How certainty drives value in business
January 10, 2013
Will a new employee perform well? What will the new tax environment be? These challenges and more create levels of uncertainty that drive business decisions.
So how did President Obama win the election? At the FABTECH® show, held Nov. 12-14 in Las Vegas, David Goch recalled what Sen. Lindsey Graham, R-S.C., said after the election: “There aren’t many angry white men anymore.”
Goch, a partner at Webster, Chamberlain & Bean, sat with co-panelists Omar Nashashibi, partner at The Franklin Partnership, and Paul Nathanson, founding partner at the Policy Resolution Group. All Washington-based, the three espoused their views about the election results, how and why it happened, and what it means for manufacturing.
The panelists’ audience of several hundred was an accurate demographic snapshot—mostly men. But they were also different from Graham’s stereotype. They weren’t angry, only perhaps disappointed. Most important, they were uncertain.
When panelists asked for a show of hands as to who thought Romney was going to win, most raised their hands. Many of them probably voted for him as well. Several informal polls at thefabricator.com showed that a little less than 70 percent of this magazine’s audience planned to vote for Romney.
There was worry about the fiscal cliff, of course, and by the time you read this, you’ll know how the drama played out (or at least how it moved on to the next chapter). Most businesspeople listening to the panelists seemed to be realists. They know how to read balance sheets, and they know government spending and taxes can’t remain the status quo. But they also wring their hands in worry, because they’re not sure how well the people who have power over the pursestrings understand business, especially small business.
As Nashashibi explained, “The president came out last February proposing a 28 percent corporate tax rate and then offered up a 25 percent effective tax rate for all manufacturers. The challenge is that he’s only proposing it for C corporations, and 70 percent of manufacturers in this country are structured as a subchapter S, a partnership, LLP, LLC, or similar pass-through. And that means 70 percent of the people in this room are looking at a tax rate increase of up to 39.6 percent, if that’s the final number they decide on. Now, C corps and S corps really work hand-in-hand. Many of the smaller businesses that are pass-throughs work the customers and suppliers that are larger C corporations. Your metal comes from steel mills that are among the country’s largest companies.”
Because both S corps and C corps work together in the manufacturing supply chain, both kinds of businesses must be taken into account in any new tax policy geared toward the industry. But as Nashashibi pointed out, “Many members of Congress don’t know what an S corporation is.”
The panelists recognized the subtle relationship between small businesses and Washington. Tax rates aren’t the problem; not knowing what those taxes will be exactly—that’s the problem.
“Even pundits on Fox News are agreeing that the government needs to find new revenue,” said Goch. “And if we look at recent history, we’ve had prosperous times, as during the Reagan era, when taxes were higher. It’s really about certainty and the business decisions you can make on that certainty. And that’s why the Republicans and Democrats and the White House have let down the business sector.”
These panelists were preaching to the choir, but the overall congregation of the general electorate continues to have a muddled view of the manufacturing sector.
For instance, The New York Times ran a series in December that described how large corporations, like Caterpillar, negotiate tax deals with local governments, many of which bend over backward to attract large employers. The argument goes that large employers build wealth in the community, which in turn funnels back to the government. Over the long term, government officials assume the payback is far greater than the tax breaks. But what if those plants close? The local employer turns from a shining star into an albatross that the community may not be able to shake for years.
Even if the plants don’t close, the wages they pay may not be great. Consider another December column in the Times about how entry-level pay in manufacturing is waning. Reporter Adam Davidson quoted The Boston Consulting Group. This same consultancy that predicted a Manufacturing Renaissance recently wrote a report that called into question the skilled-labor crisis. “Trying to hire high-skilled workers at rock-bottom rates is not a skills gap,” it said.
“It’s hard not to break out laughing,” Mark Price, a labor economist at the Keystone Research Center, told Davidson. “If there’s a skill shortage, there has to be rises in wages. It’s basic economics.”
This all paints an unfavorable picture of manufacturing. Greedy corporations seek out tax breaks. The big plants set up shop and, yes, may support a large network of suppliers, but they and their suppliers don’t pay good starting wages. And now these business owners are complaining about … taxes?
Above all else, business owners want certainty. Yes, many manufacturers do have low starting pay, but that’s for the unskilled and inexperienced who present a lot of uncertainty to the employer. Will they make the cut? Can they be trained? Will they fit in? Manufacturers don’t know, so they hire them at a lower-than-average wage, train them, and raise their pay over time. The extremely wide range of salaries for skilled positions, as reported by the Fabricators & Manufacturers Association (FMA) 2012 wage survey, suggests this trend.
As the Times pointed out, many corporations choose locales with less generous tax breaks because the area may have a more employable workforce. Yes, we always hear about the threat of a plant moving overseas to low-cost countries. But as shown in this year’s financial ratio survey from FMA, direct labor costs represent only between 9 and 12 percent of overall sales for the average fabricator. Material is by far the dominant cost (at 30 to 50 percent), and the faster those employees can turn that material into a sellable, quality product, get it into customers’ hands, and receive payment for it, the more successful the manufacturer can be.
Does the metal fabrication industry have companies that don’t pay a fair wage, even to those with skills that merit such wages? Sure, but so do other businesses. I’ve received e-mails from welders and machine operators who make very good money. And then I’ve received e-mails from those who tell me they have the technical skills yet can’t make a living wage. Reality is messy, and this business has frustrating issues like any other sector.
The real problem isn’t that manufacturers are paying entry-level wages similar to Walmart’s and other retail and fast food companies’. The real problem is that both Walmart and manufacturers are drawing from the same labor pool. As Davidson aptly put it, “The so-called skills gap is really a gap in education, and that affects all of us.”
It comes back to certainty. Business leaders want certainty in new employees’ ability to perform well. Employees want certainty of consistent employment at a fair wage. And all want certainty about what taxes we’ll be paying in 2013 and beyond.