Many government initiatives are passed with the best of intentions but with unintended results. In the U.S., small to mid-size manufacturing companies will be spending more on healthcare requirements this year than on expansion and new product development.
PrimeAdvantage, a purchasing consortium of small to midsize companies, surveyed its members about their financial expectations for 2014 (registration may be required for this link). PrimeAdvantage aggregates the buying power of small industrial manufacturing businesses so they can leverage volume purchasing agreements. For 2014, 92 percent of respondents expect their healthcare costs to increase, while only 27 percent expect to increase spending on new product development.
The Affordable Healthcare Act, of course, takes effect in 2014 and requires all U.S. citizens to sign up for health insurance. Businesses that provide healthcare coverage for their employees have seen their premiums increase by as much as 10 percent. Other external challenges PrimeAdvantage members say they face this year are price pressure from competitors and customer demand. The top economic factors that are hindering growth are the effectiveness of the U.S. government and the U.S. budget deficit.
So CFOs are focusing on cutting internal costs. All of these may be short-term issues, but U.S. manufacturing is clearly feeling squeezed. Global companies, by comparison, can take advantage of policies that actually benefit their business. Apple, Google, Microsoft and other tech companies bank a lot of money overseas. General Electric gets skewered every year for paying almost no U.S. taxes. None of these companies broke any U.S. tax laws, but clearly they have an option that exclusively-domestic companies don’t.
A lot of hoopla has surrounded these same businesses as they announced they’d be manufacturing in the U.S. Apple will be building products in Texas and Arizona. Google is manufacturing in Fort Worth, Texas. Businesses, consultants, pundits and politicians all point to these moves as validation of the onshoring trend. It’s true that foreign wages are going up and overseas transportation expenses aren’t the bargain they used to be. But there is another element to this onshoring that is worth mentioning: tax and other incentives. These companies are getting some sweet deals. According to Bloomberg News:
So last year, when Apple was searching for a place to house a factory that makes a stronger glass for its gadgets, Mesa [AZ] pulled out the stops. The city, which was ravaged by the 2007 housing crash, offered tax breaks, built power lines, fast-tracked building permits and got the state to declare a vacant 1.3 million-square-foot facility that Apple was exploring a foreign trade zone. With unemployment high, such are the lengths that towns are willing to go to to lure the world’s most valuable company.
I realize that GE, Google, Apple and the like are seeing their employee-healthcare costs rise like everyone else’s and they’ll be paying U.S.-level wages in their new factories. But I wonder if that is coming at the expense of their R&D budgets. More likely, healthcare costs are being offset by savings elsewhere, such as overseas banking; offshore R&D or U.S.-based foreign trade zones.
For several years now, businesses, consultants, pundits and politicians have been fretting about the U.S. losing its competitive edge. It used to be small companies and start-ups were the centers of innovation in the U.S. But based on the PrimeAdvantge report, small manufacturing companies – at least for the moment -- seem to be shifting their spending away from R&D in order to pay their bills. That’s not good for innovation.