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SAVE THE DATE! UPCOMING EVENTS:

TSMA Q4 Best Practice Plant Tour - PGP InternationalDecember 5 | 8:45 – 10 am | PGP International

TSMA CFO Peer GroupDecember 11 | 7:30 am | Southwest Indiana Chamber

WorkOne Southwest Quarterly Business SeminarNovember 8| 8 – 9:30 am | IVY Tech Community College

TSMA Q1 Event: Workforce DevelopmentDetails to come

Check out theSHARED LEARNING PROGRAM

Sign Up Today at:www.swinchamber.com/tri-state-

manufacturers-alliance/

Welcome

CHRIS BRACKCHAIRTri-State Manufacturers’ Alliance

PURPOSE STATEMENTTo work collaboratively to create a vibrant and attractive manufacturing environment in Southwest Indiana that results in improved revenue and profitability and an increase in manufacturing sector jobs.

STEERING COMMITTEETim DolletzkiCentral Services ManagerAlcoa Warrick Operations

Thad GoingsGM, Assembly & ConveyanceToyota Motor ManufacturingIndiana, Inc.

Jim HeckExecutive DirectorGrow Southwest Indiana Workforce

Constance HermannHR Manager, ESC & NA QualityRB

Matthew Nix – Vice ChairPresidentNix Companies

Chris Brack – ChairPresidentGeorge Koch Sons, LLC

Shannon Brewer, CPAVice PresidentHarding, Shymanski & Co., P.S.C.

John BurantVice President, InnovationFlanders

Stephani CattVice President, OperationsUniseal, Inc.

Joe CastraleGM, Mt. Vernon SiteSABIC

Dave ConnerCFOAnchor Industries, Inc.

Dorothy PergolaTSMA CoordinatorSouthwest Indiana Chamber

Jake WardDirector of Business DevelopmentEvansville Tool & Die

Matt WeinzapfelVice President, Engine ManufacturingJasper Engines & Transmissions

STEVE MENAKERCPA and Audit Partner at RSM US LLP


TRADE, TARIFFS AND TRENDSTri-State Manufacturers’ Alliance Q4 Event

October 29, 2018

© 2018 RSM US LLP. All Rights Reserved.

RSM’s manufacturing focus

• RSM US LLP serves over 3,000 clients in the manufacturing industry

• We have companies across the country from industrial manufacturers to chemical companies and everywhere in between. We have specialty practices focused on industrial manufacturing, automotive, and energy.

• Clients include local, national and internationally recognized companies with diverse organizational structures

Steve MenakerAssurance PartnerNational Manufacturing Industry [email protected]

mailto:[email protected]


What’s happening?

13


BREAKING THROUGH THE NOISE


US Economic Outlook

Base Case: Growth 3.1 percent in 2018• Tax cut boosts growth prospects in 2018 & 2019

• Current account and trade deficits explode• Tax effect fades in 2020, growth back to long-term sub-2 percent trend• Key economic driver: Strong Household consumption

• Upper quintile of income earners driving spending• Rising incomes finally showing up for low-wage earners

• Stronger business outlays on capital expenditures• Software, equipment and intellectual property• Tech and energy


56.6%

61.7% 61.0%

77.8%

93.3%

89.5% 89.8%

94.6% 93.5%95.1%

92.5%

2016:1 2016:2 2016:3 2016:4 2017:1 2017:2 2017:3 2017:4 2018:1 2018:2 2018:3

NAM Manufacturers’ Outlook Survey by Quarter(First Quarter 2016 – Third Quarter 2018)

Source: NAM Manufacturers’ Outlook SurveyNote: Percentage of respondents who characterized the current business outlook as somewhat or very positive.

How are companies feeling?


Production and Manufacturing

• Industrial Production and Manufacturing• Noticeable improvement due to resilient domestic demand and global demand

• Auto production to be strong through end of year• Industrial production advanced 4.88 percent on a year-ago basis through August and

overall output is at all time high• Some pulling forward of activity to avoid tariffs so a risk of payback in near term • Global and domestic demand easing


Manufacturing Solid In 2018

20

25

30

35

40

45

50

55

60

65

70

75

2002 2004 2006 2008 2010 2012 2014 2016 2018

Inde

x

ISM Manufacturing ISM New Orders Contraction=Less Than 50 Recession= Less Than 43.1

Source: RSM US, Bloomberg


Global manufacturing snapshot

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

2015 2016 2017 2018

Inde

x

US ISM Manufacturing JP Morgan Global Pmi German Markit PMI

Source: RSM US, Bloomberg


-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Aug-17 Sep Oct Nov Dec Jan-18 Feb Mar Apr May Jun Jul Aug

