For Investors - Picking the Biggest Winners from a Border Adjustment Tax

By Taylor Milner

Congress is considering using a Border Adjustment Tax to increase the financial incentives to produce goods in the United States. If successful, demand would significantly increase for US-made products..  Most US manufacturers would likely benefit in some way over the long term, but some would win much more than others. The biggest winners will be those that are able to find and utilize excess capacity in their existing operations.

If you are an investor, where should you look to find those manufacturers who are best positioned to tap into excess capacity and become the biggest winners?  This hidden capacity is not obvious to either outsiders or the internal management teams. However, every business has significant unrealized operational potential, and realizing it requires looking at the business differently. Here are a few ways to get started:


Find the Industries With the Most Supply Chain Potential

There will be some industry winners and losers, but how can you discern between the two?.  Here are a few questions an investor can ask to find those industries that have higher growth potential with a Border Adjustment Tax:

  • Where is it close to breakeven already to reshore? Those industries where costs are close to parity with foreign competition could see an immediate bump from the Border Adjustment Tax, as their cost base will likely drop. These have the most potential to take on new business.
  • Who has been declining/consolidating capacity and offshoring? Industries that have been in recent decline due to overseas cost pressure may have excess capacity at hand. They are likely to have plants working fewer shifts, or even have idle assets, and they will be poised to quickly hire new staff to service growing demand. (Note: make sure that these industries have not been declining due to shrinking global demand for their goods--rather, look for industries where US production has dropped despite steady or growing global demand.)
  • What industries import a lot of their components or parts (look at their suppliers)? The Border Adjustment Tax will impose new taxes for goods built with imported parts, rather than domestically-produced ones. With the new tax, these industries will look for domestic suppliers in order to reduce their COGS. Upstream suppliers for these industries will stand to gain a great deal from the new demand for domestic supply of parts to their downstream partners.
  • What industries are running higher operating margins? Businesses that have had to sweat their assets for years in order to cope with low operating margins will have realized some of their previously-hidden potential. Growth-focused industries have typically been allowed to run their supply chain “softer” and have not yet put as much effort into finding greater capacity in their assets.


Find The Businesses that can Tap Hidden Capacity

Within high-potential industries, some businesses will have more potential to find capacity and more ability to do so. Here are a few ways to find the businesses that are best set up to win:

  • Find businesses that already have excess capacity. Businesses that are running only one shift can quickly ramp up to 2 or 3 shifts in order to absorb new capacity.
  • Look for businesses that have highly talented operations teams. Realizing the hidden capacity in a supply chain will require the business to challenge itself and devote effort to solving hard problems throughout its operations. The operations leadership team needs the talent to both inspire the effort and deliver with early results in order to get the business behind the change. They need to help the business believe that the order of magnitude of improvement is 20% (or far more), not 2%.
  • Find leadership teams that are willing to get help. Insular management teams will struggle to find hidden capacity. As with any organization, a business over time develops its own assumptions and beliefs about what is true. Internal experts face massive pressure to “know” everything about the business, so they are hard-pressed to ask questions that demonstrate ignorance. There will be a need for outsiders to ask “stupid questions” and challenge conventional wisdom.
  • Beware of operations that are devoted to a dogmatic Continuous Improvement program. Many operations in the United States have already implemented some sort of very broad Continuous Improvement program--classic examples are Lean or Six Sigma. Too deep an attachment to any of these will create a resistance to being challenged with an approach that could break old beliefs and assumptions.  These CI processes are often over- or mis- applied which can lead to opportunities being hidden.

Every business has untapped capacity which can yield greater shareholder value. If the Border Adjustment Tax passes, going after this untapped capacity could quickly yield significant value in a few months. The businesses that will be best poised to win with a BAT will be those in industries most able to onshore, those that are the least squeezed today, and those with the teams that are able to see and rapidly realize additional capacity within their existing operations. Finding these businesses before others do can put investors on top during the scramble to appropriately allocate a portfolio after a BAT passes.

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Border Adjustment Tax: Who Will the Biggest Winners Be?

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