Anyone involved in trade and manufacturing knows that the trade row between the United States and China is not good for business. Rising tariffs on both sides create price increases that are felt in almost every industry.
Even if you are a small company that does not engage in export yourself, you are likely feeling the crunch based on the components or finished goods you are importing and need to do something about it.
Whilst it’s easy to feel helpless under the weight of political decisions, we’ve devised a number of tried and tested cost-reduction strategies for manufacturers and buyers to lighten the burden. In this blog, we guide you through the implications of tariffs and provide suggestions on how to meet your goals.
What is the “Ceasefire” and what does it mean?
In September 2018, the United States Trade Representative officially placed 5,745 lines under a 10% tariffs with the promise that the tariffs will increase to 25% in January 2019. Despite the talks going on right now, it is likely that these additional tariffs will come to pass.
It is worth noting that these tariffs are in addition to the existing steel and aluminium tariffs passed earlier. The tariffs cover a wide variety of products. The situation is amplified for manufactured goods such as electronics, machinery, vehicle parts, and manufactured goods made of metal and plastic since these products are already struggling under the weight of previous tariffs.
A fragile peace?
At the recent G20, President Trump has agreed to a 90-day halt on increasing tariffs to 25% while President Xi has agreed to lower tariffs on American automobiles (current rate is 40%) and buy a “substantial” amount of American agricultural, energy, industrial, and other products. The halt will help both countries as the tariffs are already starting to affect US economic growth as evidenced by falling stock prices and GM plant closures due to higher material costs.
However, this halt is not a signed agreement and could easily end without warning, and tariffs could increase to 25% instead. As mentioned earlier President Trump is not above breaking promises when he deems it necessary. In addition, China’s vague goals may be difficult to enforce, leaving a lot of room for the Chinese government to find ways around them.
The US stock market had its worst December performance since the Great Depression. Performance has since improved but it 3,000 points below last year’s peak.
What’s next in the tariff war?
No one knows for certain. The 90-day ceasefire on tariffs gives the United States and China vital time to go to the negotiating table and find hammer out these issues to prevent further escalation.
Will 90 days be enough? China has long denied that it uses the unfair practices that the US has accused it of. For example, joint ventures and licensing to force technology transfers or the fact China heavily subsidizes industries throughout with generous government subsidies and to a less extent lax environmental regulation (although this is coming to end; see CMC’s upcoming series on environmental fixes).
Additionally, as mentioned above, this is not a formal written agreement. Many of the statements made by President Trump are not backed up by similar Chinese government announcements. There are no enforcement mechanisms to ensure that either side follows their end of the agreement.
One thing is for sure: every business should be prepared for volatility and for tariffs on these products to continue into the foreseeable future. The situation is just as likely to worsen as it is likely to improve.
Do not lose hope: There are solutions to weather this storm. Companies that take steps to mitigate their weaknesses and get ahead of the tariffs will come out stronger than before.
What should I do with my supply chain to mitigate risk?
There are two main ways we have found to be effective at reducing costs and increasing profitability: either improving the existing factory or relocating to a more cost-effective location.
1.Cutting costs by improving processes at supplier factories
Now is the best time to focus on cutting costs, improving quality, and raising efficiency. The brands and manufacturers that do this will come out stronger, more profitable, and likely with fewer competitors than those that failed to rise to the challenge.
How you do this strongly depends on your situation. If you are primarily producing in China and exporting to the United States, it is possible not only to stay in China but to become more profitable. That is possible because, despite recent progress, most Chinese factories are woefully inefficient and follow production practices that are no longer viable in an increasingly expensive China.
In our collective decades of manufacturing experience, we’ve frequently cut costs by a third through process improvement, inventory reduction, and lean manufacturing guidance – all this without any high-tech automation. The tariffs may be an effective means to push your suppliers into making long-desired changes.
2. Relocating your manufacturing operations to North America
In other cases, relocation or building in North America is a great option for processes that manufacture precision equipment or can be extensively automated. American manufacturing is expanding rapidly and is significantly more efficient than Chinese factories.
Mexico is an excellent choice, especially for products like auto parts that require precision. Mexican factories are more efficient than Chinese factories and Mexican labor is now cheaper than Chinese labor. Both the US and Mexico both have the added advantage of significantly closer supply chain and location to customers allowing businesses to be more agile and flexible to changing customer tastes.
Which approach is best for me?
The advantage to either approach is that they are win-win. If the US and China reach a settlement that eliminates all tariffs, the companies that make these improvements now will still be more efficient and more profitable than those that did not make the same changes. If tariffs increase further, the businesses that focus on improve now will weather the storm and the companies that do not will fail.
The key for any business engaged in manufacturing or trade (basically any company that produces, sources or sells a physical product) needs to act now and get ahead of these tariffs in an unpredictable global climate.
We’d love to hear your trade tariff stories in the comments section and are always on hand to help with specific queries on cost reduction, process improvement or relocation.