Announcer: Welcome to the EY Advanced Manufacturing and Mobility Business Minute Podcast series, where EY professionals explore the critical business issues impacting our industry today.
Raman Ram: Welcome to another edition of our podcast. Today we'll be discussing the potential implications from the recent US election. I'm Raman Ram and I lead EY’s Aerospace Defense and Mobility sector in the Americas. While the sector encompasses a lot of industries, today, we will focus our discussion on a couple of sectors, Automotive and Aerospace & Defense, and specifically on the impact of the election on policies, taxes, tariffs, incentives and also some of the geopolitical implications.
Today, I'm joined by three of my colleagues. Derek Burgess, who's the EY Americas Tax industry leader for industrials and energy. Steve Patton, who is the America's Automotive sector leader. And Mike Cadenazzi, who's a leader in the Aerospace & Defense sector with EY. Before we jump into policies, taxes, tariffs and incentives and implications, I would like to briefly highlight the macroeconomic backdrop based on EY economist projections.
I'll touch on three things. The first one is economy. The U.S. economy is in a good place and carries solid momentum. Our economists expect minimal change to gross domestic product (GDP) growth, inflation and outlook in 2025, but pronounced changes to the (2026-2027) outlook. We believe the short-term economic impact of changes in regulatory and policies will be marginal. However, changes to tax and trade policies will have consequential impact on the economy, but won't be visible, until 2026 or 2027.
Real GDP growth in 2024 will hover around 2.7%, in 2025, which is what most of the economists expect. We expect this to be around 2% and 1.7% to 1.8% during 2026 and 2027. That's on the economy. Inflation, we expect consumer price index (CPI) inflation to be close this year at about 2.4%, easing to about 2.3%-ish in 25 and 26.
And then the last thing that's on people's minds is the fed funds rate. We continue to expect a 25 basis point cut to about 4.25 to 4.5% in December, and a rate cut every other meeting, in 2025 or so, for a total of 100 basis points cut easing in 2025. So we expect the resulting fed funds rate to land at about 3.4% by the end of 2025.
I just wanted to lay out the backdrop before we jump into this discussion today. So with that said, one of the questions that's on people's minds is the expectation of a deregulation wave to lighten the regulatory load on the economy and the businesses. There's some expectation what the new administration might do. Specifically, what can we expect on the regulatory shifts and the implications for the automotive industry? So, Steve, perhaps, I'd love to ask you to share your thoughts here.
Steve Patton: Yeah. Thanks, Raman. And obviously, as it relates to the auto industry, the number one thing that's on people's minds is what's going to happen to the so-called EV mandate. And it's worthwhile to understand what that mandate really is. Two of our agencies, the Environmental Protection Agency (EPA), through the emissions reduction standards, and (the National Highway Traffic Safety Administration), through the (Corporate Average Fuel Economy) CAFE standards, CAFE standards being the average fuel efficiency of the fleet of (original equipment manufacturer) OEM vehicles. There is regulation that's put on those around a continual improving efficiency of the vehicles.
And so one way, and we saw this in the first Trump administration, is a relaxing of the standards. So in other words, a slower reduction in the overall emissions, a slower increase in the overall fuel efficiency of the vehicle. And so what that will effectively do is these standards today are built with certain percentages of EVs built into that. And so if you reduce those regulations, what it allows OEMs to do is start further elongating out their plans around introducing or at least the pace at which they introduce EVs into the into their fleets. So what we would likely see in the very near term, is a bit of a continuation of the relaxation of the investment in EVs.
And so how fast do (companies) look to completely convert their fleets over to from (internal combustion engines) ICE over to EV. And this isn’t frankly new. Over the past several months, we've already seen a slowing of that investment. And part of that has been the consumer response and the fact that we really haven't seen the very quick adoption that the consumer, from the consumer that we had initially expected.
So what we're going to continue to see is a little bit more of a slowing of that, if we do indeed relax the EPA and the NHTSA standards through CAFE. Another area of regulation that could be impactful here is that the federal government today has had a stated goal of getting to 100% zero emission vehicle by 2035. And so that would probably be another one of the regulations that would be a candidate for being further relaxed to allow a longer time period to shift towards lower emission vehicles. So I suspect those are two of the very near-term impacts that were somewhat expected coming out of the new term and the new administration.
