If you take time to rethink your strategic imperatives first, your subsequent investment is more likely to provide a much greater ROI.
So, how are you going to spend it? It’s a foregone conclusion that the Tax Cuts and Jobs Act (TCJA) is going to unleash a torrent of business investment — and there is no question that the tax bill provides extraordinary financial incentives for US investments. That was one of the primary intentions of the legislation.
But if you intend to migrate to a culture of continuous innovation and rethink the way you do business, you should first consider the impact of this bill in the context of your in-flight or pending strategic initiatives. The TCJA is not just a driver of capital investment for US-based multinationals. It’s also a driver for taking a deeper look into your new business model and strategy, and the operating model you will rely on to deliver on the promise of your strategy.
There is a lot of punditry and conventional wisdom about the benefits of the Tax Cuts and Jobs Act. But, we think you might also want to consider the following perspectives before you make your next investment decisions.
The conventional wisdom is too conventional
Yes, tangible assets (new and used, other than real property) can be expensed in the first year acquired (for the next few years), prompting increased investment in plants and capital equipment. Yes, “repatriation” of cash is expected to be huge for investment in the US and spur a wave of M&A activity. You already know all the obvious, well-covered expectations and opportunities.
However, the Tax Cuts and Jobs Act is an opportunity for the industrial products sector to think more strategically and holistically before making their capital investments. If your customers are becoming more focused on outcomes than products, reframe your investment strategy so that you invest in your entire value chain, not just your supply chain, to deliver on these evolving customer expectations and create more value for your customers.
It’s not just about how much cheaper investment has become; it’s about how much smarter and strategically targeted you can be in where you invest it.
Business strategy needs to encompass tax strategy
Much investment in the industrial products sector has historically been driven by continuous improvement and market consolidation. As the industrial products sector gradually migrates from a culture of continuous improvement to continuous innovation, however, business strategy is evolving as well: industrial products organizations are considering new business models and unconventional initiatives. Failure to consider tax in such strategic decisions is at one’s own peril.
But all the focus on the capital investment benefits is too narrow a view of the TCJA. For instance, well-targeted upgrades to optimize enterprise costs and potentially increase operational effectiveness will also have tax implications. If you improve or create a new operating model or undertake a supply chain transformation that delivers another level of cost reduction, the resulting increase in profits (and where those profits are subject to tax) will also be impacted by the new tax code and the evolving global tax environment. So, tax considerations are always a key component of the overall business case for initiatives and can significantly impact the amount of the after-tax ROIs.
Invest for the future
It’s easy to get caught up in making decisions on the basis of the immediate or short-term financial incentives. Wall Street tends to reward those kinds of decisions.
But if you are an industrial products organization, you know you need to rethink your business. You know you need to take the long view. You know you need to embrace disruptive, new, services-led business models. Tax reform essentially gives you additional financial incentives for implementing this kind of innovative thinking and strategic decision-making.
Of course, every industrial products organization needs to do its own rigorous assessment of the opportunities associated with the TCJA and how those opportunities fit with existing and prospective business models and strategies. To that end, EY not only brings tax-aligned operating-model assessment and modeling tools to the table, but we also bring a broad, enterprise-wide perspective that can provide a huge assist in your opportunity-evaluation process. We leverage from the most current operating model and supply chain theory, to considerations of technology and innovation options, so that the business strategy aligns with the enterprise tax strategy.
We know you are eager to take advantage of the investment incentives in the new tax act. We just want you to be more informed about it. There’s a win-win opportunity if your investment can avoid traps for the unwary and take full advantage of the opportunities afforded from the new tax law — while also advancing your strategic agenda of reinventing your business for success in the Transformative Age.