General Electric: How a Multi-National Corporation is Profitable

Introduction

Companies produce goods and services and are taxed by the states in which they operated. In 2014, Fortune magazine noted that the US, Japan, Argentina, Pakistan and Venezuela led the world with corporate tax rates– all more than 30% (Dumaine, 2014). A 2014 Tax Foundation report noted that the United States had the third highest general top marginal corporate income tax rate in the world at 39.1 percent, and was exceeded only by Chad and the United Arab Emirates at 40% and 55% (Pomerleau, 2014). While these state governments provide some services to businesses, corporations in these countries incur corporate tax as part of the cost of doing business. Since these businesses really don’t pay tax, they must pass this expense onto their customers in the form of elevated prices. If countries have differing rates of taxation such as China whose corporate tax rate was at 25% then if other things about the production and distribution of products and services in a global marketplace are equal the nominal corporate tax rate can put domestic US companies at a disadvantage (“China Corporate Tax Rate,” 2015).

Similarly, companies that produce goods and services must use the currencies of that country to conduct business in that country since currency is the legal tender of those countries. When the supply of money in countries exceeds the real output, these countries experience inflation (Ely, Adams, Lorenz, & Young, 1926). Inflation can be influenced by the cost of other money’s in countries that trade with the domestic market. The Nomad Capitalist reported in 2013 that the top five countries in the world with inflation were South Sudan, Iran, Syria, Sudan and Venezuela (Henderson, 2013). In the United States the rate of inflation has been reported at 1.5% in 2013 (Current US Inflation Rates: 2005-2015, 2015). When considering the supply of money and its valuation in the world markets, currencies can strengthen or weaken themselves in the marketplace. When speaking of a strong or a weak dollar the value of that dollar changes against other currencies in the world. When the dollar is strong, it means that this currency can buy more goods and services and when it is weak it means that other currencies can buy goods and services in the domestic market. These fluctuations happen on a daily basis and high speed traders can capitalize on these differences for a profit in the FOREX marketplace (Nakaso, 2011). In these instances, investors can capitalize on inequalities in the movement of those currencies as well.

Another area of macroeconomic interest is the means by which countries borrow money from each other and this metric is  more commonly called national debt. When companies buy and sell in countries the rate at which governments assume debt means that at a later point in time the government of that country will have to take first from productive entities in the economy. If they tax citizens at a higher rate, then people will have less money to buy the companies products or services. If the governments increase the nominal taxation rate on businesses they will have to pass these increases onto their customers which means that fewer people will be able to afford their products or services, or worse, will choose a competitor’s product that can be sold on the market for less. Forbes reported in 2014 that the five most indebted countries of the world are: Japan, Greece, Italy, Portugal, and Singapore (Patton, 2014). The same report matched the debt to the gross domestic product and all these countries are trending at increasing this ratio.

When companies have subsidiaries in various countries, they move money between these corporate interests according to the laws of each of these countries. Countries with strict controls on foreign investment often limit how much a company can do this. A world bank report on direct foreign investment noted that even when companies want to enter these markets they are often met with other challenges which include, “onerous start-up procedures, excessive licensing and permit requirements, and time-consuming export and import processes are among the factors that can make an economy less attractive to foreign investors,” (Deva & Kobayashi, 2010). The report noted that 90% of the 87 countries surveyed limit foreign access to some aspect of markets and that the majority of these restrictions noted add several months to getting these products to market (Deva & Kobayashi, 2010). Companies enter these markets because they are profitable (Ball, Geringer, Minor, & McNett, 2010c).

Profit is the amount of money a business makes after it pays all its expenses. This view is further defined by Mises who notes that profit is, “is the gain derived from action; it is the increase in satisfaction (decrease in uneasiness) brought about; it is the difference between the higher value attached to the result attained and the lower value attached to the sacrifices made for its attainment; it is, in other words, yield minus costs,” (Mises, 1969). Samuelson claims that there are four aspects of profit, “(1) profit as implicit rents, wages, and interests; (2) profit as the temporary return to daring but unforeseen innovations; (3) profit as the divergence between what was expected to happen and what happened; and (4) profit as a monopoly return,” (Samuelson, 1948).

When countries conduct business across international borders, they often exchange their currency of the host nation for that of another. Often this is done in denominations through an exchange bank and pegged against the US Dollar which remains the world’s reserve currency (Mueller, 2003). Ball, Geringer, Minor and McNett contend there is no theoretical model to explain why these exchange rates vary (Ball, Geringer, Minor, & McNett, 2010a) but they do note however, that some governments place controls on how currencies are exchanged within that country (Ball, Geringer, Minor, & McNett, 2010b). The balance of payments is a record of a country’s transactions with the rest of the world and reveals the demand for that country’s currency. If the country is exporting more than it, imports there will be a high demand for the currencies in other countries in order to pay for those goods. When a country imports more than it exports the currency is usually expected to be devalued and this balance of payments can be affected directly by trade controls imposed by a country (Taylor, 1998).