Ram: Thanks, Steve. Quite a few changes that industry could anticipate, I guess. Steve, thank you. Mike, let me switch to you on the defense side and broadly, Aerospace & Defense. What do you expect from a policy backdrop standpoint with the new administration and the trifecta?
Mike Cadenazzi: Thanks, Raman. First, in contrast to 2016, the administration has moved incredibly fast to identify the leadership across the board for the national security space. If you think about it, at the end of November 2016, then President-elect Trump was having dinner with Senator Mitt Romney just to identify whether he would be Secretary of State. So we've moved to a much faster pace that shows they are much more organized and much more focused on identifying what their priorities are and who's going to go and be an effective leader for those agencies. So you have (Mike) Waltz as national security advisor, Senator Marco Rubio at State, Pete Hegseth at Department of Defense, and Tulsi Gabbard at (Director of National Intelligence) DNI. First, the speed of those nomination is going to provide ample fodder for analysts globally to assess their plans and intention.
So going through the record, understanding who those people are and what they're likely to do to run their agencies. It's also going to offer plenty for the Senate to consider during those confirmation hearings. I'm sure there'll be a lot more on that going forward. Throughout the election campaign, Trump's campaign has articulated an intent to take a more aggressive approach to deterrence, backed up by what I guess would be a reinvigorated defense industrial base, but balanced with a desire to this no forever wars position, which has been articulated throughout.
There's clearly some tensions in those positions that's going to need to be balanced as the leadership takes over and starts to move forward. However, I do think you can look at the first Trump term for some clues and how this is likely to manifest itself. Perhaps first, maybe a more direct and explicit framing of challenges and how the US is likely to respond.
So think about the early 2017 counter ISIS campaign and the maximum pressure campaigns, focus on the nuclear challenges. There's probably a more direct willingness to confront our allies about their relative military capacity and investments than we've seen from the previous or the current administration, and we're likely to see more scrutiny on how we're investing our resources to support allies and partners in both Europe and Asia. Those topics have been covered amply by the press and throughout the campaign discussions. Underpinning all this is really a desire to expand our military capacity and improve the industrial base and pivot it largely to get into a pay com region for a whole host of reasons.
But one of the particular challenges that doesn't get a whole lot of scrutiny is much of what this administration coming in plans to do would seem to require a lot more money for national security and the intelligence community. This is going to require the president and Congress to address a US government fiscal situation that has the US paying more for debt interest than for defense. That's a problem, and would seem to indicate they've got to go ahead and be relatively reasoned in their approach to investing more.
If we pivot to the commercial aerospace side, climate policy and regulations are likely to be a major topic. So, first of all, the Paris climate accord is likely to get a lot of scrutiny. And whether or not we continue our association there. For aerospace in particular, this is going to be relevant as industry is positioned to meet its own self-imposed targets for net zero 2050. Industries’ ability to meet these targets is already in question.
We discussed this in your panel this past summer at Farnborough and with our partners across the sector. We wrote and released a couple of pieces on that as well. Our European partners are likely to press ahead with their targets and with their climate goal, impacts on aerospace. The US could very well wind up in a different place from our partners.
That means airframers, engine manufacturers, lower tier manufacturers across the sector are likely to have to navigate a complicated set of incentives to work through serving both all of their global operating partners and customers that they work across the aerospace sector.
Ram: Thank you, Mike. I want to come back to a couple of points that you mentioned when we discuss geopolitics. Derek, perhaps I'll come to you to ask this. So we've talked about some of the policies and regulatory changes. But tax and trade policies will have more consequential impact in the longer term. What do you expect to see broadly in the industry, as well as specifically for the Automotive and Aerospace & Defense sectors?
