In this section, the advisors of this firm propose some issues to ponder over in Q&A format. As IR covers topics of strategic importance, companies must recognize changes in their operating environment that may have a direct or indirect impact on their business model. Investors will, at all times, assess companies’ preparedness and steering policy in light of such market forces at work (referring to Darwin’s theory). The dates for uploading are as shown.
USA – Trump Policy Impact Analysis
- What is the significance of Trump’s trade policies that lean toward protectionism ?
- A disruption in the business model of manufacturers located especially in Asia. President Trump is aiming at the heart of global manufacturing which has become concentrated in Asia, and is trying to engineer a realignment in the landscape for makers. Japanese companies, in particular, stand to lose out, if significant tariffs are added on imports into the US. Their production hubs have been set up in China, Thailand, Malaysia, etc., under incentives given by various Asian governments. Also, if major American companies start to pull out from the region, and reshore to the US, then we could see a hollowing out to some extent as their Japanese suppliers are left with a significant drop in orders.
- So what can companies do to deal with US protectionism ?
- They need to consider seriously shifting some of their manufacturing facilities to the US through direct investments. We have seen companies like Hon Hai Precision Industry (of Taiwan), Toyota Motor and Softbank (of Japan) making commitments to the US. These may be a harbinger of similar corporate moves to come.
- What are the challenges of relocating ?
- Higher American labor costs, and developing extensive supply chains from scratch, if they are not already present in the US. A relocation sounds simple enough, but a supply chain can be extremely complex and manufacturing processes can be labor intensive, so related suppliers would all need to relocate. That presents the challenges of finding the right talent at the right price, and locating where all suppliers can cluster. Also, closing existing factories across Asia could cause a backlash with local governments, with a possible ban on re-entry in the future in the worst case scenario. Some emerging industries like aircraft manufacturing could suffer a severe blow under a “Buy Made in USA” policy, as these industries have been earmarked by certain Asian governments as a key new contributor to economic growth. The US remains undoubtedly the world’s biggest market for aircraft.
- So where are some good places to locate in the US ?
- US corporate relocations have, mainly, targeted low cost areas. And with a good standard of living at a reasonable cost, companies can, in turn, attract and retain top talent who can make their earned dollars go further. Looking at the year-on-year increases in residential property values at the end of 2016, the top 5 cities are:
1. Seattle, Washington State +10.4%
2. Portland, Oregon State +10.1%
3. Denver, Colorado State +8.7%
4. Tampa, Florida State +8.1%
5. Dallas, Texas State +8.1%
(Source: November 2016, Case-Shiller home price index)
Other prime growth cities include:
Phoenix, Arizona State;
Charlotte, North Carolina State;
Salt Lake City, Utah State;
Austin, Texas State;
Kansas City, Kansas State
High jobs growth and people “migrating” to meet that corporate demand are fueling this housing demand. So companies setting up a new facility, factory, etc., from now on would find these locations optimal for tapping key human resources.
- How about tax reforms ?
- Relocation of global headquarters back to the US will have a domino effect on the stock markets, job creation and economic growth. Tax incentives will allow the repatriation of large pools of cash, some of which can then be paid out to shareholders as bumper dividends. But repatriated money would also be earmarked for US “tangible” expansion, meaning building factories, research and development centers, etc., thereby creating new quality jobs and pushing up economic growth even more. As another positive factor, with an increase in cash deposits, we will see banks lending more, coincident with the looser regulations on banking practices. This could fuel further growth in the real estate market.
- Which indicators should we watch to gauge the state of US economic growth ?
- Interest rates and inflation. Specifically the yield on the 10-year Treasury note and the consumer price index. The US economy has shown growth for 8 straight years now through 2016, and it is likely to continue through 2017-2018, meaning: a possible 10-year winning streak. Looking at the 10-year bond yield, it is at about 2.3% (as of April 11). If inflation is rising faster than this yield, then it suggests the US central bank is lagging in its policy action. Irrespective of market expectations for 3 or 4 rate hikes this year, we expect interest rates will stay subdued in 2017 at well below 4% to 5%. This level was last seen prior to the onset of the Lehman crisis, back in 2008.
- So what would investors focus on when comparing companies ?
- Policy formulation and action to take advantage of the insular US policies. Investors will, at all times, scrutinize a company’s expansion strategy for the US market. As proposed above, one way would be direct investment, but other means include forming key partnerships within the US without the huge investments. It will be very important for a company to disclose its US business plan, going forward, to reassure investors about its commitment to the world’s engine of growth over the next few years.
- What impact does a huge capital increase (through new stocks) have ?
- An excess supply of stocks and a dilution in the earnings per share. Under normal conditions, a 20% capital increase compared with the current market capitalization would be about the limit. Beyond that, we think common sense and morals have been trashed, and excessive capital increases of up to 40% could anger existing shareholders. Companies must practice a more transparent and consistent policy for shareholder returns. So even if a company claims the funds raised will be for expansion of scale and facilities, the market will see straight through this white lie and understand the money will be used to shore up a battered financial condition. So as an effective IR policy, it is better to be honest and convey the truth. This will then actually be perceived well by the market. If a company buys back its own shares, this will also be well received.
- What is behind nonpublic transactions, such as private placements and cross-shareholdings ?
- Companies all over the world conduct these transactions. At one extreme, they are an M&A type measure to ride out adverse economic conditions. There are other reasons, of course, such as a technological tie-up, and forging greater cooperation. But so long as there is some logic in terms of contributing toward corporate value, we think shareholders cannot object.
- How about hostile takeovers by undesirable funds ?
- If a company is the target of a hostile takeover bid, there must be some good reason. Forgetting about greenmailers, the bidder may see some inefficiency or extreme value in the target organization. Buyouts, reorganizations and so on are triggered by many factors, but we think the most common root cause is an inadequate IR program. If a company consistently and regularly discloses information that investors want to know, then it will be perceived well by the investor universe (=accounting standards boards, investors, stock exchanges, etc.). As a result, the company’s stock price would reach an appropriate level through a so-called price discovery process, which in turn would eliminate the advantages of a hostile takeover to reorganize that company.
- How about poison pills (=defensive measures to prevent hostile takeovers) ?
- If the majority of shareholders vote in favor, then their existence seems reasonable. However, if the top management introduced poison pills without majority support, then that could create problems. Non-stock related defensive measures exist as well, but please prioritize the interests of shareholders before all else.