The world’s largest company is General Electric (Roberts, 2010). It remains headed by Jeffrey R. Immelt with offices in over 170 countries and over 300,000 employees world wide (“Fact Sheet,” 2015). It is headquartered in the United States and provides both goods and services in appliances, aviation, capitalization and finance, healthcare, energy management, oil and gas, power and water and transportation (“Fact Sheet,” 2015). General Electric is publicly traded on the New York Stock Exchange as well as traded in London, Paris, and Frankfurt. Fortune magazine rates General Electric as ninth in the world as a respected company (“General Electric,” 2015). The Wall Street Journal reported that in the first quarter of 2015, after selling off its financial services business, GE lost revenue in three areas of its core business: oil-and-gas equipment, jet engines and medical devices (Mann & Dulaney, 2015). This was due to a one-time write down on its assets and if these were not included GE would have made $2.1 billion in profit (Mann & Dulaney, 2015). The New York Times reported that 2015 second quarter earnings were improved with GE’s industrial business up 5 percent, to $4.4 billion, and it was up 11 percent before currency translations. The New York Times reported that this Industrial revenue came in at $26.9 billion which was a ‘flat’ number though up 5 percent without the currency effect (Lohr, 2015). While some of these adjustments in oil and gas may seem significant, they were up 20% the year before and 17% in the year before that as reported by Morning Star (McGrath, 2014).

When assessing the value of this company, it is important to note that this company deals in more than 170 different currencies because of the countries that it is operating in. Gerber discusses four agents in a macro economy which include households, businesses, governments and foreigners (Gerber, 2011). When operating in so many different markets, there are many risks to consider. The following will address how Gerber’s four macroeconomic agents are affected by General Electric in a broad global sense rather than specifically as to these market economies. Furthermore, the following will address how a severe financial crisis would affect the company. Lastly, if the company were required to reform because of a crisis, the following will insinuate what those reforms would look like.

Analysis and Findings

Households. In each of the many countries that General Electric operates in, the company must recruit human capital to conduct that business. The kinds of labor across the market, given the multiplicity of markets and services that GE is in varies as diversely as the company itself. GE must employ hundreds of thousands of people around the globe with so many different skill sets. Citizens in many countries also buy products from General Electric as consumers and many businesses around the world buy their products that are built into a business to business model. Examples of consumers in house holds are light bulbs that are in use around the world. An example of the business to a business product is the magnetic resonance imaging machines or x-rays that are sold to hospitals around the globe. Some of these machines are made for businesses that work upstream in their economic development so that they provide indirect benefit toward the marketplace. ABC News reported that GE came under fire in the US for employing a significant amount of foreign workers instead of American workers when domestic workers could do the job (Kim, 2013). GE has also been criticized for moving operations around and displacing workers. Notably, the 1980’s they moved their industry-leading appliance facilities in the heartland of the US to new factories built in Mexico and China (Patinkin & Magaziner, 1989). In 2011 GE moved their 115-year-old X-ray division from Milwaukee to China which displaced several hundred American jobs (Dufner, 2011). In 2015, General Electric Announced that it would move 500 jobs from the US to China over its financial arm (Timiraos, 2015).

Business. As a global business GE moves jobs and production from many places around the globe to meet market demands. To the economies gaining this production or service, there is an increase in tax revenue and economic output. This includes jobs and disposable incomes of families that are gainfully employed by these businesses. Furthermore, it allows General Electric to remain globally competitive and innovative by retooling in those locations that it rebuilds, moves or innovates with new production or facilities. These businesses provide significant revenues for governments. General Electric in 2015 announced that in order to avoid losing more revenue in the United States due to the Congress’s inability to pass import/export reform or to renew export licensing, GE made plans to move jobs overseas. The Wall-street Journal reported in September of 2015 that, “GE has said that the failure to reauthorize the export financing agency, which congressional Republicans have singled out as an example of corporate welfare, would force the company to move jobs overseas or risk losing contracts for turbines, power projects and other industrial equipment,” (Timiraos, 2015). When companies buy GE’s products they are benefiting a multi-national company. Companies who buy GE’s products do so to remain profitable at a price point they feel they can be competitive in.

