Polaris Manufacturing

Polaris's Tariff Tangle

May 17, 2019
CEO Scott Wine takes the hit, but Wall Street is the real villain.

I’ll focus my comments this week on Polaris Industries CEO Warns US Jobs May Move To Mexico If Tariffs Rise because it drew a lot of commentary and brings out some important points about both the U.S. financial system and the current U.S. trade policy.

Polaris CEO Scott Wine takes a lot of criticism from readers of this article. Wrote one reader:

“I think it is sad state of affairs when CEOs like Mr. Wine choose to stand with the Chinese in advocating support of imbalanced trade, currency manipulation, lackluster environmental standards, poor labor standards & IP theft.”

I think it’s unfair to characterize Mr. Wine or other CEOs as the overall cause of our current trade problems with China. You want to assign blame to someone, point to Wall Street, which the CEOs are beholden to.

Polaris’ stock took a hit in the two days after Trump tweeted that he was raising tariffs by 25% on additional Chinese goods. The last thing CEOs want to do is reduce investor return, including stock value. If you don’t like what they are doing, the only way to change it is for the fundamentals of our current financial system to change, and good luck with that.

Two of Polaris’ primary competitors are doing their assembly in Mexico and Canada, avoiding the tariffs while, unlike Polaris, bringing no manufacturing jobs to the U.S. If the tariffs look to be long-term, of course Polaris and other companies doing assembly in the U..S. will consider moving manufacturing overseas to keep their competitive position.

The U.S. tariff strategy is a long-term strategy, but investors look at the short-term. Where is the short-term strategy to handle the damage to U.S. companies around the tariffs, damage that I predict we’ll start to see around Christmas (when all the toys are higher priced)?

Read more Supply Chain Initiative columns by Paul Ericksen

Part of our short-term strategy should be to work with the rest of the world against China. Rather than alienating our allies, we should be partnering with them to get them to step up and support our tariffs. But this administration wants to go alone. It’s becoming very polarizing.

With China, you either have to shock them enough to get their attention or bleed them out until they have to give. We haven’t done the former, and the latter will take a good, long while.

Steel and Aluminum

With the steel and aluminum tariffs, we’ve been saving a few manufacturing jobs here and there in the U.S. in the past year. But the U.S. manufacturing index has gone down for three straight months, which does not bode well.

Steel and aluminum costs for U.S. manufacturers have gone up 25%, giving them a global 10 to 12% disadvantage competitively for raw materials. With percentages like that, I really think we’re going to see the impact before long.

While I believe China has taken advantage of the U.S. through employing unfair trade practices—and that tariffs are one tool in the tool belt that can and should be used in addressing the matter, I do not believe that the broad tariff policy on steel and aluminum supports bringing back U.S. manufacturing. 

Bringing Back the Supply Chain

On the other hand, I wholeheartedly agree with this reader comment on the Polaris article:

“The solution is looking at the existing supply chain, not exporting final manufacturing labor to offset tariffs.”

A tenet of my understanding of manufacturing is that product should be manufactured in the markets served, both within the supply chain and in final assembly. There are many reasons for this, of which the following three are pretty representative:

  • Only local suppliers and OEMs can be responsive and flexible—in other words be lean—in supporting market demand.
  • Manufacturing locally significantly reduces OEMs’ overhead cost, which can dwarf any advantage obtained through lower piece prices.
  • When you manufacture in your primary markets, you lay the groundwork for increased demand by employing future potential buyers of your product.

However, once a supply chain is established, it takes a lot of time, effort and cost to replace it. So, I guess, the point is that even if OEMs “see the light” relative to sourcing, the fix will not occur in the short run.

Paul Ericksen is IndustryWeek’s supply chain advisor. He has 38 years of experience in industry, primarily in supply management at two large original equipment manufacturers. 

About the Author

Paul Ericksen | Executive Level Consultant; IndustryWeek Supply Chain Advisor

Paul D. Ericksen has 40 years of experience in industry, primarily in supply management at two large original equipment manufacturers. At the second he was chief procurement officer. He then went on to head up a large multi-year supply chain flexibility initiative funded by the U.S. Department of Defense. He presently is an executive level consultant in both manufacturing and supply chain, counting Fortune 100 companies among his clientele. His articles on supply management issues have been published in Industrial Engineering, APICS, Purchasing Today, Target and other periodicals. 

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