Currently, there is a window of opportunity for foreign companies to establish themselves in the U.S. and manufacture domestically. The current administration has already signaled its interest in placing a tax on imported items. Another consideration is that new incoming manufacturers may, at some time in the future, only be allowed to register as an entity and open a facility in the U.S. if certain criteria are met, such as number of jobs created, minimum capital invested within a certain time frame, specific U.S. regions targeted, etc. For foreign manufacturers already in the United States, this is a good time to “double down” on the domestic economy and increase production and/or expand operations, given the current situation and possible changes in import/export rules and trade relations.
If it is harder or more expensive to import our products into the U.S. because of changing policies, should we instead manufacture in the U.S.? Making the Move Or Not
One of the biggest concerns for foreign manufacturers that want to build plants in the U.S. is that they may not be able to recoup their investment if the proposed policies do not materialize in the manner that was predicted or expected, or are later reversed. A “wait-and-see” approach might feel more comfortable, but also results in diminished opportunity. Timing — and policy in general — is difficult to predict. If the business climate is deemed favorable for having operations in the U.S., and a company’s business case for such a move is also favorable, the longer the company waits, the greater the risk that the rules of the game might change and adversely impact its business.
Having a solid business case is the most critical part of this decision-making process. Surprisingly, many expansion plans are oversimplified, lack foundational processes of estimation/planning, or do not have the right multidisciplinary leadership in place to truly plan, prepare, and execute such a move. Part of the issue is not just the “unknown unknowns,” but also the incorrect perception that the known variables — which may have been used effectively in past expansions — are still valid today.
Some companies need nothing more than market traction for their products to make expansion in the U.S. a viable proposition. Others may be looking to identify where potential border adjustment taxes will land, so they can better determine whether importing to the U.S., or making products in the United States, is the most productive path. A key consideration is the value of the U.S. dollar. Most economists believe the proposed border adjustments would result in increased demand, and therefore increase the value of the U.S. dollar. As the U.S. dollar gains strength, exports would generally be more expensive to international target markets, resulting in a decrease in value of foreign currency denominated assets. The question is whether this will play out as the economists have suggested, especially with respect to the trade balance.
Ultimately — whether driven by market traction in the U.S., or influenced by a border adjustment tax — strategically minded companies will look to the market potential as a whole and evaluate whether a domestic presence in the United States will drive access to more opportunity, brand-building enhancements, and longer-term benefits, compared to just a viable business case for domestic production.
What Companies Can Do Now
Regardless of what changes may occur with U.S. federal policy, foreign companies should have a comprehensive understanding of why they are not manufacturing in the United States. By effectively mapping its supply chain components, as one point of context, a company has a clear understanding of the benefits/trade-offs of each operating situation. Components to include in this mapping process include:
- What are the costs of delivered raw materials to the foreign facility and delivered finished product back to your portfolio of customers?
- What human labor cost per unit would be offset by use of U.S.-based automation? Does this apply to all products or only a high-, medium-, or low-volume product line?
- Is the labor talent for the specific needs of the operation readily available? If not, what transferrable skill does the current workforce have that will shorten the time from hire to productive state?
- What regions of the U.S. have historical utility infrastructure (water, gas, electric, wastewater) relative to creating a foreign greenfield?
- What effect does currency play in cost exposure to the end customer in a U.S.-based manufacturing setting? How about in securing project financing locally?
- Companies can further consider their capitalization structure, particularly where they are debt-funded and there is the possibility of net interest expense being denied as a reduction to taxable income in the future.
- An assessment of all cross-border transactions, including related party cross-border transactions, involving movement of inventory and payments for intangible property should be in order.
- Given pending tax reform, it may also be beneficial for vendor contracts to be carefully vetted to address unforeseen tax implications.
- Accounting methods should be reviewed to accelerate deductions and defer income in light of proposed language and dialogue on a reduced corporate income tax rate.
- Companies can assess whether or not they have optimized any research and development benefits.
- Remember to factor in the potential state income tax considerations of a move.
This is a time of significant opportunity for companies considering the launch of operations in the United States. In further exploring this opportunity, companies must address as many aspects as possible regarding doing business in the U.S. (and cross-border from their countries) to appropriately capitalize on the opportunity, plan for the changes ahead, and minimize disruptions of their business cycles.
Staying on top of policy and tax changes is also important for foreign companies that are already operating in the U.S. Although they have more experience with the system, and how things work, much has changed over the years that may make in-house knowledge obsolete.
Regardless of what changes may occur with U.S. federal policy, foreign companies should have a comprehensive understanding of why they are not manufacturing in the United States. Companies also need to bear in mind that tax reform is only one part of the overall puzzle with respect to anticipated reform in the United States. Existing manufacturers are poised to be agile in responding to change and forward-thinking in the way they do business to benefit from the overarching direction of reform in the areas of tax, trade, and capitalization. It is a new era for both existing manufacturers and those considering whether or not to enter the U.S. — there is opportunity for all.
Finally, facility expansions do not happen frequently for most companies, and some have never had to deal with one in their recent history — especially one starting up in a different country. This inexperience adds considerable complexity to the decision-making process, especially fully understanding the short-term and long-term ramifications of possible policy and tax reforms. Most companies do not have the expertise in-house to carry out this complex evaluation; or, if they do, that expertise may not be completely objective. Sometimes the very structure of a company may create hurdles in speed-to-market when considering such an expansion. This can drag out the process, add cost, and potentially compromise outcomes. Time to market is always key, as opportunities abound in states across the U.S., which will anxiously compete for new production facilities to be located within their state lines.
In conclusion, it is important that a cross-disciplinary management team is guided by specialists experienced in the overall evaluation process of expanding in the United States, providing for guidance and collaboration. Employing external project development and international operations-launch specialists to validate, structure, prioritize, and execute the project phases is an effective way to manage the process and streamline the path to the final go/no go decision of such expansion. This also frees up the company’s existing management to do what it does best — run the company.