Derek Burgess: Yeah, thank you, Raman. So I'm going to start off and I'll give what I'll say is an overview of the process, because that's going to be important here as this transitions. And then I'll hit on exactly what you just said, which is what we see as the highest impact areas for tax for, for this particular sector. So process wise, we have what we refer to as a red sweep. So the trifecta for Republicans in the House, Senate and White House. This is really going to allow Republicans to enact what could be a GOP only bill and use what's called the budget reconciliation process. So just a quick minute on that, because it is important for how this is going to all get through, if it does. And really what that does is it allows the Senate to pass on a simple majority basis, meaning 51 or more. And since Republicans have 53, they have that. They don't need the 60 that you would normally need to overcome the filibuster.
That said, the House is very close. There's a very slight majority there. But nonetheless, that's the trifecta that's needed to pass some of this through. That being said, there's still a lot to negotiate within the party, whether it's what's the revenue target going to be as it relates to tax legislation, what's the, acceptable cost or deficit? And that's going to make things complicated. And given how tight it is, you're going to really need to get some good consensus.
All that being said, as far as timing wise, we are thinking that the aim is going to be to try to do this in the first half of 2025. So very soon after taking office. And really that's driven largely by wanting to get it done before they hit the mid-year debt limit timing. So there's a quick overview of process. Just pivoting to the actual policy, I'll say overall, probably the biggest piece to the tax legislation we're expecting is the extension of the tax cuts and Jobs Act provision. This was implemented during, President-elect Trump's first term, but is set to expire in 2025. So we do see this going through. Importantly, this is not a new tax cut. This is just avoiding taxes increasing as that was going to sunset. So it's extremely important to really all companies, this is probably going to be the biggest piece of tax legislation. In terms of what's new and what we heard on the campaign trail, let me answer that question, Raman, that you posed before. And I'm going to focus on what are probably the three biggest priority provisions for the aerospace, defense and auto sectors.
So number one is a potential reduction of the corporate rate from 21% to 15% for Made in America products. Alternatively, I know we'll touch on this later, that's the carrot side of this. The stick is going to be if it's not made in America and it comes in, there could be a series of tariffs, but we'll touch on that separately. But the 15% Made in America could be really, really big across the sector. Number two is around R&D. And so a couple things there. One is discussions around enhancing the R&D credit itself. But the other is the (Section) 174 R&D expenses. As many of these companies know, today, that needs to be amortized over five years.
And it's really increased the cost to our companies and our manufacturers around R&D. And so the proposal would be to bring it back to immediate expensing. And that would be a really, really big lift to our companies there.
The third one, and we haven't heard as much about it on the campaign trail, but is really a big global impact, is the (Organization for Economic Co-Operation and Development) OECD's Pillar Two global minimum tax framework.
This was something Trump started to take on early during his first term, but it has since then progressed quite a bit. And we already have other countries starting to adopt and implement this. We think at a minimum, this is going to be much harder to get through and passed under a Trump presidency. And it's likely he may push back and really avoid the US becoming compliant there and we'll see what happens. There's going to be probably a lot of different negotiations that occur there. But again, this this is a really big area for our companies. So as you can tell, it was a bit of a quick summary, but there's going to be a lot of action in tax. The question becomes what do you do? And I really think over the next several months, it's going to be extremely important to scenario plan, model out how you think you would be impacted by these provisions. And given the time that it may move quickly, there's there is still room for advocacy. So you really need to understand, understand how you're going to be impacted and then get out there, advocate and try to really be on your front foot in terms of where this all goes.
Ram: Thanks, Derek for outlining the process, as well as the three or four areas where companies could see changes and impact. Steve, specifically to the automotive industry, do you want to add anything more to what Derek said?
Patton: Well, I would certainly affirm what Derek mentioned around the 15% corporate tax rate. That would an incredible stimulus check for the auto industry. So that will be very helpful for an industry that has historically operated in very low margins, not only for the OEMs, but the supply base as well. The other thing to add maybe is the fact that in the campaign, there was some talk towards the end in the Trump administration around having deductibility of interest expense for auto loans. And that could be a pretty strong stimulus effect, too, just knowing where the consumer is right now and some of the concerns around the high price of automobiles and the overall consumer confidence right now. So that could have a very positive impact as well.
Ram: Thank you. Steve. On that note, you mentioned a good point about the deductibility of auto loans. Derek, perhaps a follow up question to you. Do you expect the bonus depreciation to come back? And would that be more positive for the automotive sector?
