How U.S. R&D Will Lead the Post-COVID Economic Recovery
By Andy Parrish
Americans are reeling over the loss of what had been one of the strongest economies in modern history. Goldman Sachs has projected a 24% contraction in GDP for second quarter, followed by growth in Q3 and Q4. Across the country, businesses and individuals ponder their future prospects in a sea of uncertainty. However, whenever one door closes, another opens. When viewed through an optimistic lens on could argue that America is in the best position to lead the charge in bringing the global economy back to life.
The economic situation brought about by COVID-19, while catastrophic, plays into America’s strengths, which include its ability to adapt and innovate. Indeed, innovation in various areas will be needed to meet the near and long-term needs of our recovering global economy. R&D investments will be needed to meet the demands of our healthcare system in the near-term and enable an expected reshoring of manufacturing operations in the long-term. We believe this will result in unique opportunities for firms in various industries, particularly:
Architecture & Engineering
Robotics and Manufacturing Integration
In the near term, many companies will need to realign capabilities to meet the needs of the healthcare system that will be working to battle the virus. The high demand for PPE, tests, and medical equipment will require a shift of production capabilities in the manufacturing sector. In order to meet demand, manufacturing companies will need to refit and reprogram facilities and machines. This will require a heavy investment in the R&D needed to discover the plant processes, methodologies, and technologies needed to move away from existing product lines and toward the production of equipment and materials critical to fight against the virus.
Architecture and Engineering
A key factor in increasing healthcare capacity will be adding beds to medical facilities. This will require investments in new construction and renovation. However, budgets and timeframes will produce a significant hurdle, requiring fast problem solving by the companies that will be called upon to complete these projects. Architects and engineers will need to be able to figure out how to construct new facilities rapidly, on a limited budget, and without shutting down existing operations. These demands will call for design and construction innovation. Luckily, U.S. architects and engineers are used to performing this type of R&D on a regular basis and will be able to rise to this challenge.
Robotics and Manufacturing Integration
While our near-term demand calls for increasing healthcare capacity, industry is also preparing for a return of manufacturing operations from China. Even before this latest global pandemic, companies had begun exiting China at record rates. As reported by global consulting firm Kearney, the 2019 reshoring index had reached record highs. We should expect this rise to continue as talks on decoupling the U.S. and Chinese economies increase. However, we should not expect that companies will blindly exchange the low overhead costs of China-based operations simply to return to America’s shores. No, in fact, companies will increasingly look to automation and robotics to achieve the same economies and efficiencies they had grown to enjoy in China and throughout Asia.
The need for automation will require an increased focus on system integrators and robotics engineers to figure out how to drive costs out of new U.S. facilities through automation. The U.S. has a talented and growing industry of automation, robotics, integration, and controls houses. These companies engage in applied R&D on a daily basis to solve manufacturing challenges; however, we trail countries like Japan and Germany in robotics research and development. If a reshoring of U.S. manufacturing is to be successful, large investments in exploratory R&D will be needed to expand the knowledge within this industry.
While the U.S. conducts emergency triage to “flatten the curve” in the short-term, long-term planning will call for the creation of an infrastructure that can manage these types of outbreaks. Tracking and preventing future outbreaks will require contact tracing, measurement of immune vs. susceptible population segments, and more accurate modeling, to name a few. America’s IT community is primed to take on the challenge of developing these solutions. Heavy R&D in big data analytics and artificial intelligence will be needed to produce the software tools that can track and contain this virus and the next one. Concerns over how to protect all of this shared data will require exploration into emerging security architectures such as Blockchain. This presents an opportunity for software firms with expertise in these areas to shift focus toward solving healthcare-related problems through IT R&D.
Seizing the Opportunity
The strength in America’s ability to rise to these challenges lies in the fact that our manufacturers, architects, engineers, and IT professionals engage in R&D in their day-to-day activities. Developing an automated manufacturing process, designing a building for clients with unique needs, or developing the next version of a proprietary software requires constant trial-and-error testing and iteration. The daily repetition of problem solving engaged in by U.S. firms to deliver their own products and services to the market, combined with a strong demand for the dollar globally, puts the U.S. in a good position to lead the economic recovery to come.
Moving to solve these problems and pursue new opportunities will require sound financial and tax planning. Capital will be needed by firms seeking to explore new areas. Not only will firms take a margin hit from loss of cash flow due to the economic shutdown, but they will also need to allocate more resources to non-billable basic and applied R&D efforts in order to solve these problems. Fortunately, our tax code has rewards for companies seeking to commit to this R&D. With vehicles such as bonus depreciation, R&D tax credits, and the newly passed Payroll Protection Program, companies with sound planning can move to pursue new areas of opportunity while mitigating financial risks. US Banks are also in a position to help bolster the coming recovery. In the wake of regulatory restructuring, banks are now sitting on large capital reserves that may be deployed to help businesses through these challenges.
As always, Diligentiam aims to serve any company looking to unlock capital within its business through smart financial and tax planning. Our experts can help in obtaining R&D credits and designing financial strategies that will optimize taxes and improve company value. Please feel free to reach out to any of our staff with questions regarding how to maneuver through the economic recovery to come.
Andy is the VP of R&D Tax Credit operations at Diligentiam. He has worked with companies in numerous industries to identify qualified research activities and obtain tax credits. His division serves companies nationwide, handling millions of dollars in R&D claims per year. He can be reached at [email protected]