Year-Over-Year Industrial Production Growth(August 2017 – August 2018)

Industrial Production Manufacturing Durable Goods Nondurable Goods

Source: Federal Reserve Board

Production is up


Private Fixed Investment: Policy Key to Reversing Slide

12%

13%

14%

15%

16%

17%

18%

19%

20%

21%

1978 1983 1988 1993 1998 2003 2008 2013 2018

Pece

ntag

e of

GDP

(Nom

inal

)

Source: RSM US, BEA


100

101

102

103

104

105

106

107

108

109

2016 2017 2018 2019

Actual and Predicted Manufacturing Production Growth(NAICS, 2012=100)

Actual Manufacturing Production Predicted Manufacturing Production

Manufacturing Production Forecast:

↑ 0.2% (2016) ↑ 1.5% (2017)↑ 2.5% (2018)↑ 2.0% (2019)

Source: Federal Reserve Board, NAM calculations using Moody’s Analytics simulation model

Production growth should continue


Tight labor market

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

2004 2006 2008 2010 2012 2014 2016 2018

Job

Ope

ning

s Pe

r Per

son

Number of Unemployed Persons Per Job Opening=.90

Source: RSM US, BLS


300

320

340

360

380

400

420

440

460

480

500

520

Jul-17 Aug Sep Oct Nov Dec Jan-18 Feb Mar Apr May Jun Jul

Manufacturing Job Openings, Hires and Separations(July 2017 – July 2018, in thousands of workers)

Job Openings Hires Separations

Source: Bureau of Labor Statistics

Manufacturers were already feeling the effects


And throw in an opioid crisis..

25Source: MAPI Foundation


-0.3%

-0.9%

-1.2%

-1.8%

-1.9% Miscellaneous durable goods

Paper

Plastics and rubber products

Aerospace and other transportation equipment

Printing and support

0.2%

0.6%

1.8%

2.2%

2.2%

2.6%

4.2%

4.4%

4.5%

5.6%

6.2%

7.1%

7.3%

7.5%

Furniture and related products

Apparel and leather

Textile and product mills

Petroleum and coal products

Food, beverage and tobacco products

Wood products

Electrical equipment and appliances

Primary metals

Chemicals

Fabricated metal products

Computer and electronic products

Machinery

Nonmetallic mineral products

Motor vehicles and parts

Year-Over-Year Growth in Manufacturing Production by Sector(August 2017 to August 2018)

Source: Federal Reserve Board YEAR-OVER-YEAR GROWTHManufacturing (NAICS): ↑ 3.4%

Durable Goods: ↑ 4.5%Nondurable Goods: ↑ 2.3%

Many sectors showing strong results


US Economic Policy Outlook

• Policy Outlook:• Fiscal Deficits:

• Annual operating deficit of $1 trillion in FY 2019• Toward 5.5 percent of GDP in 24-36 months

• Spending• Large increase in defense and social outlays• Massive increase in fiscal spending of $320 billion in 2018 & 2019• Infrastructure: Major initiatives unlikely

• Big I: Energy grid, telecom networks• Little i: roads, bridges, ports, tunnels, etc.

• Regulation• Regulatory relief for banks with under $250 billion AUM: Passed into law in May 2018.

• Significant win for the middle market


The 3 T’s…

• Taxes• Trade & Tariffs• Technology

28


TAXES


Tax Cuts and Jobs Act

• Key business provisions − Reduces C corporation tax rate from 35 percent to 21 percent− Repeals alternative minimum tax− Pass through non-professional businesses receive a 20 percent

deduction on pass through income− Immediate capital expensing− Research and development credit retained− Limitations on business interest expense− Repeals domestic production activities deduction− New net operating loss (NOL) limitations


Wayfair overruled Quill: Modernity finally wins

• Physical presence is no longer a good rule in 2018− Access to the internet: 2% (1992), 89% today − Modern technology and the administrative costs of

compliance are unrelated to physical presence (one salesperson in many locations versus net retailer)

− Revenue losses of between $8 and $33 billion collectively− Mail order sales: $180b (1992); e-commerce: $450b (2017) − The once “bright-line” rule had becoming increasing

shadowy • Was cookie nexus physical presence? (Massachusetts and Ohio)• Was click-through nexus physical presence? (20-odd states)


Wayfair is not just about retail

• Manufacturers should consider:− Reversed the impact of Quill - no longer mandates a physical presence

to require collection of sales taxes.− Sales tax filing requirements− Sales Tax Exemption Certificate Management− Accounts Payable

32


Income taxes got more complex – what we’re seeing.