Burgess: Yeah, it will be a part of it and definitely considered. And while I didn't put that in my top three, that is incredibly important to for the ability to get the immediate benefit of expensing on some of these large capital expenditures. It could be really important and will be a part of what's discussed. Thanks, Derek.
Ram: Switching to incentives. We always talk incentives when we talk taxes as well. And incentives have always played a role in the economic growth and particularly plays a big role in this sector. So let me ask you, Derek, on this thing, what can we expect on incentives and credits given this administration and Congress coming in?
Burgess: Yeah. Thanks, Raman. So probably the two biggest areas I'll touch on is the Inflation Reduction Act or IRA, and then the (Creating Helpful Incentives to Produce Semiconductors) CHIPS Act. So starting off with IRA and again a little bit of the background into it. So this was passed under the Biden presidency in 2022. Broadly speaking, it's a series of credits and deductions both for businesses and individuals.
And of course, we're going to focus on businesses here. When you look at what they span everything from energy, decarbonization, batteries, EV credits were included, among a host of other things. Importantly, as we look into the future and how that passed, that passed in 2022 without any Republican votes. The other thing that's really important is the cost of this has surged well beyond what was originally estimated. In fact, we've heard some estimates that say it could exceed up to $1 trillion. We also know we've heard President-elect Trump talk negatively about this. And so really, the question that we're getting asked a lot is where does this go from here?
The other thing that's evolved, I'd say, since the passage is much of the funding, and we think it's around probably 75% of it, has actually flowed into Republican districts. And we're now seeing, as opposed to the original vote, that there's much more support from Republican lawmakers. In fact, there was a letter submitted to speaker Mike Johnson opposing the repeal of the bill as something that's considered.
So it is a little bit up in the air. Where we see things going is if you think of this on a scale, maybe the left side of the scale is minimal, marginal changes, the right side being complete overhaul or repeal. We're probably going to be more towards the left side of that. Again, you just see a lot of money going into red districts. And we think much of this legislation is probably going to be safe through this process. That being said, there are some specific things we think could be picked off. You could imagine things like, and we'll talk more about EV tax credits, maybe residential clean energy. There's some things around IRS funding, wind credits. Those might be a little bit more of what we see versus an overhaul of this. And again, in terms of aerospace, defense and automotive,
this would be really good. And this is something that is important to these companies.
Quickly on CHIPS. So, CHIPS2 also passed in 2022. Now this was different because this had much more bipartisan support. And although similarly, we've heard some criticism from Trump and even House Speaker Mike Johnson there, there are some smaller components that might be unpopular or at risk, but generally we think this is going to also stay intact. It has overall been popular and attracted investment in the U.S, which has been a bipartisan goal of it.
Ram: Steve, building on that and a point Derek was making on credits, specifically over the past couple of years, even this year for that matter. We've seen the growth rate in EV adoption coming down. There has been all kinds of concern. So love to get your thoughts on the impact of what we can expect on credits and particularly the implications on the automotive value chain and the EV value chain.
Patton: Yeah. Thanks, Raman. I do think that, as Derek mentioned, there'll be probably different treatments of some of the different aspects of IRA, (the Infrastructure Investment and Jobs Act) IIJA and maybe to a lesser extent for auto in the Chips act. But for instance, the EV tax credit is a highly likely target to be eliminated. The tax credit itself today has some very different qualifications in order to apply it to a vehicle sale for the consumer.
And so in many ways, it's picking winners and losers. And, there's some question as to whether the government should be funding that buildout when it hasn't done it for all automakers. And so that will be one of the areas that will we'll see some probable... In fact, there's been some reporting yet this week that is suggesting that it might go away entirely, the EV tax credit, the $7,500 for a new vehicle purchase.
There's a lot of other provisions in there too that are really offering funding or financing for projects around electrical grid, battery storage, even hydrogen-type projects. It will be interesting to see how those develop over time here because as Derek mentioned, many of these are going to the states that are considered red states, (National Electric Vehicle Infrastructure) NEVI funding, for instance, out of the IIJA. It really has tried to build EV infrastructure across the entire country. That's what the intention of the NEVI funding is. And a lot of that money has already been spent and has been spent in both red and blue states. And so we know from the consumer through some of the research that EY has done, is that one of the biggest challenges the consumer has right now in buying EV is availability of electric vehicle infrastructure.
