SEATTLE A U.S. tax overhaul proposed by Republican leaders in Congress would deepen divisions between big manufacturers like Boeing Co and the thousands of smaller companies that supply them, according to suppliers and tax and trade experts.
U.S. automakers and other manufacturers that rely on imported components also would be affected by the proposals, which would tax imports at a 20 percent rate, and could split these sectors into winners and losers.
The revamp would heighten existing tensions in the aerospace industry, where Boeing’s aggressive cost-cutting driven by fierce competition with European rival Airbus has pushed suppliers to lower prices and source more parts and materials abroad.
Aerospace components often zigzag through multiple countries and companies before reaching Boeing’s factories in Washington and South Carolina. U.S.-based suppliers to Boeing would face a tax on their imports of these parts. Boeing, the top exporter among U.S. manufacturers, would export its jetliners tax free.
Boeing and some of its largest suppliers, such as United Technologies Corp, General Electric Co and Honeywell International Inc, which also have substantial exports, favor the Republican tax package.
The plans, laid out in a blueprint last year and which President Donald Trump has spoken about favorably, aim to boost U.S. manufacturing, and include cutting the corporate tax rate to 20 percent from 35 percent and making capital investments immediately deductible.
Lawmakers already are at work drafting a tax bill to introduce by early summer, but it could be delayed if health care changes take longer than expected, according to congressional staff.
If the proposed 20 percent tax on imported goods had been in effect last year, Norfil Complex Machining, a 40-employee company in Pacific, Washington, likely would have paid more for titanium it imports from Russia. The metal goes into parts Norfil makes for Boeing landing gear that get assembled in Japan.
“A lot of Russian titanium goes into planes,” said Doren Spinner, Norfil’s CEO. His purchase contracts have pricing that adjusts if costs go up, so the tax “would end up affecting what the plane would cost,” he says.
Other companies said it would be tough to pass higher costs on, and some might move production to low-cost locations abroad.
“If the taxes are ridiculous, we’d just have to think of something creative,” said Paul Doran, a sales manager at Mifa, a subsidiary of Netherlands-based Aalberts Industries NV that makes precision aluminum parts for aerospace, autos and other industries. “I think most companies would be in the same boat.”
Colin Frost, chief operating officer at parts and tooling supplier Carr Lane Manufacturing Co in St. Louis, Missouri, said he would consider manufacturing overseas if the tax plan were passed. “We’d end up splitting up the company and I don’t think that’s necessarily good for the U.S. economy,” he said.
Boeing said it was too soon to judge the plan’s effects on suppliers and so far it appeared likely to benefit the industry as a whole rather than disrupt the supply chain.
“These assessments will vary by company, and it’s premature to speculate or generalize,” Boeing spokeswoman Kate Bernard said.
Boeing was among about 90 companies, including many suppliers, that signed a letter this month from the Aerospace Industries Association urging Congress to overhaul the U.S. tax system. Boeing also is part of the American Made Coalition, an industry group that backs Republican tax proposals.
Proponents say tax reform also would strengthen the dollar, offsetting the impact of the import tax for suppliers, and would encourage companies to invest in the United States.
The tax overhaul could have cut Boeing’s taxable income by an estimated $44.5 billion last year, according to tax experts and a Reuters analysis of Boeing’s 2016 deliveries. Two-thirds of Boeing’s jetliners were delivered overseas and would be tax exempt. Worth about $89 billion at list prices, they were likely sold at discounts of about 50 percent typical in the industry. Boeing declined to comment on the estimate.
Boeing would face import taxes, too. Its 787 Dreamliner, for example, uses major parts from Japan’s Mitsubishi Heavy Industries Ltd, Fuji Heavy Industries Ltd, Kawasaki Heavy Industries Ltd and Italy’s Leonardo SpA.
Boeing also would still pay tax on sales to U.S. airlines and the new tax regime would affect its defense and space businesses, which source and sell globally.
Yet suppliers say Boeing’s vigorous cost-saving has pressed many to outsource production to low-cost countries, which now exposes them to a potential border tax.
U.S. aerospace imports have doubled the past decade, with Mexico the fastest-growing source, up 950 percent since 2006. (Graphic: tmsnrt.rs/2n4A8o1)
Supply chains would face renewed pressure under the new tax regime, said David Wireman, managing director and co-head of aerospace and defense at consulting firm AlixPartners.
“The tax on imports proposed by the new administration would certainly affect the complex decisions on choosing suppliers, and likely would cause manufacturers to change some supplier relationships.”
(Reporting by Alwyn Scott; Editing by Joe White and Tomasz Janowski)