Johnson Controls

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By HamletsMill
November 28, 2005

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Johnson Controls is one of America's oldest surviving industrial corporations. Founded in 1885 by Warren Johnson to manufacture and market his invention of an electric thermostat. Over the decades, it expanded its product line to encompass a range of environmental controls, principally for commercial, office, and industrial buildings.
In 1978, it went into the automotive battery business, the start of its major entry into being an original equipment manufacturer for the auto industry. Starting in 1985, through a series of acquisitions, it became a major provider of automotive interiors (seats, dashboards, and doors), and interior electronics.

JCI is now a global company, with sales in excess of $26 billion, 120,000 employees, and has been consistently profitable with 59 consecutive year of sales increases, and 30 years of dividend increases (dividends have been paid consecutively since 1887).
The automotive group accounts for the largest part of the business, about 2/3; the controls and facility management business accounting for the rest. (Although with its pending purchase of York International, another extremely old American company, the non-automotive ratio will increase.)

If you own a car from the following, odds are extremely high that Johnson built a good deal of the interior work: BMW, Daimler-Chrysler, Ford, General Motors, Honda, Mazda, Mitsubishi, Nissan, Renault, Rover, Toyota and Volkswagen. (For the Japanese companies, the cars that were assembled in the US.) Its growth has been fueled by the fact that the American automobile industry has been steadily outsourcing parts of its manufacturing to companies like JCI, Lear, and Dana; augmented by producing parts of high quality that are constantly being incrementally improved.

Why bring up JCI? Partially because of discussions about the manufacturing sector, as an example of a major company that has been quite successful in one of the most troubled industrial sub-sectors, and partially to note that recent success has come despite (since the late 1990's) the rise of a more militant work force that has pushed for a union � despite the fact that JCI roughly has paid competitive wages, health plans and pensions.

It's obvious, from the boardroom reasons, Johnson isn't thrilled by the advent of unionization. However, it doesn't see the UAW as a sufficient threat to profits to spur a serious moving of its current automotive plants overseas. (Interestingly, it is moving more of its controls manufacturing operations to new foreign plants, and expanding both automotive and controls plants in that Mecca of low cost employees � Western Europe.)

One of the reasons why they aren't moving, is that their American plants are highly productive and effectively managed; arguably in the top tier of manufacturing performance. The advantage of lower labor costs and potentially lower material costs is offset by the prospect of lower efficiencies of production � there is a similarity of approach in how JCI does business in the States and how the Japanese do in their homeland.

I don't wish to convey the idea that I think that Johnson Controls is a paragon of virtues and a beau ideal of how American corporations should function,* rather as an example of what industrial companies work well in the US, and possibly as a guide to what could be a much better, stronger, manufacturing sector. If we have the will.

*Or that is a great investment idea. JCI has been an excellent stock to own; it has returned about 18.8% annually over the past decade (about twice the S&P 500), but at current prices I think it's fairly to slightly over valued � which to me means expected forward total returns not significantly above the rest of the market.

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