1. Luke Mariani
5/11/2016
Econ 489
An Economic Analysis of Johnson Controls
When it comes to economic analysis, there is no better wealth of observations than a
multinational conglomerate. Operating at every level of the economy – from daily transactions to
international mergers - Johnson Controls Inc. stands as a textbook example. Johnson Controls is a
Fortune 100 company actively traded on the NYSE. In 2015, the company had a global workforce of
130,000 which is approximately the size of Syracuse, NY. As a market leader, economic moves made by
the corporation have a global impact, and are interpreted as an indicator for the industrial sector. The
company is a multifaceted machine that demonstrates a strong knowledge of economic theories in
addition to market awareness. With sell offs, spin offs, mergers, and acquisitions - from the
international market to the domestic- there is a lot to consider. Implementing widely accepted
economic theories and models, the company can be thoroughly studied. Moving from hand to hand
transactions to multimillion dollar deals, analyzing Johnson Controls can serve a practical purpose as a
learning tool. In order to properly consider the present, analysis must me prefaced with history.
Founded by Warren Johnson in 1885, the 125 years of experience have undoubtedly done well
to shape the company into what it is today. Beginning with the first electric thermostat, the
corporation has seen many different products since. There was a time that Johnson Controls was in
the market of manufacturing plastic water bottles, but that time has come and gone. In fact, some
employees refer to JCI as “Just change it.” Whether this is with affection or distain can be ambiguous
at times. Regardless, the company certainly does not shy away from innovation. In 1910, Johnson
Electric Service Company produced the first steam powered car. This may seemlike a marvel of

2. Luke Mariani
5/11/2016
Econ 489
modern times, but the kerosene powered steamcaused the engine to explode without notice.
However, without dropping the notion of automotive manufacturing, the company began moving
through various endeavors, eventually resting on the production of batteries and car interiors, in
addition to the original masterpiece of building controls.
Through multiple outlets Johnson Controls grew. With the 2008 acquisition of their largest
competitor, York, the company began to take off in its building efficiency endeavors, in addition to its
larger scale building projects. In May of 2015 there were four main business units: Automotive
Experience– dedicated to the production of interiors for cars, Power Solutions – focusing on the
manufacturing of batteries for all purposes, Global Workplace Solutions – which offers competitive
advantages to customers who want to improve lifetime savings for large scale building projects, and
Building Efficiency – which, in true Warren Johnson fashion, produces thermostats and building
controls like fire alarms, roof top chillers, and other such industrial goods and services. I was stationed
in Building Efficiency handling seven million in receivables for the Albany branch of Johnson Controls.
It was here that I began to take an interest in the economic decisions of the corporation, from the
smallest scale to the largest.
At the ground level, the business needs to sell its goods and services. This was evident in
Mississippi, at one of the more successful high schools in the state. Oxford High School had an 87%
college acceptance rate, and consistently scored above the state average on the ACT test. In 2011,
Oxford High School had a vision to build a new school with a “One-to-one Digital Learning Initiative.”
This meant putting a laptop into the hands of every student. The school raised approximately 30
million dollars to the cause, but that was still short of their goal. Oxford High School looked to Johnson
Controls for a solution. By entering in to an Energy Services Agreement (ESA), Johnson Controls agreed

3. Luke Mariani
5/11/2016
Econ 489
to produce operational savings that would make the goal of one-to-one technology possible in the
long run. This was achieved by installing more efficient lighting and building controls to save energy
cost and reduce carbon emissions. This type of operation goes through the Global Workplace
Solutions branch of Johnson controls.
The design of an ESA is compelling. Basically, Johnson Controls agrees with a customer on
future discounted estimates that outline how much the customer will save over the course of a
defined number of years. Typically, these types of projects are have a higher initial cost, but tend to
save more money in the long run. JCI insures these estimates with an agreement to repay a sum to
customer if the savings are not achieved. This can lead to complications if the net discounted present
value of the savings is not right. One can visualize the basic model for discounting as follows:
NPVJCI = S0 - C0 + (S1 - C1)/(1+i1) + (S2 - C2)/(1+i2)2 + … + (Sn - Cn)/(1+in)n
Where Sj is savings in year j, Cj is the cost of service or maintenance in year j, and ik is the
expected interest rate in year k, with j = 0, … , n and k = 1, … , n.
In order for Johnson Controls to secure this contract, they would have to offer a higher NPV
than a competitor with a similar contract. There are actually two possible situations that could arise.
Firstly, a competitor could offer a one-time construction bid at a significantly lower cost that Johnson
controls, but then offer no follow up work or advanced long-term savings. In the second scenario, a
competitor would offer a similar contract bid with follow up service and energy savings. Assuming that
the customer is rational and forward thinking, you could expect the two models to look similar to the

