Aerospace




 

The Crossroads Between Nationalism And Globalism

July 19, 2017

By Jason Slivka

No industry is more interestingly positioned at the vanguard of today’s political divide between nationalism and globalism than the aerospace and defense industry.

The commercial component itself is responsible for last century’s surge in globalization, transporting individuals to locations they once would never have frequented, either for work or leisure. Defense, dominated by non-aerial forces for most of our history, has experienced a significant shift in flying capabilities over the past century.

One attribute common to both aerospace and defense is the heavy manufacturing needed to support such complex aero structures. As administrations around the world enact policies to mitigate the heavy losses caused by local manufacturing jobs being supplanted by global sourcing and technology, can they resurrect these jobs and also enhance national security? If so, what impact will these policies have on the aerospace and defense industry?

Manufacturing Jobs

In November 2016, Donald J. Trump was elected President of the United States of America.  One of his campaign promises was to bring manufacturing jobs back to the US. Despite significant economic growth over the past two decades, the US has shed approximately five million manufacturing jobs since 2000[1]. This loss represents 29% of all manufacturing jobs in January 2000. Manufacturing jobs are a vital part of the aerospace and defense industry, as it directly employed approximately 917,000 workers as recently as 2015[2], while indirectly supporting many more.

Most of the administration’s policy decisions thus far have attempted either to slow the decrease of, or even increase, domestic manufacturing jobs, evidenced by the decision to remove the US from global partnerships, such as the Paris Agreement and Trans-Pacific Partnership.

These agreements were intended to increase global collaboration on climate change and trade, respectively, but were deemed by the current administration to be anti-competitive for US manufacturers. Additionally, the current administration has spoken about changes to the tax code to incentivize companies to increase local sourcing.

National Security

Every country has the right to protect its people and borders. The current US administration has expressed its desire for stronger immigration laws and increased defense spending because of global terrorist attacks and the ensuing media coverage that has increased overall public anxiety.

An executive order restricting travel for individuals from six countries is currently in the court system to determine its constitutionality. The administration’s current proposed budget shows an increase in defense spending, though not as significant as some expected.

The nationalistic approach, evidenced by an increase in local manufacturing jobs and national security, has been a common political theme outside the US as well. In June 2016, the United Kingdom voted for the “Brexit” option to leave the European Union.

Brexit proponents expressed their perception of unfairness in the European Union community that limited job growth and raised national security concerns in the UK. Other politicians, like Geert Wilders and Marine Le Pen, also have tried, unsuccessfully, to implement similar, nationalistic governments in the Netherlands and France, respectively. Clearly, there is a global trend for administrations to look inward and focus on local policy rather than globalization.

“Today…we face headwinds from those who would deny the benefits of globalization. In parts of the world, nationalistic political rhetoric points towards a future of more protectionism. That is a threat to our industry,” notes Alexandre de Juniac, Chief Executive Officer of IATA, in a statement on June 5, 2017.

Does this mean globalization is going away? Based on recent actions by large aerospace OEMs, the answer is an emphatic NO. Over the past year, Boeing, Airbus, and GE all have entered into agreements to expand their international presence in Morocco, China, and the Czech Republic, respectively, as noted in the following quotes from each of these companies:

“Airbus and China have signed a Memorandum of Understanding (MoU) on aviation and aerospace, further enhancing a spirit of cooperation…The MoU strengthens and deepens mutually beneficial collaboration between Airbus and Chinese aviation industry in various fields. Based on an already established solid foundation, Airbus and China will support the development of engineering skills and technology innovation in China and also promote the integration of Chinese suppliers into Airbus’ global supply chain.”

Airbus Group press release, June 1, 2017


Morocco has signed an agreement that Boeing Co (BA.N) will seek to attract its suppliers to boost the kingdom’s aeronautics industry. The “Boeing ecosystem” project aims to bring around 120 suppliers of the company to help raise Morocco’s aeronautics exports by $1 billion and create 8,700 jobs.”

Reuters News, September 27, 2016


General Electric and Czech Republic government officials today signed an investment agreement to build GE’s new turboprop headquarters in the Czech Republic. The investment doubles GE Aviation’s in-country employment via 500 new jobs, 100 of which have been added since the start of 2016 to support development of GE’s all-new Advanced Turboprop (ATP) engine powering the Cessna Denali, Textron Aviation Inc.’s all-new single-engine turboprop aircraft.

GE Newsroom, October 20, 2016

 

The global economy won’t go away—it is too intertwined, especially in the aerospace and defense industry. But, going forward, the industry may find globalization to be somewhat more challenging because of current political decisions. These manufacturing companies noted above, along with many others in the industry, continue to see the cost benefits of global sourcing, better access to indigenous contracts, and entrée to a more diversified pool of experts.

So, globalization is here to stay, but with policy changes comes additional industrial complexity. Although renouncing global partnerships may make global sourcing more difficult, it is not clear whether these decisions will have net profitability impacts that encourage local sourcing.

To address that issue, companies must understand the administration’s tax policies, such as a change in the effective corporate tax rate in the USA, which is expected to decrease from 35% to anywhere between 15% and 28%, and a possible border tax, making it more expansive to import products. In addition, the possibility exists for a tax repatriation holiday, allowing American companies to bring accumulated earnings from foreign operations back to the US at a lower tax rate. These changes all demand careful corporate structuring analysis, taking into account local and international tax laws and decisions affecting potential transactions.

The divide between nationalism and globalism is unlikely to be resolved anytime soon, but rather will ebb and flow for the foreseeable future. This will surely lead to continued uncertainty, making strategic decision making even more important to ensure maximization of capital value and regulatory compliance. Companies will benefit from seeking local and global advisors to guide them in enhancing capital value and making regulatory decisions.

That guidance must be grounded in industry experience and technical knowledge, and provide corporate structuring, local and international tax, and transactional direction. Doing so will equip organizations throughout the aerospace and defense ecosystem for both today’s complexities and those in the future.

 


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