According to the Tax Foundation and other economics researchers, US businesses and consumers were able to cover a significant portion of the costs of the Trump trade war.
The to-market team measures the impact of tariffs on a company's products, but finance leaders and their procurement have different authority. To reduce the financial impact of purchasing from international suppliers in the target country.
The management of risks related to purchasing, supplier selection, contract negotiation, and payments is within the scope of the CFO, with operating expenses and margins being affected by rising parts and product costs.
We have asked Logicsource's Managing Partner and Chief Client Value Manager Michael Braunschweiger to offer options to US companies that buy or import from countries facing new tariffs on their products in the US. Because tariff targets are constantly changing, buyers need protection against already instituted tariffs and those still in discussion.
Jump start
Front price challenges. Even manufacturers can place large orders shipped to the US and place them in warehouses to avoid future taxation. It was happening in the steel and aluminum markets before customs duties on these imports came into effect. But positive purchases are just stopgaps. Eventually, stock will run out, says Braunschweiger. “We can't move forward for ten years,” says Braunschweiger. “Maybe five or six months.”
Not all businesses can afford to tie up working capital or pay additional warehouse space premiums over that period. Advanced purchases are also dangerous in markets such as products where prices are whipped.
Procurement from alternatives. Companies can shift purchases to providers that are subject to shopping and customs duties but not to. Another route is to look for a supplier with multiple regional manufacturing sites. “You can stay with the same supplier, but even if it's expensive, you can buy it from domestic manufacturing sites in the US rather than China,” says Braunschweiger.
Warning: When tariffs are applied to imported products, it leads to some US companies that raise the prices of competing products, (1) tariffs provide protection, and (2) theoretically reduce domestic competition.
Changed suppliers will have other risks and costs, such as delayed orders and higher shipping costs. For example, manufacturers of textile, shoes and fashion clothing that many still manufacture in China have been able to move to India, Vietnam and Malaysia. But rerouting worn-out non-Chinese vessels into US channels increases freight and fuel costs, Braunschweiger says. European countries may be alternatives, but the European Union could also suffer substantial import collection by the US
In the short term, the economics of many markets do not allow production to the US.
A limited publicly-publicized brand that sells everything from kitchenware to outdoor storage boxes is looking to cut production based in China. However, “Re-Addition” is off the table. “We want to move to the US, but we're not ready to sell can openers over $20, so it's not feasible at this point.”
Rearrangement of added value. According to Braunschweiger, companies importing personal packaged products have the opportunity to stack products ready for retail and complete the final packaging or assembly of US shoes sold to US customers that are packaged and shipped individually. Chinese companies make, print and assemble Chinese boxes. By producing boxes and other packaging and assembling them in the US, the company pays duties on the value of partially completed products. In some industries, such as alcohol, packaging can be 40% of the finished product price, says Braunschweiger.
Working with suppliers
After Covid disrupted the supply chain, experts have encouraged CFOs to develop close relationships with key suppliers, including invitations to production planning. If the company formed those relationships, they could now prove useful.
Value Engineering. One way to reduce the impact on tariffs is to work with suppliers to adjust product specifications. For example, with steel, it would be to find alternative materials, or reduce the amount of steel in the product without compromising the integrity of the product, says Braunschweiger. Devising creative solutions requires the involvement of suppliers.
As they are looking for alternatives to heavy crude oil from Canada and Mexico, some US refineries have the idea of switching to lighter crude oil to avoid threatened US tariffs. However, some Midwest refineries do not have that option. According to the Energy Institute, these refineries are uniquely designed for heavier Canadian crude oil.
Contract negotiations. In revenue calls, most companies that predict negative effects from trade fines say they pass costs to customers or people downstream of the supply chain. However, some suppliers may be willing to absorb the tariff percentage, Braunschweiger says.
Suppose a customer is trying to remove production from Mexico and Canada. Suppliers from these countries may be more flexible in negotiating, he says, trying to ensure they don't leave. Companies need to review supplier contracts and negotiate better contracts that will protect them from rising tariffs or make it easier to withdraw the contract without penalties.
Braunschweiger expects that in the future, or higher tariffs, will be hit in the future, will be able to negotiate a mass contract with “negotiation prices delivered to the US, including taxes and obligations.” Another option is to agree to the cap and collar for potential tariff increases.
Braunschweiger says it will help if a company needs to increase leverage with a supplier, either consolidating spending with that supplier or increasing purchases from them. However, doing so will reverse the supply shortage mitigation measures taken by companies during Covid.
Global procurement
For businesses with a genuine global supply chain, decisions about supplier relationships and locations are not easy.
At last week's UBS conference, CFO John M. Vandemore decides where to produce and which markets are “difficult calculations” for companies like Skechers USA. “For us, it's not just a move from markets like China and Vietnam to the US, but rather every transit we do globally,” according to the S&P Capital IQ transcript of Vandemore's remarks.
“From Europe to Vietnam, China, Southeast, there are many different routes that we have to consider, and what we optimize is not just what happens in the US, but also the global tariff cost,” says Vandemore.
