"American" Home Products Moves Abroad

"The first thing we do Monday morning is go to the bulletin board to see if a list [of workers to be laid off] has been posted," says Jim Sharp, a third-shift worker at American Home Products' Whitehall Division's pharmaceutical plant in Elkhart, Indiana. "For the workers that are still working, there's a lot of tension because they don't know from one day to the next if or when they're going to be laid off."

Every day after he completes his shift, Sharp heads for the office of Local 7-515 of the Oil, Chemical and Atomic Workers Union (OCAW) to stuff envelopes, keep the fax machine running and answer the phones. Local 7-515 is in the midst of a what it calls a "watershed struggle" to keep open the Whitehall plant, which American Home Products (AHP) has scheduled to close by this year's end. Sharp, who sleeps two hours a day in between volunteering at the union office and his work shift, this month received an award for 25 years of service at the Whitehall facility. He is also fighting to keep a job he's had for over half of his life.

In November 1990, American Home Products (AHP), one of the world's largest pharmaceutical companies, announced that it would close its 775-employee Indiana plant and shift part of its production to a new plant in Guayama, Puerto Rico. Within weeks of the announcement, the company began a series of layoffs. Whitehall's workforce in Elkhart is now down to about 600 employees, most of whom are members of OCAW. More than half of the workers are women over 40 years old, and many of them have been employed at the Elkhart plant for more than 20 years.

Last year OCAW launched a massive campaign called "Keep Whitehall Open: Hometowns Against Shutdowns" to prevent the plant's closure. The campaign has consisted of appeals to the press, marches and rallies, and numerous lawsuits against AHP, including a $100 million racketeering suit. Additionally, the National Labor Relations Board has charged the company with numerous labor-law violations.

"The closure of Whitehall looms like a death sentence over our members," says Connie Malloy, president of OCAW Local 7-515. Malloy charges that "American Home Products has displayed a total lack of respect for the law [and] a total lack of respect for their long-term employees."

A taxing move

OCAW's central complaint against AHP is the company's transfer of production from the Elkhart facility to the one in Guayama. AHP is one of many U.S. based corporations to shift production facilities to Puerto Rico in order to reap the benefits of Internal Revenue Service Code 936, known as the Possessions Tax Credit, and generous Puerto Rican tax breaks. Although these tax laws provide incentives for U.S. companies to set up plants in Puerto Rico, they stipulate that the new factories cannot siphon away existing U.S. jobs.

In practice, however, corporate profiteering in Puerto Rico is conducted at the expense of U.S. workers like those in Elkhart. OCAW estimates that thousands of U.S. workers have been dislocated because their employers chose to boost profits by setting up 936 plants in Puerto Rico.

AHP is a conglomeration of almost 200 companies which market hundreds of products ranging from heart medicine to spaghetti. The company is one of the leading manufacturers of prescription pharmaceuticals, over-the-counter medications and various other health care products. Some of its brand name products include Advil, Anacin, Premarin (estrogen), Preparation H, Robitussin, the Today contraceptive sponge, Jiffy Pop popcorn and Chef Boyardee prepared foods. In 1989, AHP earned $1.1 billion on $6.7 billion in sales, and CEO John Stafford received total compensation of $3,709,137.

AHP began its abandonment of its Elkhart facility in January 1990, when it laid off 56 workers, claiming a downturn in sales and demand. Six months later, when the company laid off 41 more employees, it blamed the layoffs on a "seasonal downturn" in business. By this time, AHP had constructed one of the largest pharmaceutical complexes in Puerto Rico, with a total employment of 1,250.

In July 1990, AHP laid off 187 workers at Whitehall's non- unionized plant in Hammonton, New Jersey. The same month, Whitehall vice president Richard Hill met with officials at the Elkhart facility to announce that an AHP study found 500,000 square feet of "excess capacity" within the Whitehall Division and that the "excess capacity" was the exact size of the Elkhart facility.

On October 1, AHP officially announced plans to close the Elkhart facility. In a news release announcing the planned closure, AHP said its decision was "principally the result" of its 1989 acquisition of A.H. Robins Company and reflected the need to rationalize production between its Whitehall Division and Robins' facilities. The company estimated the "gradual phase-down process" would be completed by the end of 1991. Another statement said the "production activities currently performed at Elkhart will be re-allocated to the remaining Whitehall-Robins facilities in Hammonton, New Jersey; Richmond, Virginia; and Guayama, Puerto Rico."

