During his criminal career, Willie Sutton stole an estimated $2 million. Willie reportedly said that he robbed banks because “that’s where the money is.” If you are in the robbing business, that makes a great deal of sense.
Conversely, if you are in the business of manufacturing, having operations in the United States may make a great deal of sense. Ours remains the biggest consuming economy in the world. This is where you can sell your stuff in greater numbers. This is where the money is.
This past week, I had preliminary discussions with a foreign company that wants to have a manufacturing presence in the U.S., because it believes there is a lucrative market here for its products. This company wisely recognized that site selection for a future plant is not one of its core competencies, but that it is for me.
Now if I do my job right, I will save this company time, money and heartache. In doing so, I will take them where they need to be and not some personal favorite place of mine. That’s my pledge. I hope that we can come to agreement where I can be of service.
If They Build It
That desire for a physical presence is a key driver to why the U.S. remains the largest recipient of foreign direct investment in the world. ($257.5 billion in 2011.) There is this instilled belief that if they build it, they (their customers) will come, which is always a gamble.
I once helped a Canadian automotive supplier set up a plant in which I know the company had virtually no established orders to support that plant. They built it on the sheer belief that the business would follow. They were coming in on a wing and a prayer.
I think it is noteworthy that the company that I was speaking to this past week wants a U.S. manufacturing presence despite the fact that production costs would be lower in their home country. They figure, correctly I believe, that just being here will give them a competitive edge by stirring up more orders. And yet, we are a higher cost environment.
In a speech earlier this month at the Detroit Economic Club, Jay Timmons, president and CEO of the National Association of Manufacturers, said this: “It is 20 percent more expensive to manufacture in this country than it is anywhere else in the world – a direct result of years of policy choices made in our nation’s capital.”
I included that quote in my blog last week, which prompted a friend in the People’s Republic of Austin (a place that I actually like very much) to write to me to say, essentially, that he didn’t believe it. As my friend will never let me off the hook, it is now incumbent on me to prove to him (and you) that Mr. Timmons ‘ remarks were accurate.
Well, maybe not quite. Among the US’s largest nine trading partners, only France has higher structural costs, according to the Manufacturers Alliance for Productivity and Innovation. Since 2003, MAPI and The Manufacturing Institute has been tracking the burden of structural costs – corporate tax liability, employee benefits, tort litigation, regulatory compliance and energy – of U.S. manufacturers relative to their counterparts in our nine largest trading partners. The bad news is that our cost disadvantages have not been falling.
“Structural costs in 2011 were 20 percent higher than for our major competitors, up from 17.6 percent in 2008. That cost differential excludes the cost of labor.” That is a direct quote from the ninth edition of the report “Facts About Manufacturing,” published in November 2012 by NAM, MAPI and the Manufacturing Institute.
The good news is that we have experienced a 50 percent increase in productivity since 2000. Those productivity gains would have made the U.S. a lower cost platform were it not offset by costs essentially created by our own government policies. Subsequent to a corporate tax reduction in Japan last year, the US now holds the unenviable position of having the highest combined federal-state statutory corporate tax rate in the world.
If the U.S. were to reduce its statutory corporate tax rate from its present 35 percent to 24 percent, it would add $500 billion to GDP and create 2 million new jobs within five years, according to MAPI. In his Detroit speech, Timmons said we need to go farther than that.
“We hear policymakers on both sides of the political aisle talk about reducing our corporate rate to 25 percent or so. But the average tax rate of our trading partners was 25 percent five years ago, and I don’t think we became the great country we are today by striving to be average,” Timmons said.
“Today, that average rate is around 23 percent, so we are already starting at a disadvantage if those proposals become law. We need to be bold. We need to be looking at the example of your neighbor just over the bridge. Canada lowered its rate to 15 percent, and we need leaders to propose an equally competitive rate.”
They May Say It
Now I have heard President Obama say that corporate tax rates need to be lowered. I have heard Congressmen and senators of both parties say the same thing. But I think we all know that is not going to happen anytime soon, because Washington is effectively broken.
I think the president cares about manufacturing. His idea offered in his State of the Union address for the establishment of 15 manufacturing research hubs around the country is a commendable idea. His administration, too, has made progress in growing our manufacturing exports abroad. Both Republicans and Democrats are giving at least lip service to the notion that our country must have a growing and vibrant manufacturing base if we are going to have any sort of a better future.
But that is where it stops. Getting them to agree on anything of substance appears to be beyond them. These people that we have sent to Washington took the nation to the brink of the fiscal cliff last month and now they are doing it to us again. Most economists say the spending cuts that will kick in with this manufactured thing called sequester could result in the loss of up to 750,000 jobs and a reduction of GDP growth by a full point.
Both parties theoretically agree that spending cuts have to happen to get a handle on our nation’s long-term debt, now at $16.5 trillion. But coming up with a compromised solution on how to get there, well, don’t hold your breath. I only wish we recall the whole bunch of them and replace them with pragmatists who are not wedded to political grandstanding but toward actually getting work done.
I realize that I am ranting, if not singing to the choir to many of you. (I make no appeal to the wingnuts on the extreme right or left) But I have to think that our elected leaders in Washington don’t get it. I don’t think they understand that they are the principle reason why business in the country remains very wary about investing and hiring. This gang that cannot shoot straight is actually inhibiting economic growth.
“This type of week-by-week, month-by-month budgeting is having major repercussions not only in manufacturing, but in business in all sectors,” Timmons said in his Detroit speech. “Manufacturers don’t plan months ahead. They formulate business plans that project out years ahead. The uncertainty created by these never-ending budget showdowns is preventing manufacturers from taking risks and growing their business.”
Regulators Going Unchecked
Add to that reality the fact that regulators in Washington are going largely unchecked, imposing new costs and additional uncertainty on manufacturers. Now it would be easy for me to put all or at least most of the blame on the current occupant of the White House. But I am not sure that would be accurate or fair.
“Presidents of both parties are to blame. In the past 30 years, according to the Manufacturing Alliance, more than 2,000 regulations have been imposed on manufacturers,” said Timmons.
In the November FACTS report, it said that manufacturers are spending $192 billion annually to be in compliance in federal regulations. Now I am all for regulations within reason. If I am getting on airplane, I want to know that it has been inspected. If I am going under the knife, I want to know that surgeon is board certified and meets certain requirements. I think most Americans, including most business people, favor reasonable regulation to weed out potential bad actors and bad behavior.
But our manufacturers are paying the equivalent of an 11 percent tax in order to comply with a growing mountain of regulations, according to the FACTS report. This regulatory burden goes beyond the pale, thereby discouraging investment. In fact, it may have encouraged certain companies to locate production abroad.
This is one area where I think President Obama could prove himself. If he is truly is an ally of U.S. manufacturers, he could put out a directive tomorrow to all appropriate federal agencies that there should a systematic review and reduction/elimination of unwarranted regulations now on the books. If he could pull that off, not just say it but do it, that would send a huge message to manufacturers big and small (and most are small) and you would see more corresponding investment in this country.
I am certain that this foreign company that I am talking to is well aware of the challenges of operating in the US. Still, they want to be here, and I want them here, too. It will be good for them, despite the impediments thrown up by Washington.
The truth is that the US remains the big Kahuna with a GDP of $15.7 trillion. Our economy is almost twice the size of hard charging China at $8.3 trillion. When you play here, you’re playing in the major leagues. And that’s the way it should be.
I’ll see you down the road.
Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm in Plano, Texas — www.barberadvisors.com He can be reached at 972-767-9518 or at firstname.lastname@example.org