Government. When General Electric moves production facilities from the United States to China, its tax-burden shifts from paying a higher rate in the United States to a lower rate in China. This makes GE a more profitable company to its share holders and allows its products to be sold at a competitive advantage when not burdened with those costs. Again noting the US has one of the highest corporate tax rates in the world (Pomerleau, 2013). Additionally, the total cost per employee for the same level of skill changes for jobs that require many types of labor and human capital. When the US has the most prosperous and developed economy in the world, the cost per worker is higher than other places in the world to make the same product. Notably, the environmental regulations faced by General Electric in one country may force it to relocate as well. In 2011, the Business Insider reported that GE was closing its incandescent plant in Virginia and moving it to China because environmental regulations would make it unprofitable to produce that product in the United States (Yarow, 2009). Additionally, an environmental group called Scenic Hudson has been upset and in court over General Electrics failure to clean up of the Hudson River Valley (Burgess, 2015). They closed a capacitor production facility that put significant amount of PBA’s– a contaminant– into the water shed in the area and agreed to a six-year clean up plan which failed to clean up all of the waste (Nearing, 2014). General Electrics CEO following the market crash in 2008 was named as President Obama’s jobs czar (Lesley Stahl, 2011). Following this appointment, stories broke in the US accusing General Electric failing to pay US income taxes–by keeping $108 billion in assets abroad (Kavoussi, 2013).

Foreigners. The issue of foreign labor and capital remains at the center of the multinational corporation. General Electric leads the way as it is in more than 170 different markets. When its products are made by individual subdivisions of the company and sourced from several countries, the amount of nationalism is minimized in the perspectives of the company remaining profitable or not. Any lens that one looks through regarding General Electric will have some aspect of foreign association. The company is headquartered in the US but has production facilities all over and in dealing with all these different governments must face all kinds of hurdles for licensing, financing, importing and exporting and other customs and courtesies associated with each country. The overhead of this practice for this company must be immense. This makes GE more diverse than the US government’s military with 662 foreign bases in 38 countries. General Electric is a business and its motive is profit. It ability to displace workers and create jobs depends on this motive and sometimes these shifts cross international boundaries.
Crisis. When major market shifts happen and multinational companies experience them, companies like General Electric are more diversified than most governments in the world. If there is civil unrest in a country where their interests are threatened, since General Electric is in more than 170 different markets, the ability of the company to remain diversified can minimize the impact of that instability or security situation as it affects the company by moving production or finding another way to get the product to market through a country that may be on better terms than where the product or service originates.

The only challenge with this perspective is when the world’s reserve currency is threatened as with the petrodollars challenges with the Euro and Yuan (Leverett & Leverett, 2014; Looney, 2005; Puzzanghera, 2013). In these instances’ companies like General Electric use derivative contracts to defer risk and in their financing use put options to cover any potential losses. The challenge with this is that the same credit agencies that rate these deals are the same ones that failed to predict the dot-com bubble, the real estate bubble, or predict the major market corrections in China the last few weeks– essentially being worthless. Furthermore, they’ve failed to see the secret bailouts by the Fed that amount to trillions (Cardinale, 2011) or when AIG was deemed too big to jail (Rove, 2013).

Reforms. When considering a multinational corporation and its ability to produce competitive goods and services across a world market, the nation state that holds the world’s reserve currency status may continue to be the last country standing when considering such reforms. While this may be the case, the US have not jailed its bankers who have devalued the currency or had serious political reforms that make it easy for a company to continue to do business in the United States. Efforts to reform the US tax code with a FAIR tax or a flat tax have been thwarted as millions of jobs have moved over seas in previous decades starting with the Bretton Woods Agreements and made worse with trade agreements like NAFTA, GAT, and more recently the TPP. When companies take capital and keep it overseas to avoid taxes that money is not reinvested in a domestic US economy and thus jobs, capacity or other aspects of growth associated with business are not met. Instead the economy contracts and deficit spending fuels the trade deficit as well as increased food stamp and welfare roles in the US.

If the US lowered its income tax rate to the world average of 22% and provided real and equal incentives for entrepreneurs and companies to come back the mechanisms of the free market would work to create jobs so that they would remain globally competitive. Several challenges in this regard remain and would be the environmental regulations that a company adheres to as a matter of policy and when profit is the bottom line, those best practices may not include environmental considerations. In this regard those jobs that have left the US for multinationals operating out of the China– the pollution in that country and its record are atrocious.

Conclusion

Many opportunities in the United States exist to make business competitive. Modern industrialization and robotics allow high value production and quality to come from a smaller and more effective and efficient work force in the United States. These efforts to retool in the US have the potential to allow the US to rebound from a 30-year slump of off shoring that was once the most industrialized country on the planet. Finances and services have taken over the US economy and the industrial base is smaller than it was in 1970 at its apex. Nominal wages are down from 1979 and potential to reclaim these grows more difficult by the minute as multi-trillion dollar loans are taken out against the future earnings of all Americans to pay a national debt financed by our allies and trade partners rich in manufacturing products and services. If these items aren’t corrected peacefully, then like the last century political violence would ensure that new regimes at states would reinvest in these multinationals as has been the case in South America following the implementation of the Monroe Doctrine. Companies like General Electric would come back if they had an incentive.

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