The ripple effect of the closing of the Elkhart plant will result in 2,900 layoffs and will cost the government $37 million, according to a study by the Midwest Center for Labor Research (MCLR), a Chicago-based consulting firm. The MCLR's analysis projected that, two years after the closure, dislocated workers will be earning less than 75 percent of their former incomes. Unemployment benefits will cost the government a total of $5.7 million, and an estimated 472 new welfare cases will cost an additional $1.4 million, the MCLR concluded.

AHP claims that its decision to close the Elkhart plant is "not unique in today's economic environment." Like other companies, a company statement explains, "AHP needs to operate its business in the most efficient manner in order to remain competitive." The company further denies that it decided to reassign most of Elkhart's production capabilities to Puerto Rico in order to exploit IRS Code 936. Asserting that the tax benefits associated with the move were only "minor," AHP claims, "The company's plans for product reassignment were based on its assessment of the best use of available capacity and staffing."

OCAW has filed a $100 million lawsuit seeking punitive damages under federal racketeering laws against AHP. A number of Puerto Rican officials are also named as defendants, including Governor Rafael Hernandez Colon, Secretary of State Antonio Colorado and Silvia Matos, the director of the territory's Industrial Tax Exemption Office. At its core, the lawsuit alleges that AHP has violated, and the Puerto Rican authorities have neglected to enforce, several U.S. and Puerto Rican laws. The violations have enabled the company to acquire millions of dollars in U.S. and Puerto Rican tax subsidies and to illegally obtain economic development and job training funds, the suit charges.

Ayerst-Wyeth Pharmaceuticals, Inc., an AHP subsidiary, is also named in the lawsuit. According to the lawsuit, AHP illegally sought to shelter the movement of equipment and millions of dollars in profits by appending a Whitehall Division plant it built in Puerto Rico in 1987 to the already-existing Ayerst-Wyeth plant.

Incentives to flee

AHP is one of many pharmaceutical companies to glean profits from the investment benefits granted to U.S. corporations which shift production to Puerto Rico. The Possessions Tax Credit exempts the profits of wholly owned U.S. corporate subsidiaries in Puerto Rico from all U.S. corporate income tax. The Puerto Rican laws, arranged under the umbrella of FOMENTO, the Puerto Rican Economic Development Agency, provide a host of tax exemptions which are utilized by virtually all of the 936 plants on the island.

The investment incentives are unique in that they encourage capital-intensive industries to locate in Puerto Rico. This is in direct contrast to the advantages sought by multinational corporations in other Latin American countries, where cheap labor and a low regulatory environment provide the primary investment incentives. "It's the exact reverse of what you would find in a stereotypical Third World/First World producing relationship," says Richard Leonard, director of the OCAW's special projects program.

The highly profitable, capital-intensive pharmaceutical industry is well-suited for Puerto Rico's investment structure. Pharmaceutical companies account for over half of the $2 billion the U.S. Treasury Department loses each year through 936- sheltered profits. Other major pharmaceutical conglomerates benefiting from IRS Code 936 include Abbott Laboratories, Bolar Pharmaceutical, Johnson & Johnson, Eli Lilly, Mylan Laboratories and Upjohn.

To take advantage of the 936 shelter, corporations have their Puerto Rican facilities perform only the most profitable elements of their operations. For example, Leonard explains, AHP's Guayama facility produces Advil, Anacin, Dristan, Primatene, Denorex and other products--all which were once produced at the Whitehall plant--with largely automated production lines. Defective products coming off the line, however, are thrown into boxes and shipped back to the United States, because fixing the defects--containers with missing or altered labels, for example--has to be done manually. This "reworking" is one of the most labor-intensive production facets for pharmaceutical companies. "The companies want to have nothing on the Puerto Rican books but pure profit with the lowest cost possible because the difference between the cost and the revenues can be sheltered," Leonard says.

IRS Code 936 is intended to assist Puerto Rico obtain employment-producing industries, according to a 1989 U.S. Treasury Department report. The report estimates that 936 corporations employ 88,579 persons in Puerto Rico, about 12 percent of the country's wage workers. Pharmaceutical companies, however, employ only 17,000 persons, while raking in over half the profits of the 936 companies. 936 corporations' tax benefits also differ substantially depending on the industry; in 1983, tax benefits per employee averaged $3,000 to $4,000 in low technology and labor-intensive industries, while the capital- intensive pharmaceutical companies average was an extraordinary $57,761 per employee per year, according to the Treasury Department report.