4. Luke Mariani
5/11/2016
Econ 489
following:
1. NPVJCI > αβ(C0)
2. NPVJCI > β(NPVCOMPETETOR)
Where α, β are preference variables, and 0 ≤ α, β. In this model α is the customers preference
for free capital, i.e., a cheaper project means that the excess capital could be invested elsewhere.
Suppose α < 1, then the customer prefers riskier investments of capital. If α > 1, the customer prefers
to have immediate free capital. If α = 1, the customer has no preference between the two. β is a
multiplier that captures the customer's preference for the quality of work, or reputation. It is a
perception bias. If β < 1, the customer prefers the quality of Johnson Controls. If β > 1, the customer
prefers the work of the competitor. If β = 1, then the customer is neutral.
If these models return true, then the customer will work with Johnson Controls, and if they
return false, then the customer will default to the competitor. This is visualized in the below graphs.

5. Luke Mariani
5/11/2016
Econ 489
In Scenario 1, NPV is a function of the interest rate. Since the competitor in Scenario 1 offers a
one-time cost which has no relation to interest, it is a constant line (here α, β are held constant for
simplicity, though they do have a direct impact on the graph). There is a negative relationship between
JCI's NPV and interest rate, since as interest rises over time it will cause the NPV of the savings to
decrease. The customer will choose the JCI bid anytime that NPVJCI - αβ(C0) > 0.
In Scenario 2, all Sj, Cj, and ik are assumed constant since we assume that the competitor has
equal access to the same resources, technology, and labor as Johnson controls. This makes NPV a
function of β. In this model NPVJCI becomes constant while NPVCOMPETETOR increases with β. The
customer will choose the JCI bid anytime that β < 1. This demonstrates clearly the importance of
quality. If the competitor offers higher quality of work, then the customer will select the competitor’s
bid.
To understand this in the scope of Economics, imagine in Scenario 1 that NPVJCI is the marginal
benefit of working with Johnson Controls, and αβ(C0) is the marginal cost of not working with the
competitor. Any time that MB-MC > 0, Johnson Controls will win the bid. Similarly for Scenario 2,
imagine that NPVJCI is the marginal benefit of working with Johnson Controls and NPVCOMPETETOR is the
marginal cost of not working with the competitor. Again, any time that MB-MC > 0, Johnson Controls
will win the bid.
Since it is now understood how Johnson Controls handles small scale business, it follows that
the large scale operations should be analyzed. To delve into this, it is important to understand that
Johnson Controls is a multinational conglomerate. Included in in this conglomerate are the four major
arms of the business which were detailed in previous paragraphs. (It should be noted that Johnson
Controls is not solely comprised of these four entities.) Each of the business units also own smaller

6. Luke Mariani
5/11/2016
Econ 489
businesses that assist in the completion of contracts. Therefore, Johnson Controls can be thought of as
a conglomerate of conglomerates.
Let the Automotive Experience entity be the example in this analysis. As previously discussed,
Automotive Experience branch controls the manufacturing of various parts for planes, boats, and
automobiles. These parts range from plastic components to seating. In 1985, as a plan to diversify and
secure a larger market share in the automotive industry, Johnson Controls purchased Hoover Universal
– the leading producer of automotive seating. The transaction was valued at approximately $490
million. This deal all but created Automotive Experience, requiring Johnson Controls to form a
subsidiary to purchase 45% of Hoover's outstanding shares. At the time there were 13.4 million shares
outstanding, selling at a price of $36.50 each, which summed to $219 million. The remaining Hoover
shares were exchanged for 0.83 shares of Johnson Controls common stock bound by the condition
that the price per share of JCI stock remained in the range of $40 and $48.
This has a clear correlation to economic theories, particularly Economies of Scope. The
question arises: Should Johnson Controls absorb production of automotive components into one
facility, or allow Hoover to retain its control over production, manufacturing components in a separate
facility? The following model would do well to describe the economic theory applied to make a
rational decision:
C(Q1,0) + C(0,Q2) > C(Q1,Q2)
Where C(Q1,0) is the cost of producing Johnson Controls components in one facility, C(0,Q2) is
the cost of producing Hoover components in a separate facility, and C(Q1,Q2) is the cost of producing

7. Luke Mariani
5/11/2016
Econ 489
both components simultaneously in one facility. Q1, Q2 are the quantity of components produced by
JCI and Hoover respectively. If this statement returns true, there would be a savings of
C(Q1,Q2) - [C(Q1,0) + C(0,Q2)].
This would be gained from reducing cost by manufacturing the components simultaneously. If the
model returns false, there would be no (or negative) savings by combining production facilities.
In the case of the Hoover acquisition, production facilities were left separate. This is largely due
to the fact that the components produced by each company had very little in common. Johnson
Controls' main good was batteries and electrical components while Hoover mainly produced seats. It
did not make much sense to combine production facilities, due to the lack of overlap in manufacturing
procedures.
However, this does give rise to another economic theory which applies to the case of the
Hoover acquisition – namely, Economies of Scale. With access to more access to capital funding from
the deal, Johnson Controls was able to invest in larger production facilities to decrease the cost per
unit of each item. For each dollar invested in a larger facility, there is a direct effect on output. This is
demonstrated in the following graph.

