A Blog by Jonathan Low

 

Jan 30, 2018

Tax Incentive Puts More Robots on Factory Floors

Enhanced depreciation benefits in the new tax law could provide a supplemental boost to purchases of robots and other factory equipment.

Ironically, however, this may not result in transformational manufacturing output because of industry's reluctance over the past several decades to train workers needed to do related tasks. JL


Andrew Tangel and Patrick McGroarty report in the Wall Street Journal:

U.S. orders of manufacturing equipment this year are forecast to rise 12%, up from 9%. Half of the factory equipment sold in the U.S. is made overseas. Bigger companies (are) planning to build new plants or spend more on factory equipment this year in part because of the beefed-up depreciation benefit. The tax law (could) boost manufacturing production 1.25% by 2025. “It’s a positive effect. But at the national level it’s not transformational.”
New tax rules are hastening automation and modernizing in U.S. factories by giving manufacturers an incentive to buy machinery and boost productivity in a tight labor market.
For the next five years, the revised tax code allows companies to immediately deduct the entire cost of equipment purchases from their taxable income. Previously, companies generally were allowed to write off only a portion of the cost in a single year.
The change is encouraging manufacturers to install robots and replace aging machines sooner than planned.
“We probably would have put it off another year” without the tax incentives, said Ken Mathas, president of Cornell Forge Co., a Chicago maker of gears and other components for heavy machinery. Mr. Mathas said he plans to spend at least $1.5 million this year to add three or more robots to a production line in lieu of workers he is struggling to find.
U.S. manufacturers already are benefiting from a global economic upswing, a weaker dollar that has made American products more competitive overseas and improved business sentiment at home.
Manufacturing output in the U.S. rose 3% in December compared with the same month the previous year, Federal Reserve data show, up from a year-earlier increase of 1%.
Some manufacturers have already increased their planned capital spending. U.S. orders of manufacturing equipment this year are forecast to rise as much as 12%, according to the Association For Manufacturing Technology, up from an annual rate of 9% as of November. About half of the factory equipment sold in the U.S. is made overseas, according to the association. By effectively reducing the cost of automation, the tax overhaul puts “another arrow in the quiver of companies that want to go that route,” said Josh Pokrzywinski, an analyst at Wolfe Research.
It will also hit government coffers. Full expensing, compared to the prior U.S. tax law, would reduce federal tax collections by $36.5 billion in 2019, according to Congressional estimates.
Rick Toth, whose 66 employees at Toth Industries Inc. in Toledo, Ohio, make parts for heavy trucks and construction equipment, said the depreciation benefit has encouraged him to buy at least three computerized metal-fabrication machines this year for up to $400,000 each. Before the legislation passed, he planned to buy just one machine to handle the 10% to 15% boost in business he expects this year. “You’ve got to be competitive in this marketplace to protect the jobs you have,” Mr. Toth said.
Aluminum producer Novelis Inc. is among the bigger companies planning to build new plants or spend more on factory equipment this year in part because of the beefed-up depreciation benefit.
“The tax reform solidified our decision and allowed us to feel very comfortable with the financial return,” said Steve Fisher, chief executive of Novelis. It plans to build a highly automated $300 million plant in Kentucky that would employ 125 experienced process engineers and metallurgists.
PPG Industries Inc., a paint and coatings maker, plans to spend $50 million on capital projects in the U.S. this year in part because of the depreciation benefit. Equipment upgrades will boost productivity, a spokesman said, adding that it isn’t clear whether they will be more automated than existing manufacturing methods.
The benefit led executives at diaper- and tissue-maker Kimberly-Clark Corp. to move up plans to spend as much as $200 million to make one of its U.S. factories more productive. The plan, which awaits board approval, comes as the company plans to close 10 factories and lay off thousands of workers. Some public companies may find the depreciation benefit less enticing, as it doesn’t affect reported taxes and earnings under accounting rules. Other companies are boosting capital spending without singling out the depreciation benefit. Apple Inc. said the tax law’s inducement to repatriate overseas cash contributed to its decision to commit $4 billion more to modernizing production facilities for its U.S. suppliers.
Fiat Chrysler Automobiles NV suggested the tax overhaul contributed to its decision to shift production of Ram Heavy Duty trucks in 2020 from Mexico to a partially automated plant in Michigan. “Tax reform, I think, was an absolute essential ingredient of the decision-making,” Chief Executive Sergio Marchionne said.
Joel Prakken, chief U.S. economist at the forecasting firm Macroeconomic Advisers in Washington, D.C., estimates the new tax law will add 5% to business spending on equipment nationally by 2024. He sees the tax law boosting manufacturing production an additional 1.25% by 2025.
“It’s a positive effect,“ Mr. Prakken said. ”But at the national level it’s not transformational.”
Some companies were already shifting toward more mechanized production. The Minneapolis Federal Reserve said this month that 45% of manufacturers responding to a recent survey said they added automation over the past year to increase productivity. About a third did so to mitigate worker shortages and reduce labor costs.
Across the U.S., spending on business equipment rose at an 11.4% annual rate in the fourth quarter, the biggest gain in three years, according to Commerce Department figures released Friday.
Rockwell Automation Inc., a maker of factory software and hardware, expects the tax changes will spur customers to make overdue upgrades to equipment purchased during earlier waves of automation, CEO Blake Moret said.
“The equipment that’s in those U.S. factories gets older every day,” Mr. Moret said, adding that Rockwell is considering investing in additional U.S. production to meet expected demand.
The continuing trend toward automation has pushed down manufacturing employment overall since the financial crisis, but also has created some well-paying jobs that require years of training or an engineering degree.
Still, wages aren’t keeping up with the upswing in production. Even as U.S. unemployment lingers at a 17-year low of 4.1%, factory wages rose 2% last year, down from a 3% bump in 2016.
Flowserve Corp. , a maker of pumps and valves, was planning to add machine-learning capabilities to its equipment. Networks of sensors and software to monitor its machines have helped Flowserve pick up some of the slack resulting from a 20% workforce cut following a downturn in business from its oil- and gas-producing clients.
“In this relentless pursuit of cost-cutting, we have been asking our plants to simply do more with less,” said Eric van Gemeren, Flowserve’s vice president of marketing and technology.
Other companies say the tax legislation changed their plans. Nicole Wolter, president of HM Manufacturing Inc. in suburban Chicago, said because of the lower 21% corporate tax rate that was instituted she will be able to afford three additional milling and lathe machines this year for her 20-employee firm, which makes transmission and other components.
Aneesa Muthana, owner of medical- and automotive-parts maker Pioneer Service Inc. in Addison, Ill., is willing to hire eight new workers to help operate the 12 machines she plans to purchase as a result of the depreciation benefit. She doesn’t know where she will find them, though.
“It’s almost impossible,” she said.

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