Augmenting the impact of 936 are a number of local tax exemptions which shield up to 95 percent of a qualifying U.S.- based company's income. The Puerto Rican Tax Incentives Act of 1987, for example, negates or greatly reduces local property taxes, municipal taxes and excise taxes. Companies utilizing these tax breaks, however, are prohibited by law from engaging in any business practice in Puerto Rico which would "substantially and adversely effect employees of an enterprise under related control operating in any state of the United States."

The view from Puerto Rico

The Puerto Rican economy, its workers and its environment are also victims of the various investment inducements. While IRS Code 936 remains in effect for companies throughout their stay in Puerto Rico, the investment incentives granted under Puerto Rican law are only temporary. Typically, the Puerto Rican government grants the tax exemptions and other benefits for 15 to 20 years. After these benefits expire, many companies leave the island, leaving behind toxic waste sites, empty plants and unemployed Puerto Rican workers. "

The only thing the companies do contribute are the wages," says Grey LeRoy of the MCLR. "But if they leave behind a toxic dumpsite and a bunch of dislocated workers when they close, then their balance sheet looks different." Puerto Rico is "littered with empty plants." LeRoy says.

The General Council of Workers (CGT), a federation of three major Puerto Rican unions, supports OCAW's lawsuit. "We believe that these corporations that come to the island with many tax privileges cause losses both in Puerto Rico and in the United States," says Luis Suarez, secretary general of the CGT.

"The companies come and they go and they change their names to come again to get their privileges for another 20 years," Suarez states. "The corporations are capital-intensive so they don't create many jobs. We have the pharmaceutical industry and it pollutes the island.... Whenever there is the possibility of making more money in another place, they move, so there is no stability." Suarez also objects to the fact that the Puerto Rican government guarantees investing companies that workers will not unionize.

The reach of 936

The problem of corporations abandoning U.S. plants for Puerto Rico is broad and severe enough that the AFL-CIO has made amending IRS Code 936 one of its legislative priorities for 1991. Calling 936 a "backdoor gimmick," the AFL-CIO Executive Council said in a February statement that Code 936 "has become an incentive for corporations to shut down production lines or whole factories on the U.S. mainland and relocate jobs to the territories and the Commonwealth of Puerto Rico."

American Home Product's production shift to Puerto Rico and the resulting loss of U.S. jobs in Elkhart represent only "the tip of the iceberg," says OCAW's Leonard. Pharmaceutical companies employ a variety of techniques to conceal and obscure any direct correlation between a plant closure in the U.S. and an opening in Puerto Rico, Leonard says. OCAW has commissioned a study to determine which companies have illegally shifted production practices and how many American workers have been displaced. OCAW has already compiled information on the transfer of jobs by Bristol-Meyers Squibb, Warner Lambert, Sterling Drug, Anaquest, Johnson & Johnson and Merck.

Thomas Dooley, the coordinator of OCAW's Drug and Cosmetic Industry Council, says the union has been aware of a "steady migration" of the pharmaceutical industry to Puerto Rico for 15 years. Several thousand pharmaceutical workers have lost their jobs as a result of this trend, he estimates. Dooley says that the OCAW's suit against AHP "may not be the last of its kind ... [since] American Home Products' actions are not isolated but are part of a much wider pattern of abuse."

AHP vs. Workers Over the past decade, American Home Products has steadily de-unionized its overall workforce by selling off and closing unionized facilities, or de-certifying unions at existing facilities. In 1975, 12,000 AHP workers were represented by 14 unions. By 1990, the number had declined to 4,800 union workers and seven unions. AHP's anti-union activities have been in evidence as it tries to close down its Elkhart, Indiana Whitehall Division plant. In December 1990, officials of the National Labor Relations Board (NLRB) concluded that AHP had attempted to intimidate union leaders at the Whitehall plant from demanding negotiations to bargain over the plant's closure. Based on this incident, the NLRB is currently pursuing a case against the company for seven alleged unfair labor practices. NLRB regional director William Little charged AHP, and particularly assistant vice president Alfred Jablonski, with blacklisting union leaders and other employees, threatening "an early shutdown of operations" if employees didn't end demands for a bargaining session, accelerating layoffs unless the union stopped demanding negotiating sessions on the plant's closure and making "other unspecified threats." A hearing before a NLRB administrative judge is set for March 1991. OCAW anticipates bringing additional unfair labor practice charges against the company.