How to Future-Proof Your Business From Tariff Fallout

What should manufacturers do to limit fallout from tariffs in a time of real economic boom? We talk to industry advocates and financial advisers to explore the best options for reducing costs, right-sizing capacity and controlling risk exposure.

U.S. manufacturers are starting to feel the impact of tariffs implemented on China. As the number and cost of tariffs—already affecting products in the hundreds of billions of dollars—rise, companies are taking steps to protect their businesses from the effects of the trade war.

With such a strong U.S. economy, manufacturers are staying busy, says Omar S. Nashashibi, founding partner of The Franklin Partnership LLP and head of government relations for One Voice, the advocacy program of the Precision Metalforming Association and the National Tooling and Machining Association.

“They are cranking out parts faster and more often than they have in generations, they tell us,” says Nashashibi. He worries, however, that some of that demand could be overordering by customers anticipating even higher tariffs.

Meanwhile, prices of steel and aluminum have skyrocketed by 30 to 50 percent, and lead times for these materials have lengthened significantly, he says.

“In some cases where you could get it in three to four weeks, now it’s 18 to 20 weeks. One person told me they were quoted a wait time by domestic steel producers of 361 days,” he says. “And we expect that to get worse.”

The impact has shown up in corporate earnings reports. Caterpillar reported tariffs added $40 million in costs for materials during its third quarter, while Stanley Black & Decker expects that tariffs cost it an additional $50 million this year and could rise to $250 million next year. As a result, it plans to raise prices in January. 

The Impact of the Trade War on Aerospace, Automotive, Medical

The tariffs affect companies differently, depending on what they are importing, whether they are able to find a substitute for a tariffed product, and their ability to pass through price increases, says Nick Bova, principal at RSM US, which advises middle market companies. But suppliers further back in the supply chain particularly feel the squeeze, because these materials are a large part of the cost of their goods, says Dan Haynes, principal, industrial products and construction at Deloitte Consulting. Haynes knows of one U.S. nail maker who has already gone out of business. The company sourced all of its steel from China, and steel was virtually 100 percent of its material costs.

Some industry segments are harder hit than others, among them automotive, aerospace, heavy equipment and medical devices. Suppliers to the automotive market, already dealing with rising steel and aluminum costs, must also contend with rising costs of parts made from various metals, rubber, chemicals and industrial machinery, and other items. What’s more, they worry about the impact of retaliatory tariffs against the United States, according to Nashashibi.

Automakers in South Carolina, including Volvo and BMW, are talking about moving their manufacturing out of the U.S. in response to retaliatory tariffs announced by China. One BMW executive said the China tariffs will cost the company’s South Carolina plant about $347 million in lost earnings this year.

“That’s going to affect downstream suppliers of the automobile industry,” says Nashashibi. “Parts manufacturers around the country are watching that very carefully.”

Both the aerospace and medical device markets rely on high quality, specialty steel, for which there are few or no domestic sources. Much of this steel is imported from Italy, Switzerland, South Korea and Japan. In aerospace, the steel needs to be able to withstand the stresses of flying at hundreds of miles per hour, for example. Materials used in medical devices often need to go through long certification processes because they go into the human body, notes Nashashibi.

In the near term, manufacturers can try to mitigate the impacts by “pursuing aggressive cost reduction or capacity right-sizing,” says Bova. But Nashashibi hasn’t seen big cutbacks yet. Instead, he notes what is not happening. In spite of the booming economy and the investment incentives included in the tax reform law passed last year, “we are hearing about opportunities lost,” he says. “They were planning on expanding, putting in new machines, adding more space and employees. Now, they are not doing that.”

Looking for guidance on tax reform? Read “Better MRO Asks Experts to Weigh In on Tax Reform Opportunities for Manufacturers.”

Manufacturers Are Bracing for Long-Term Effects from the Tariffs

Steve Menaker, national industrial products industry leader at RSM US, sees the same picture: “In the midmarket, we haven’t seen significant pickup in capital expenditure. That’s what was hoped for, but the uncertainty around trade has made people hesitate.”

Now is the time for manufacturers to step back and view potential impacts through a wide lens. One Voice is advising members to examine their risk exposure on multiple levels including: raw materials costs, operating expenses, exposure to tariffs on imported parts, machines, chemicals and other products, notes Nashashibi. They should also assess the impact of retaliatory tariffs already in place or threatened by various countries.

“Look at not only how it impacts your business directly, but how it impacts your customers and how that will reverberate back to you,” notes Nashashibi. “Consider how to plan for longer lead times, for being unable to get materials you need on a timely basis.”

Companies should be upfront with their customers and try to work out how they can navigate the additional costs and tighter supplies together, he advises. Another solution, but one that will take time, is to reconfigure supply chains. Some of RSM’s clients are looking into how they can reduce their reliance on China and other countries hit by the tariffs. After all, says Menaker, “we don’t know how quickly this can get settled.”