhoun thought it was a good idea to tell the Washington Post that Boeing doesn’t need to fill its board with safety experts because it already has airline and supplier expertise.

DEALS, ACTIVISTS AND CORPORATE GOVERNANCE UPDATE
Siemens AG is carving out its power, oil-and-gas and wind operations into a separate company that will be publicly listed by September 2020. This is a pivotal move in CEO Joe Kaeser’s effort to transform the sprawling conglomerate into a “fleet of ships” that are nimbler and higher-valued. Siemens plans to own less than 50 percent of the new energy company, which would mean it no longer consolidates what have generally been disappointing results for the associated businesses. That’s a contrast to its Healthineers IPO (Siemens still holds an 85% stake) and the merger of its wind unit with Spain’s Gamesa (Siemens retained a 59% stake that will now transfer to the new entity). Those holdovers had meant Siemens for all intents and purposes was still a conglomerate – just a more complicated one – and the company struggled to deliver the kind of returns one might expect from a breakup. The energy split gives investors the opportunity to get an almost clean look at the digital factory and automation businesses that will remain. It’s hard not to compare Siemens’s unwind to GE, which should have been better positioned to break up as an American company subject to less onerous regulations. But the cash-flow challenges in its power unit make it virtually impossible for that business to stand alone right now. Recall that Siemens had reportedly been in talks to merge its gas-turbine business with Mitsubishi Heavy Industries Ltd., a combination that threatened to thwart GE’s efforts to rebuild its power unit’s profitability. While such a deal now appears to be put on ice, it may actually be easier to construct once Siemens’ energy businesses are independent.

Alstom SA’s former CEO Patrick Kron, blasted as a turncoat by many in France for selling off his company’s energy assets to GE, increasingly looks like the dealmaker of the century, writes Bloomberg Opinion’s Chris Bryant. GE paid $10 billion for Alstom’s power operations in 2015, in hindsight way more than it should have given the business’s cash flow struggles and the impending collapse in demand for gas turbines. GE booked a $22 billion writedown in its power unit last year, largely because of the Alstom deal. But that isn’t Alstom’s problem. On top of the initial takeover, GE also was obligated to buy out Alstom’s share in three joint ventures, which it did last year, for about $3 billion. Alstom is putting that money to good use on a 5.5 euro-per-share special dividend and will still have about 1 billion euros in net cash left over.

Occidental Petroleum Corp. looks like it will get to do the Anadarko Petroleum Corp. takeover CEO Vicki Hollub has been pursuing for years. Chevron Corp. declined to raise its offer after Occidental tapped Warren Buffett’s deep pockets to improve its bid. "Winning in any environment doesn’t mean winning at any cost,” Chevron CEO Mike Wirth said in a statement, which seems like a rather pointed dig at Hollub and a call to arms for aggrieved Occidental shareholders. Buffett’s money means Occidental investors don’t get to vote on the actual deal, but they can vote against Hollub and the board and as many as 30 percent of voting holders did so when the company hosted its annual meeting this week. You could see that vote being even more contentious in the future if the Anadarko acquisition doesn’t play out as planned. For its part, Chevron now gets a $1 billion breakup fee to use as it chooses. It could seek other deals, but its decision to hold firm on price suggest the oil and gas sector is finally getting some much needed discipline, writes Bloomberg Opinion’s Liam Denning. 

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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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