8. Luke Mariani
5/11/2016
Econ 489
The y-axis is the cost per unit, the x-axis is the quantity of units produced, and the line
represents average total cost. As the size of the production facility increases, more units are able to be
produced at a lower cost. However, past a certain point, Q*, the inverse is true. This can occur for
numerous reasons, but typically happens when the cost of maintaining the facility outpaces the
savings gained fromreducing marginal cost per unit. From 0 to Q*, the company is experiencing
Economies of Scale, but from Q* to infinity, the company experiences Diseconomies of Scale. It can be
inferred that Johnson Controls will continue to invest in expanding production facilities until they
reach the equilibrium output, Q*. The solution is to allocate more funds into research for more
efficient production, rather than to increase the size of the production facility.
Economies of Scale and Scope play a huge role in business world. This is certainly true when it
comes to mergers, acquisitions, and divestiture. In July of 2015, Johnson Controls decided to spin off
the Automotive Experience arm of the company. It was a controversial decision at the time, mainly
because Automotive Experience generated $22 billion in revenue for the corporation in 2014. This

9. Luke Mariani
5/11/2016
Econ 489
amounted to about one third of total revenue for Johnson Controls in that same year. Once the
economics behind the spin off were considered, the decision made sense. In Q3 of 2015, the profit
margins for the seating business was 6.5%; for the automotive interiors line, the margin was 5.8%.
When these margins were compared to that of Building Efficiency, and Power Solutions – producing
10% and 15.9% respectively – Johnson Controls decided to invest the money from Automotive
Experience into more profitable enterprises. In other words, they were avoiding Diseconomies of Scale
and Scope. While Johnson Controls strives to maintain profitability with external business maneuvers,
it does the same internally.
In November of 2015, the company announced it would be moving its Milwaukee Business
Center (MBC) to join with its counterpart, the Bratislava Business Center (BBC). JCI business centers
handle most of the accounting, finance, cash applications and collections for the Building Efficiency
unit of the company. Again, while a shock at first, the economics driving the decision proved to be
sound.
The MBC was comprised of approximately 400 employees, with an average salary of $62,000.
This amounts to $24,800,000 annually. Johnson Controls sought to reduce labor cost by moving the
building overseas, where labor is much cheaper. For comparison, the average hourly wage of an
employee in the BBC was approximately $7.00. This means that the average salary was $14,560. If 400
employees worked in the BBC, then labor would cost the company $5,824,000 yearly. This equated to
a savings of $18,976,000 solely in labor every year. This came as a cost saving measure to ensure
against declining demand in the real estate and automotive markets. On September 18th, 2015,
Johnson Controls made this statement,
“Johnson Controls, announced ... it is planning to reduce its global salaried workforce by as

10. Luke Mariani
5/11/2016
Econ 489
many as 3,000 people, or 2.5% of total employees, through comprehensive initiatives designed to
ultimately deliver up to $250 million in annual cost savings.” (PR Newswire)
Some protested the decision to move the MBC, claiming that through loss of quality the
company would lose more than it would save. However, in order for the transition to fail, the company
would have to lose $18,976,000 in addition to the saved operating costs from the closure of the
building. Clearly, the right choice was made.
In conclusion, as an employee of this international conglomerate, I have learned a lot. The
applications of my education afforded me a unique insight into the rationale behind each business
decision. Placing an emphasis on customer satisfaction and long term savings at the ground level,
Johnson Controls has secured a reputation for success. Through strategic mergers and acquisitions,
the company ensures that competitive market share remains in its grasp. Divesting in less profitable
assets, it has allowed a free flow of trade working capital to act as a safeguard against unforeseen
risks. While some saw the business unstable, it became clear to me that it was doing what was
necessary to remain one of the strongest industrial conglomerates to date. Through economic analysis
of the business, it is clear that Johnson Controls is positioning itself to remain profitable in the future,
and survive for another 125 years.

11. Luke Mariani
5/11/2016
Econ 489
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<http://www.wikinvest.com/stock/Johnson_Controls_(JCI)/Data/Effect_of_Exchange_Rate_Changes>.
Person, and Bob Tita. "Johnson Controls to Shed 3,000 Jobs." WSJ. Web. 11 May 2016.
<http://www.wsj.com/articles/johnson-controls-to-shed-3-000-jobs-1442580448>.
"An Economic Look on the Johnson Controls and Tyco Merger." WTMJ. 2016. Web. 11 May 2016.
<http://www.wtmj.com/shows/wisconsins-morning-news/an-economic-look-on-the-johnson-controls-
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