And so I do think that there is probably some hope that many of the provisions will continue. But I would expect that some of these will probably drop off just based on some of the campaign dialogue we've seen over the past several months.
Ram: Thank you. Steve. Certainly it provides a lot to think about from a tax and incentive standpoint. Switch to tariffs, Mike, which a lot has been talked about. And certainly the administration has not been shy in communicating that there's going to be tariffs across the board on a lot of imports. And also tariffs are going to be disproportionately high on certain countries products from certain countries. SoI'd love to ask you, Mike, particularly what do you expect to see in the defense, landscape and the implications of those?
Cadenazzi: Thanks, Raman. It's very reasonable for our industry partners to be concerned about the application of tariffs to our defense products, and particularly as we're talking about, import/export arrangements with our allies and partners in Europe and in Asia. There's a couple mitigating factors against substantial application of tariffs in defense. First, there's a hunger for best-in-class capabilities for us to bring in those capabilities to the US to benefit the defense industrial base and our military, but also to share that with our partners.
We also want our industry partners in Europe and Asia to dramatically increase their own organic defense industrial base. Tariffs would seem to reshape and shrink the market options for those countries. It makes it less likely, if they can't export easier to the United States, that they're going to go ahead and make government industrial investments into the defense base and probably make it less attractive for private capital to engage. Those are two major levers where we’re very focused on trying to incentivize and improve the structure of the defense environments overseas.
And of course, the US itself sells significant amounts of defense equipment to our partners and allies. In 2023 alone, we sold and arranged $80 billion in foreign military sales facilitated directly through the government and then over $157 billion in direct commercial sales of below threshold military products. It would seem to me that a broad tariff regime as broadly talked about in the marketplace is likely to work against us, the US and the military in terms of both expanding our partner capacity and growing our exports. It will actually hurt the defense industry here in a major way. And so there will be some modest approach applied here or some modest differential approach as applied to other sectors that are being considered.
Ram: Some defense companies here, Mike, are expecting to grow more from their international sales. That is going to be something they're going to be cautiously watching. So, thank you. Steve, perhaps similar question to you on the automotive side. What do you expect from a tariff standpoint and what are the implications for the automotive companies?
Patton: Yeah, I mean, a couple things here. First of all, it's clear what it's intended to do. I mean, it's a negotiating tool to really protect an incredibly large industry here in the U.S. It's estimated to be about a $1 trillion ecosystem, about 4 to 5% of our overall GDP. And the reality is, we do import a lot more vehicles and certainly value than we export at a probably about a 3 to 1 ratio.
And so the intent here is to protect U.S. manufacturing, automotive build manufacturing and tariffs are one of the ways that that could be used to negotiate more U.S. manufacturing. And frankly, we're starting to see some announcements already of slowing down non-U.S. facilities and probably a repatriation of manufacturing of certain automobiles and some components. The challenge will be that this is a global industry.
And there is dependence on a lot of non-U.S. production of components, even in a U.S. built vehicle. And so over time it can be a very valuable tool. But I do worry that there could be some significant impacts and cost introduced if tariffs were to be introduced in a very rapid fashion.
So again, it's a bit more of a negotiating tool that will watch how it develops over time here and its impact on the auto industry.
Ram: Thank you, Steve. We can jump to the last topic that I had in mind, which is on geopolitics. Certainly the U.S. economy is strong, but we are living in a constrained budgetary environment with deficits and debt increasing. But given that, the changes in geopolitics will have big implications. So perhaps, Mike, I'll start with you. What do you expect from the defense environment, given all the changes happening in geopolitics?
Cadenazzi: Absolutely. It's a major concern. To me, as I look at the incoming administration, the dominant national security theme is regarding events in the Indo-Pacific region, what they might mean for our decision making and resource availability. In particular is concern about something called the “Davidson window,” which is the window of time when the US might be at a comparative military disadvantage in its national security capabilities and responsibilities in the region and more globally.
