Electronics Manufacturers Favorable on Tax Reform

U.S.-based supply executives are receiving the Tax Cuts and Jobs Act (TCJA) of 2017 favorably. The tax reform, signed into law by President Donald Trump in December, will have a positive impact on U.S. manufacturers’ organizational, strategic and tactical considerations, managers said.

The Institute for Supply Management conducted a special survey to gauge members’ familiarity with the act and to assess how the TCJA may impact their business. Most (65 percent) of upper management within the U.S. manufacturing sector are familiar with the law. Among respondents with an opinion, those expecting a positive change far outnumber those expecting a negative change.

The ISM asked members how tax reform could impact them financially

"It will increase our business sales and revenue. It gives us the ability to increase the company infrastructure and research and development (R&D) spending. Overall, it shouldn't make us more competitive in the short term but does give us a long-term advantage for investments, which should lead to a more competitive company," said one supply executive.

ISM surveyed its manufacturing and non-manufacturing members on TCJA. Manufacturing executives expect the act will increase revenue, accelerate demand, spur expansion and allow more investment in R&D.

“Our business requires enormous capital investment. With this tax reform, future capital investment will be more favorably received,” one manager said. "The TCJA is allowing us to invest in our organization a bit more aggressively, which will in turn create more jobs locally,” said another. “And with the increased requirements for raw materials based on the plant expansion, we should have a fairly positive affect on the economy."

Broad-based optimism

A similar view is shared by members of the Electronic Components Industry Association, according to Bill Bradford, who was named president and CEO of ECIA in January.

“There is a general optimism among our members; they see this as good from the standpoint of investing more in their businesses and in manufacturing, and making companies based in the U.S. more competitive,” he said. “There’s the example of Broadcom moving its headquarters back to the U.S. The preservation of the R&D credit will also keep the U.S. competitive from the innovation standpoint.”

The ISM asked members how tax reform could impact expansion

ISM believes that increased confidence among manufacturers will encourage them to increase their budgets. “Thus, we should see an uptick in business as it relates to quotes, quote conversions to orders, and product delivery,” ISM analysts said. “We anticipate our net margin/profit to increase slightly due to the reform, but not significantly due to the extreme price competitiveness in our industry."

The electronics industry may enjoy an extended period of prosperity with the new legislation, Bradford said. “We tend to be a pretty cyclical industry. We are in the middle of an upcycle now – demand is strong and there’s been tight capacity. Maybe the run on demand gets extended with a more favorable tax environment.”

However, the ISM’s research indicates manufacturers are expecting materials prices to increase and there will be more pressure on inflation. Additionally, the industry has had difficulty finding skilled workers for some time, and tax reform might exacerbate the situation.

“Finding talent will be a significant challenge going forward,” said a supply manager. “Our company is already looking at our salary competitiveness and recruiting activities to maintain talent to support the business."

Spending plans

Some companies have already made changes under the TCJA; one company increased its 401(k) match by one percentage point, specifically due to the reform. Merger and acquisition (M&A) considerations in 2017 that were questionable due to unknowns were approved for 2018 based on the TCJA's passage, according to one respondent. Moreover, supporters of the act believe firms will be more likely to bring international profits to the United States. While approximately 40 percent of respondents say they don't know TCJA's potential impact regarding these matters, those who believe the new tax code will likely have a positive impact on revenue, net income, and the repatriation of profits far outnumber those who anticipate a negative impact, according to ISM.

The ISM asked members how tax reform could impact capital investment

Manufacturers also expect to increase their capital expenditures. Regarding where capital investment may occur, 7 percent expect non-U.S. capital investment to decrease, while 4 percent believe non-U.S. capital investment will increase. Interestingly, said ISM, only 1 percent of non-manufacturing respondents expect non-U.S. capital investment to decrease, while 4 percent anticipate non-U.S. capital investment to increase. This may reflect the perception that maximizing non-manufacturing opportunities abroad could necessitate local investment in those markets.

Compensation and training budgets are typically annual exercises, so the tax-reform impact on budgets for salary and merit increases and employee training and development are classified as tactical considerations by the ISM. On these issues, 35 percent to 45 percent of respondents indicate that they don't know the TCJA's potential impact. However, zero respondents expect salary and merit-increase budgets to be negatively impacted, while 15 percent of respondents expect those budgets to increase. A small proportion of respondents (3 percent in manufacturing) anticipate employee training and development budgets to decrease due to the TCJA. Fifteen percent of manufacturing respondents and 12 percent of non-manufacturing respondents expect those budgets to increase.

The ISM said data for this study was collected from January 25 through February 6, 2018. The "consolidated weighted" results are an average of the manufacturing and non-manufacturing results, weighted 12 percent and 88 percent, respectively. This weighting was imposed to more accurately reflect the current composition of U.S. GDP.