Manufacturers Navigate Global Flux

July 2017

For much of the period of modern globalization, the search for lower production costs propelled a steady migration of American manufacturers’ plants overseas. Now, the combined forces of protectionist trade and immigration measures, rising commodity costs and sharpening international currency risks might be priming the industry to buck this trend. 


A New Compass for Trade

Manufacturers are heavily revising their financial and supply chain models to adapt to global shifts. This year, 94 percent report risks to their international operations and sales, which has been consistent in the past two years of our analysis. The U.S. is a manufacturing powerhouse—it accounts for 19 percent of global manufacturing, according to Bloomberg—and that figure could rise in the wake of a flurry of “America First” policies implemented by the Trump administration in its first few months.  

Most notably, the U.S. withdrew from the Trans-Pacific Partnership (TPP) and the Paris climate accord, and vowed to renegotiate the North American Free Trade Agreement (NAFTA). These decisions may reverse manufacturers’ long-established dependence on foreign countries for supply chain operations, growth markets and labor. The effects will play out both immediately and in the long term, shifting manufacturers’ processes, standards and operations. American manufacturers will also closely watch how the remaining members of NAFTA, the TPP and the Paris climate accord proceed without U.S. involvement. 

In terms of European relations, Brexit concerns 30 percent of manufacturers included in our analysis. So far, British manufacturers have been keeping calm and carrying on, but this could change as the U.K. begins to formally exit the European Union. Manufacturers cited the difficulty of predicting the Brexit fallout, but they do anticipate divergent trade regulations, stock market volatility, currency fluctuations and diminished consumer confidence as potential challenges once the legal divorce is passed.  

Domestically, these developments could send a signal to manufacturers to re-shore their assets. While re-shoring has been on the industry’s radar for several years, 2017 could be the year for acceleration. Given the administration’s stated focus on reforming global trade partnerships, there could be changes in how the U.S. participates in national security reviews with other countries, as well as impacts on the Committee on Foreign Investment in the United States’ (CFIUS) position on reciprocal market access. The Department of Commerce is planning a report that aims to streamline federal permitting processes and question regulations that are slowing down domestic manufacturers.   

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“While countries across the globe work to cement economic and political priorities, manufacturers are proceeding with business as usual. With rules impacting cross-border deal flow, supply chains and global trade in the balance, digital industrial implementations and promoting talent expansion will be key growth drivers for the industry while the uncertainty plays out.”

2017-Manufacturing-RFR-headshots_Lawton-(1).jpgTom Lawton
National Head of Manufacturing, BDO UK (UK member firm of BDO International)

 


 

Global Tax Reform Still Playing Out

Globalization and economic development has spurred a surge of demand for U.S. brands and products in emerging or previously untapped international markets. This year, almost half (47 percent) of American manufacturers are concerned with their ability to expand internationally, up 42 percent from last year. Risks associated with expanding into emerging markets were mentioned by 51 percent, a 19 percent jump from 2016. Manufacturers pointed to lack of confidence in consumer demand and expansion climates in emerging international markets in their disclosures.

Companies engaged in multinational operations are watching the new administration’s proposed tax reform closely, as the proposal comes with many implications for global companies. If tax reform passes, only income originating within the U.S. would be taxed in the U.S. and companies would repatriate foreign earnings. On a global scale, the Organization for Economic Co-operation and Economic Development (OECD) is working on a 15-point Action Plan encompassing BEPS, transfer pricing, interest deduction and financial payments. The OECD’s Action Plan advises that companies with international operations and annual revenue north of $850 million file country-by-country reports on income and taxes paid. With this guidance, the OECD aims to prevent large corporations from taking advantage of international tax discrepancies and help global tax authorities monitor transfer pricing risk.

After a years-long rally in the strength of the dollar, manufacturers have felt its effects on trade; particularly, the slowing of exports. But early winds of change seem to be blowing as the U.S. dollar trades near a seven-year low. Despite that, import rates increased at an unexpected rate in April, suggesting demand for foreign goods isn’t yet contracting along with the dollar’s strength. While the recent decline hasn’t yet spurred significant effects, a return to early-2016 lows could spur higher inflation and lower wages and cause profit margins for manufacturers and retailers to take a haircut. This year, more than 9 in 10 manufacturers cited currency risks in the year ahead.


Keeping an Eye on Anti‑Bribery Blind Spots

The number of manufacturers pointing to concerns around the Foreign Corrupt Practices Act (FCPA) hovered at 71 percent this year. Since 2013, the number of manufacturers citing anti-bribery and anti-corruption regulations as a risk climbed by 58 percent. Intended to promote American business around the world, the FCPA’s regulations tightened recently with news that companies can now be charged if they are deemed to have “created a risk” of bribery. Already in 2017, Rolls-Royce plc, the British manufacturer and distributor of power systems for the aerospace, defense, marine and energy sector, agreed to pay $170 million to the U.S. following an international investigation into the company’s bribery schemes to win government contracts. 

President Trump has openly criticized the FCPA, and in February he struck down a rule created using a Dodd-Frank amendment that required oil, gas and mining companies to disclose how much they pay to foreign governments. While they wait for clarity on the future of anti-corruption regulation, manufacturers can shield themselves from potential FCPA violations by prioritizing transparent finances throughout their global operations, scheduling diligent monitoring of their operations and voluntarily disclosing FCPA violations before the threat of a government investigation arises. 
 

“Globalization, technological disruption and an increasingly populist agenda in the U.S. and Europe have led to more complex business environments that are ever-changing. For manufacturers, success will require a deft touch to evolve their business models and supply chains, and balance seizing opportunity with managing risk.”

2017-Manufacturing-RFR-headshots_Gregorcyk.jpgVicky Gregorcyk
National Leader of BDO’s Risk Advisory Services Practice