The United States Government is engaged in a volley of tariffs with major global trading partners, including Canada, Mexico, the European Union and China. The intention is to bolster the American economy by making it cheaper to buy domestic goods, protecting intellectual property, encouraging re-shoring of manufacturing and eliminating trade deficits.
Tariffs levied over the past 18 months effect the import and export of thousands of items—from consumer products to industrial equipment and manufacturing materials. The bold and busy trade policy—full of corrective measures, retaliation and delays—makes it difficult to predict whether imposing, or threatening to impose, tariffs will be good for trade negotiations or escalate into a full-blown trade war. It is a time of economic uncertainty.
It is also the perfect time for American manufacturers to evaluate their supply chains and develop contingency plans for fortifying their businesses in a dynamic climate.
Proactively preparing for possible impacts can help mitigate risks and drive innovation to advantage.
Bring in outside perspectives from third-party experts.
The 1974 law invoked to impose the tariffs, known as Section 301, was designed to deal with bilateral trade—giving the U.S. leverage when dealing with relatively straightforward, tit-for-tat trade negotiations with another country.
Today’s globalization of manufacturing complicates matters. It is not uncommon for U.S. manufacturers to engineer a product, source raw materials from one country, turn them into intermediate goods in another country, and then ship the components to the U.S. for finishing and assembly.
Cross-functional teams, utilizing both internal and external data and intelligence, can be leveraged to generate insights and plan for future scenarios. Perspectives from within the industry, but outside the company or segment, can provide specialized analysis and add value.
Negotiate with suppliers now, and if possible, lock in favorable pricing in a long-term deal.
Two of the current tariff disputes are particularly relevant to the American panel processing and woodworking industries.
In November 2017, America levied a 20.83 percent tariff on Canadian softwood lumber imports. The action was taken in response to claims from U.S. lumber producers that Canadian competition had an unfair pricing advantage due to government subsidies. It was the latest tariff event in an ongoing trade dispute between the U.S. and Canada that first arose in 1982.
Early in 2018 the U.S. began planning a tariff offensive on a vast array of goods imported from China in response to concerns over China’s policies on intellectual property, technology, and innovation. The tariffs were intended to reduce the trade deficit and bring manufacturing back to the U.S.
Currently the U.S. has levied tariffs on a total of $250 billion worth of Chinese products. Meanwhile, China has increased tariffs on $110 billion worth of U.S. products.
Adding taxes raises manufacturing costs. Many manufacturers in the furniture, hospitality, healthcare, commercial interiors and housing industries are seeing expenditures go up, forcing them to choose between smaller profit margins and increasing retail prices. Establishing fixed prices when possible can help inform other operational decisions.
When considering alternative sources for raw materials or intermediary goods, quality and supply continuity matter as much, or more, than commodity pricing.
Directly after the tariff was imposed on softwood lumber from Canada prices rose, and they’ve remained high ever since. The same effect is becoming evident with the Chinese tariff events.
While U.S. producers at the top of the value chain are cheering surging profits, downstream manufacturers of intermediary goods and finished products are feeling the pinch. In anticipation some companies are stockpiling materials, further driving up prices and reducing availability. What appears to be the least expensive option in the moment can end up costing much more in rejected or delayed materials.
Domestic OEMs may be able to extend favorable volume-based material pricing to their customers.
Throughout 2018, the U.S. and China engaged in an on-going cycle of levying tariffs and retaliation, fueled by threats to apply more tariffs to thousands of items. Industrial equipment, manufacturing materials and intermediate goods pivotal to the panel-processing and woodworking industries are on the list. Some examples include; wood, steel, plywood, chemicals, wood industry technology, machinery for treating wood, presses for making particleboard, panel processing equipment, fiber building board and other ligneous materials.
Manufacturing partners with established equipment capacity and supplier relationships can often absorb or offset costs by essentially functioning as a buyer’s club for their customers.
Investigate domestic options for sourcing previously imported intermediate goods.
When contemplating the classic “make or buy?” proposition, identify manufacturing partners that already have needed capabilities. If deciding to invest in in-house capabilities, OEM partners can help fill production gaps until new equipment is up and running. Bonus: It’s always good business practice to have a back-up if machinery goes down or capacity issues arise.
If considering financing purchases of equipment to bring technology in-house, consider timing and don’t delay to lock in favorable rates.
While most agree re-shoring manufacturing to the U.S. is a good idea in theory, in practice it is not so simple. The Federal Reserve has signaled it will continue increasing the Fed Funds rates through the end of the year, making it more expensive to finance capital investments. Foreign origin equipment is also more expensive under tariffs. Even in the best economic circumstances, significant lag would be expected in tooling up technology and reconfiguring supply chain after a decade of manufacturing off shores. Be realistic in estimating how long it takes to bring new equipment online and plan for the interim accordingly.
Consider accelerating plans to invest in information technology. As manufacturing continually moves toward Industry 4.0, digitization of processes provides more flexible options for outsourcing intermediate goods or bringing new equipment online.
Financial pressures encourage the continual evolution of traditional manufacturing models. Sometimes referred to as “the fourth industrial revolution,” Industry 4.0 uses automation, cloud-based digitized data, and the internet of things to increase productivity, reduce waste and streamline logistics. Harnessing the power of information allows modern makers to decentralize the production of parts and provides flexibility to utilize a more expansive supply chain. Distributing work to specialized facilities or manufacturing partners based on real-time capacity, availability of specific capabilities, material inventory and adaptive engineering can reduce production costs and increase agility.
Consider re-engineering products and intermediary inputs to optimize available materials and technologies.
Constraints encourage designers and engineers to innovate with new materials and methods. An example from the aerospace industry is the American company Boeing utilizing emerging materials, like fuzzy fibers and carbon fiber, instead of steel in an effort not to lose market share to competition in the United Kingdom.
Savvy panel processors can also benefit by taking the opportunity to develop new products or re-engineer existing products to include emerging materials and domestic facilities. While it might seem counterintuitive in a climate where the instinct is to be conservative, innovation in materials and design now will continue to pay into the future.
Look for partners who offer engineering services, in addition to continually investing in information and equipment technology.
If considering outsourcing domestically as a means of reducing risk, seek partners willing and able to suggest ways to increase value through optimizing material specifications and manufacturing capabilities.
When it comes to bringing goods to market, weigh the cost of developing onshore stocking programs against the cost of interrupted supply chain.
As automation levels the labor-cost playing field, strategic advantage shifts to distribution and logistics. In many instances, a shorter lead time is a differentiator. Having the technology to produce JIT isn’t enough. Manufacturers also need to consider how much warehousing space they have available and how much cash they want tied up in inventory. Having access to stock of certain materials, panels or finished goods is one way to increase responsiveness.
Are the tariffs achieving the intended objectives? It’s complicated.
American manufacturers can’t control today’s vacillating trade policies, but they can rethink how and where products are made. Well positioned businesses are more likely to weather the storm of international economic uncertainty, and even come out ahead.
Global trade changes provide good reason to evaluate design, sourcing, and production processes. Addressed proactively, tariff response can drive innovation, foster domestic partnerships, strengthen basic economy and bring new products to market efficiently.