What Does the President’s Infrastructure Program Do for Consumer Electronics?
As details are still being negotiated, there are no hard and fast definitions for the American Jobs Plan proposed by the President, so much will remain in flux until a definitive deal is hammered out, but we took a look at the proposal, or at least what the White House calls ‘The Fact Sheet’ to see how the proposal might affect the consumer electronics industry.
On an overall basis we see three general areas that will have an effect on CE in the US:
The plan for providing high speed broadband to 100% of the population through near-term subsidies is a great idea, but one that will be difficult to wean from, and we already question what ‘minimally acceptable speeds’ would actually be. Does this mean 5G for everyone, 4G for everyone, or just a way to get to the internet, and further embedded in the text is the idea that as this broadband infrastructure is being placed, it has to also be ‘futureproof’, a concept that we find hard to understand given how quickly wireless and FWA have been changing over the past few years.
We are certainly not against a plan to open broadband up to the entire US, however subsidies encourage capacity but not profitability, and without profitability there is little incentive for public companies to spend in those regions. In good economic times the subsidies will allow carriers to spend where they get the most profit and in bad economic times the subsidies will hide how cyclical or unprofitable broadband can be in some regions, and we note that the Chinese government has been using subsidies to grow and prop up the Mainland display industry for years to help to hide its cyclicality., So before the government calls such broadband subsidies near-term, they should assume that they will be nearly permanent, or find another way to finance the infrastructure needed to bring those less profitable areas into the broadband fold.
In terms of requiring that goods and materials are made in America, well we have spoken about this numerous times, and we believe that if the US were to be its own supplier for all goods and materials, the prices we pay for most CE items would be appreciably higher. De-globalization is a political issue to us, not an economic one, and assuming that the US can produce all that it needs is a bit naïve, although politically positive at the moment. The cost of producing the myriad of goods and materials that US industry and consumers need would be staggering and take decades to develop, and while there are certainly areas where the US could at least gain some traction, to us the idea is not to have the top share in every material, component, or product, but to have the best, which fosters worldwide demand. That concept has worked quite well for Apple (AAPL), who produces only a small percentage of the components that go into their products, which generate among the highest premiums in the CE space. While it is foolish for us to expect that politics be removed from the global supply chain equation, thinking we can do all things more profitably than everyone else seems a bit unrealistic.
The last area of focus is taxes, and this is the most complicated of all. Companies look to return as much as possible to shareholders (and of course, management bonuses), and taxes are technically a fixed cost of doing business in a particular market. The objective of all accounting firms is to find ways to reduce statutory tax rates through all possible legal means, and tax havens and offshoring are certainly a part of that. If the ability to use those ‘advantages’ are removed through changes in the tax laws, it will have a bottom line impact on many US companies that use countries like the Cayman Islands, Bermuda, Lichtenstein, and Ireland to shelter foreign income. These countries will not just decide to give up such practices and will work with companies to find other ways to offset potential tax savings relatively quickly, and expecting other countries to agree to a corporate minimum tax while you are promoting a more de-globalized economy seems to be pulling a string at both ends.
That said, using tax incentives, especially after a higher corporate tax rate is initiated, to specifically target R&D spending in the US is a subsidy that does not have to be budgeted and face political agendas. If such tax ‘incentives’ are structured to specifically target areas that need development, such as renewable energy or leading edge technology, they would be far more effective than subsidies mentioned above. None of this is easy stuff, and regardless of any compromises and changes that are made, unless the specifics are well thought out, highly defined, and well-coordinated between government agencies, the effect will be muted and lots of dollars will be spent will relatively little impact. If we are going to spend $2t, let’s get something tangible for it and stop spending time and money on trying to beat down any other country that might hint that they could do something better than the US. The best way to prove them wrong is not to stop them from doing whatever it is, but to do it better. Stop your bellyaching and get to work!
On an overall basis we see three general areas that will have an effect on CE in the US:
- “High Speed Broadband to all, including the 35% of rural Americans who lack access to broadband at minimally acceptable speeds”
- “Require that goods and materials are made in America and shipped under US flagged and US crewed vessels”
- “Reward investment at home, stop profit shifting, and ensure other nations won’t gain a competitive edge by serving as tax havens”
The plan for providing high speed broadband to 100% of the population through near-term subsidies is a great idea, but one that will be difficult to wean from, and we already question what ‘minimally acceptable speeds’ would actually be. Does this mean 5G for everyone, 4G for everyone, or just a way to get to the internet, and further embedded in the text is the idea that as this broadband infrastructure is being placed, it has to also be ‘futureproof’, a concept that we find hard to understand given how quickly wireless and FWA have been changing over the past few years.
We are certainly not against a plan to open broadband up to the entire US, however subsidies encourage capacity but not profitability, and without profitability there is little incentive for public companies to spend in those regions. In good economic times the subsidies will allow carriers to spend where they get the most profit and in bad economic times the subsidies will hide how cyclical or unprofitable broadband can be in some regions, and we note that the Chinese government has been using subsidies to grow and prop up the Mainland display industry for years to help to hide its cyclicality., So before the government calls such broadband subsidies near-term, they should assume that they will be nearly permanent, or find another way to finance the infrastructure needed to bring those less profitable areas into the broadband fold.
In terms of requiring that goods and materials are made in America, well we have spoken about this numerous times, and we believe that if the US were to be its own supplier for all goods and materials, the prices we pay for most CE items would be appreciably higher. De-globalization is a political issue to us, not an economic one, and assuming that the US can produce all that it needs is a bit naïve, although politically positive at the moment. The cost of producing the myriad of goods and materials that US industry and consumers need would be staggering and take decades to develop, and while there are certainly areas where the US could at least gain some traction, to us the idea is not to have the top share in every material, component, or product, but to have the best, which fosters worldwide demand. That concept has worked quite well for Apple (AAPL), who produces only a small percentage of the components that go into their products, which generate among the highest premiums in the CE space. While it is foolish for us to expect that politics be removed from the global supply chain equation, thinking we can do all things more profitably than everyone else seems a bit unrealistic.
The last area of focus is taxes, and this is the most complicated of all. Companies look to return as much as possible to shareholders (and of course, management bonuses), and taxes are technically a fixed cost of doing business in a particular market. The objective of all accounting firms is to find ways to reduce statutory tax rates through all possible legal means, and tax havens and offshoring are certainly a part of that. If the ability to use those ‘advantages’ are removed through changes in the tax laws, it will have a bottom line impact on many US companies that use countries like the Cayman Islands, Bermuda, Lichtenstein, and Ireland to shelter foreign income. These countries will not just decide to give up such practices and will work with companies to find other ways to offset potential tax savings relatively quickly, and expecting other countries to agree to a corporate minimum tax while you are promoting a more de-globalized economy seems to be pulling a string at both ends.
That said, using tax incentives, especially after a higher corporate tax rate is initiated, to specifically target R&D spending in the US is a subsidy that does not have to be budgeted and face political agendas. If such tax ‘incentives’ are structured to specifically target areas that need development, such as renewable energy or leading edge technology, they would be far more effective than subsidies mentioned above. None of this is easy stuff, and regardless of any compromises and changes that are made, unless the specifics are well thought out, highly defined, and well-coordinated between government agencies, the effect will be muted and lots of dollars will be spent will relatively little impact. If we are going to spend $2t, let’s get something tangible for it and stop spending time and money on trying to beat down any other country that might hint that they could do something better than the US. The best way to prove them wrong is not to stop them from doing whatever it is, but to do it better. Stop your bellyaching and get to work!
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