So we have concerns about the ability to bring enough resources and capabilities to the Indo-Pacific broadly. And we've seen a commitment by multiple nations, not just the US, to go ahead and reinvigorate the strategic nuclear deterrent. That's putting pressure on everyone to reinvigorate the deterrent. And it's going to require additional resource commitments from everybody that is in that small club. There's been throughout the campaign concerns about the appetite for sustaining our allies and partners in Europe that are in conflict and concerns that those resources should be going to Asia, as opposed to going to Europe. And that's led to a follow on, which is a long-term discussion around all the way back to Secretary Gates under the Obama administration, where we tried the carrot and stick approach to get our NATO partners in Europe and in Canada to go out and spend more on defense, that is, to reach their 2% goals.
So that is a challenge because now European partners have started to reach their 2% goals, which is a great thing, but they're working on a $1.5 trillion deficit relative to the last two decades of underspending. So there's a lot to be done. And at the end of the day, this administration has articulated the goal isn't to abandon NATO or to abandon the continent, which seems to be one of the concerns that's articulated in the press. But it's rather so we can invest our resources into the Indo-Pacific theater and focus our attention there.
This is going to continue to be a point of contention for this administration in their dealings with our partners overseas. Our partners in Europe aren't spending enough relative to the demands to sustain their own militaries and to contribute to our partners overseas in other places. The Middle East conflicts, the concerns about expansion there, we're likely to offer more freedom of action and support for our allies in the region in responding to what their domestic security concerns are.
As long as we don't actively need to be involved and our own contributions are pretty modest, you're going to see a relative hands off approach and some more liberal support for countries taking action in that region.
And again, we're trying to tackle these in an environment where there's real risk. I mean, just this week, two US Navy ships transited the Red Sea. They were fired up by a combination of drones, ballistic and cruise missiles. That's a real risk that any of these platforms could be hit and that there'd be US casualties, which would change the situation dramatically domestically.
So we're likely to see a more direct response from this administration as it faces these challenges going forward once it's in office. How that manifests, whether that's direct military action, would seem to be at odds with some of the tenants they've laid out regarding no new wars and no forever wars.
At the end of the day, to tackle all of these geopolitical challenges, you have a US government fiscal environment where the Congressional Budget Office indicates that we will have growing debt and sustained interest costs that are well above defense spending for the foreseeable future. That's, again, going to go ahead and cause us to have to make some really tough tradeoffs, which has not been the strong suit for either party over the past decade or so.
Ram: Steve, perhaps the same question to you. I know the automotive industry is concerned about a few other things about geopolitical changes from what Mike said. But I'd love to get your thoughts.
Patton: Yeah, the biggest challenge is truly the trade deficit. The US would very much like to have the non-domestic producers build more vehicles in the US. And again, the tariffs become a very instrumental tool in order to achieve that. The biggest thing that the US, domestic producers need to focus on is the threat of particularly some of the Asian brands in bringing in vehicles in that $20,000 to $25,000 price point.
It's a segment that the U.S. automakers have virtually ignored of late. Many, many years, if not decades. And it is an area where some of the Asian producers, in particular, have had strong exports into other Western regions.
And they would very much like to get into the US. And so that becomes one of the key areas of contention right now geopolitically around how do the non-U.S. producers enter the market with a vehicle type ,even with some fairly hefty tariffs that, frankly, the domestic producers currently don't compete in? And that will be a very strong challenge geopolitically going forward.
Ram: That wraps up our discussion. It would be an understatement to say that we're living in interesting times.
Our intent today was to touch on a few topics that stakeholders in the automotive and aerospace and defense sector will be concerned about. And we touched on taxes, tariffs and incentives and some geopolitical things as well.
While there are some indications, there's still a lot of uncertainty. As we've seen in the past, historically, a lot of these shifts can bring both opportunities and challenges to these sectors. So it'll be crucial to stay tuned and adaptable. But thank you, Steve, Mike and Derek for taking the time today. And thanks all for listening and be sure to join us next time for more insights on how these industries are evolving. Thank you.
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