• Deduction for passthrough entities• Limitations on interest expense• Use of carryforward credits• International tax

− Transaction impact – prior planning decisions may require updating− GILTI, FIDI− Transfer pricing

• State taxes could get more “possessive”

33


TRADE AND TARIFFS


Uncertainty…

35


Bi-lateral, tri-lateral or geographic agreements

• USMCA – United States, Mexico and Canada− US and Canada are each others largest trading partners− Key changes

• More auto parts from member nations – 75% up from 62%• Higher wages for auto workers• Canada loosens dairy restriction• Tariffs in place pending final resolution

• Japan – In process• South Korea – In process, awaiting approval• Europe – Representative has visited US• China

36


US-Global Economic Relations: A Difficult Period Ahead

• Global trade friction: Major 2018 policy issue• This is the major risk to the domestic economic outlook in 2018

• China trade war• China growth slowed in Q3 to 6.2% - a significant slowing• If tariffs fully implemented will shave 0.3-0.4 percent off growth • Pricing to be impacted with upside risk to inflation• Reduces boost to economy via tax cut

• Reduction of purchasing power, competiveness, rising prices • NAFTA Modernization: Largest impact to auto and dairy industries, few major

changes, measures from TPP• Rules of origin• Settling trade disputes• Small and medium enterprise accommodation


U.S.-China economic relationship


Biggest import trading partner for US

Source: US Census Bureau


Biggest export trading partner for US

Source: US Census Bureau


How are Manufacturers companies responding

• Price increases, whether or not impacted by tariffs (US manufacturing with Chinese competitors)

• Expand manufacturing in US or countries with lower tariffs− Started with the most recent recession− Global supply chains have taken years to establish− Logistics pricing up

• Acquisitions of alternative sourcing entities• Alternative routing of products – via Europe, Canada… can create

VAT issues• Substitution of materials not subject to tariffs or from other sources42


Real life responses

• US flooring company used recession to move manufacturing back to US

• US manufacturer is absorbing costs in hopes of short term impact

• Metal fastener increased prices immediately

• Farm storage manufacturer evaluating price increases –getting pressure from customer to hold costs

• Auto parts company must comply with contractual terms thereby deferring price increases

43


Real life responses

• Retailer passes costs on to customers immediately

• Distributor only passing along partial price increases

• Retailer working with suppliers and customers to have equal sharing of increase

• Chemical manufacturer increasing prices as certain of their raw materials only available from China

• Distributor working with sourcing company to move to other countries with capacity (China no longer low cost)

• International company evaluating global supply chain and structure (ITAX, VAT, logistics)

• Companies disassembling and assembling products to avoid tariffs on finished goods

44


TECHNOLOGY


Digital transformation in manufacturing

• ERP Systems• Cloud computing (could be ERP)• Process improvements, automating closing and reporting process• Low-cost microprocessors to control machinery• Data collection and analytics• 3D Printing – “makes experimentation and customization

inexpensive”• Robotics• Workforce –

− Drastically changing the skills and types of employees needed.− The Number 1 issue impacting manufacturers (and all employers)

46


Digital transformation in manufacturing

Manufacturers see a lot of barriers to digital transformation..

47


Too far behind to catch up

48Source: RSM Digital Transformation Survey


Bias towards what’s familiar



Don’t know how to define success



Future manufacturing facility

51


Digital risk - cybersecurity

52

Source: RSM Middle Market Business Index Q1 2018


Cybersecurity risks to middle market manufacturers are real!!

• Access to your systems− May be a connected device or a computer node− Large exposure from people connecting to or sending

information to your system

• Contingency plans• Insurance coverage• Ransom Policy• Intrusion Testing

53


The Speed of Change in Intense

• Taxes− Opportunities lie in the details− Internationally active companies live in a complex world− Wayfair can rear an ugly head

• Trade and Tariffs− Understand the impact on your entire supply chain− Develop a long-range plan to address trade in light of global

geopolitical issues.• Technology

− Invest, all companies are becoming technology companies− Determine where digital adds value, keep evaluating the ROI− Moving ahead is critical, don’t get left behind

54


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Q&AGo to Slido.com

Event code: #tsmaq4Submit your questions!

CHRIS BRACKCHAIRTri-State Manufacturers’ Alliance

THANK YOU TO OUR EVENT SPONSORS

THANK YOU

THANK YOU TO OUR EVENT SPONSORS - Southwest Indiana …...Tax cut boosts growth prospects in 2018 &...

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