The State of the Union went as planned and really offered nothing new to viewers, including myself, sitting there for almost 90 minutes waiting for something to happen. But that’s what happens at this annual meet-and-greet event. The real deal now comes for President Obama, as he draws up a defensive scheme to fend off the offensive rush from the Republicans.
President Obama talked about the need to generate job creation and add some stimulus to the domestic manufacturing landscape. He proposes minimizing the advantage of foreign tax incentives that make American companies initiate job creation outside of the U.S. via placing a minimum tax on a company’s profits made overseas.
While the idea to deliver job creation makes sense, I cannot see how you can overcome the superlative tax breaks and much cheaper labor available overseas in emerging markets such as Asia, Eastern Europe, and Latin America. In these regions, the labor is significantly cheaper than their American counterparts, as the countries also want to drive local job creation.
The costs of plants and equipment, specifically the cost of operating overseas, are generally cheaper compared to the U.S. And also keep in mind that many of the major U.S. multinationals that have operations overseas also derive a good portion of their revenue stream from foreign markets, so it would not be as easy to do.
Take the case of General Motors Company (NYSE/GM), which I recently discussed in General Motors: China’s Top Foreign Automaker. The automaker used to be the king of cars in the U.S. until the Japanese and Korean automakers emerge decades ago. Given the change in the domestic environment, General Motors, like many U.S. companies, looked east towards China. The company reported an 8.3% year-over-year rise in sales in China to a record 2.55 million vehicles in 2011, down from 29% in 2010, but well above the average. China accounts for about 36% of total GM sales in 2011, so the region is critical for growth and for job creation in China.
Now, why would GM slow down production in China? Do you really think the Chinese government would sit idly by and allow GM to take some production back home, cut into Chinese job creation, and then sell the U.S.-made vehicles to the Chinese consumer? I doubt this would happen. GM will likely not be swayed by President Obama’s extra tax, as would be the case of many U.S. companies with key operations and sales in foreign countries, especially China.
The reality is that U.S. companies flourish in foreign countries due to the business incentives there and the ability to be close to the market, which often is different from that in the U.S.
President Obama also wants to offer a new tax credit for companies that close their operations overseas and generate domestic job creation along with more domestic tax incentives.
I like the reasoning and the move to bring in manufacturing and drive job creation, but, realistically, I cannot see why and how a multinational, which often has joint ventures in the particular overseas market, would suddenly close shop and move home.