Raytheon-UTC Merger Highlights America’s Edge in R&D

The United Technology headquarters in Farmington, Conn., June 10.
Photo: Pat Eaton-Robb/Associated Press

6/10/19

By The Editorial Board
The Wall Street Journal

The decline and fall of American manufacturing is a oft-told story and usually fiction. The reality is that the U.S. retains significant comparative advantage in advanced manufacturing, as the merger of Raytheon Co. and United Technologies Corp. that was announced highlights.

The all-stock transaction would create Raytheon Technologies Corp., which the companies value at about $160 billion and would be second only to Boeing among U.S. defense suppliers. Raytheon, which makes Tomahawk cruise missiles and other advanced weapons, will add patents and expertise from UTC’s jet-engine and aerospace divisions.

Last year the two companies spent nearly $5 billion on R&D. The CEOs say cost savings will let the combined company increase spending on research, helping preserve the U.S. lead in defense technology as China expands its spending and military footprint.

For UTC, a conglomerate built in the 20th century, this bet on R&D is a long-coming adaptation to market pressure. CEO Greg Hayes has been trying to streamline the company by focusing on aviation and defense, and UTC is spinning off its Otis elevator and Carrier air-conditioning units over the next year. Those businesses made up a shrinking share of the firm’s sales, and meantime UTC acquired avionics company Rockwell Collins to expand in aerospace.

The marriage to Raytheon will complete UTC’s makeover, but it’s worth noting how political pressure may have delayed the transition. As President-elect in 2016, Donald Trump used Carrier as a political prop by demanding that UTC keep open an Indiana plant where it makes Carrier air conditioners.

Mr. Trump offered $7 million in subsidies over 10 years if UTC preserved at least 700 jobs and spent millions on domestic investment. It was an offer Mr. Hayes couldn’t refuse. But such industrial policy can’t overcome the laws of economics, and Carrier has continued to lay off workers at the Indiana plant as the subsidies weren’t enough to make up the costs saved by shifting jobs to Mexico.

Meanwhile, UTC added a total of 28,700 jobs from 2014-2018, and over the years has paid 38,000 employees to get a college degree. Raytheon created 6,000 new jobs in the same period. In this era of cynicism about business, politicians focus on the layoffs, not the investment in talent that companies know they need to succeed.

The merger also underscores the continuing vitality of U.S. high-value-added products. From 2009-2017, U.S. employment in advanced manufacturing rose 6%, even as automation has rapidly raised output, according to the Federal Reserve Bank of St. Louis. In 2016 defense and other advanced industries accounted for 60% of the total value of U.S. exports.

This advantage in high-value products comes from America’s edge in research and higher education, and it is likely to endure much longer than a strategy to outdo foreign exporters by competing on price in low-margin commodity businesses. At least it will if America can fill its growing need for engineers, either by improving education or inviting more immigrants with high-tech skills.

President Trump wondered on CNBC Monday if the tie-up would “take away more competition” in defense. His assent is necessary because, in addition to federal oversight, the Pentagon can use its clout as the top buyer to influence mergers in the defense industry.

Yet there’s little evidence that consolidation in defense leads to sluggish competition. A study released in February by the Center for Strategic and International Studies showed that mergers among defense contractors from 2000-2015 didn’t lead to higher prices. Raytheon CEO Tom Kennedy said Sunday that merger efficiencies would allow lower prices and bring up to half a billion dollars in savings to taxpayers.

The new company’s success will depend in part on rising defense spending in coming years, which is far from certain with the 2020 presidential election looming. Yet even if a Democratic President slashes spending on defense, the combined Raytheon Technologies would be better positioned to cut waste and sustain the investment that drives American security.

Appeared in the June 11, 2019, print edition.

The original article can be found here: https://www.wsj.com/articles/a-merger-bet-on-a-u-s-strength-11560206583

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