The United States government’s decision to introduce trade tariffs on steel and aluminium imports has kickstarted widespread tariff changes across the major world economies with strong responses from other countries, and further retaliations announced. The President of the European Commission, Jean-Claude Juncker, recently met with President Donald Trump to try and de-escalate this issue.
In mid-July, China put in a complaint to the World Trade Organization (WTO) regarding additional tariffs proposed by the U.S. on Chinese goods, at a value of $200 billion. The U.S. has proposed these further tariffs in a tit-for-tat exchange against retaliations across the globe from the initial tariff changes issued by Trump. A global trade war is forming, and the IMF has reported this could cost the global economy, by lowering worldwide growth by as much as 0.5% by 2020, amounting to around $430 billion in lost GDP.
Regardless of whether these trade tariffs do escalate into a full-scale global trade war or not, they will affect an increasing number of industries over the course of 2018 and into next year. Whatever the ultimate outcome, in this period of uncertainty, businesses must look to dynamic supply chain strategies to address an ever-changing landscape. Here’s a look at the impact this issue may have on industrial companies, along with suggestions for appropriate mitigation strategies.
The Impact on Industrials
The US has levied an import duty of 25% on steel and 10% on aluminium. The EU has proposed retaliatory measures in response, imposing 25% tariffs on US motorcycles, denim, cigarettes, cranberry juice and peanut butter, among other products. Although there are foreseen job increases for those working in steel and aluminium industries within the U.S. due to the protectionist move, the impact is already being felt among those industries most dependent on steel and aluminium imports—such as the automotive, building, machinery and consumer appliance industries, as well as on those who are gaining protection from such measures.
Vehicle manufacturing: Automotive uses just over a quarter of total steel consumption in the U.S., and 40% of the aluminium.
Harley Davidson recently announced a plan to move some production operations from the U.S., as the levies introduced in response to the U.S. will increase its costs by as much as $100 million a year.
Volvo recently opened its first U.S. factory, a $1.1 billion plant in Charleston, South Carolina. This will help partially insulate the automaker from the threat of tariffs and encourage Volvo to source more parts in the U.S., which is presumably what the Trump team would want. But it will not help the company if it wants to export vehicles during a global trade war. The more likely result is less U.S. investment, not more. Volvo’s CEO has indeed stated: “If we go back to the 19th century when everyone wanted to protect their own market, that is definitely not good for the wealth of nations. That would really be bad—not just for Volvo.” Volvo had promised to hire 4,000 employees for a new plant in South Carolina, but has said it may have to break this promise as a result of the tariffs.
Building and construction: uses 43% of total steel consumed in the U.S. and 14% of the aluminium.
The increase in import costs has forced America’s largest nail manufacturer, Mid-Continent Nail, to lay off employees. There is concern that more layoffs will come.
Consumer appliances: The 20% tariff on washing machines in January helped Whirlpool Corp: it had been losing market share to Korean manufacturers LG and Samsung, and had asked the U.S. government for protection from competitors. The company has created 200 new factory jobs, thanks to the tariff introduction.
Mitigation Tactics: How to Prepare and Respond
With the shift in trade policies, we now have many countries looking to alternative sources of products outside of the U.S.—and creating trading links with them—and we have businesses looking to move to more regional production within their home country.
As this increases supply chain complexity and, ultimately, costs, buyers should investigate alternative supply sources. When assessing suppliers from non-exempted countries, emphasis should be on the long-term supply chain risks. It is also advisable to include in the equation the impact a shortage of supply would have on manufacturing and operational costs.
Another factor to consider is an increase in the cost of raw materials throughout the production chain. For instance, the tariffs on steel and aluminium imported from China may increase raw material costs by 2 to 5%. This may not be enough to increase product costs in all cases, but there are certainly circumstances when cost escalation is hard to avoid, and the end-consumer has to bear the brunt as product prices increase. Cost rationalization, in this case, becomes critical for procurement. Sourcing restructuring and more effective supplier negotiations, for example, with a focus on the categories not affected by tariffs, may help offset the unavoidable cost increases. Since the duties are imposed on aluminium and steel, companies can try and optmize their spend on other metals such as copper, nickel, titanium, cobalt—as no matter what you do, the cost of buying aluminum and steel will result in increased cost of components dependent on these two materials.
An escalation in trade conflicts could also lead to more processed and therefore value-add products included in the retaliations and escalations. And as manufacturers pass the cost increases to customers, they risk losing market share. Take a textbook example of the duopoly between Boeing and Airbus. If Boeing increases customer pricing given an increase in raw material costs, then it will certainly lose business to its European competitor. Boeing, in this scenario, can use alternate materials like composites and carbon fibers, which is the case in the latest aircraft, along with cost rationalization through productivity improvements. The result: optimizing logical costs and earning somewhat lower margins—and eventually earning more through maintenance, repair and operations (MRO) contracts, which run for 10-15 years.
To adapt their category strategies as global trade changes, procurement teams need to more closely monitor commodity prices and how they may impact sourcing, quality and supply continuity. By working hand-in-hand with the commercial and finance teams—and being involved in all strategic discussions that take place within the business—procurement can respond and advise depending on how global trade shapes up in the future.
Both internal and external data and intelligence should be leveraged to generate insights to help plan for future scenarios, as well as improve risk mitigation across the business. One way to ensure that knowledge is captured and shared is to form a cross-functional team, with representation from across the business—covering supply chain, government relations, marketing, strategy and finance. Bringing in outside perspectives from third-party experts to provide specialized analysis on specific categories or supplier environments can also add value.
Shailesh Bhadauria is a senior manager at The Smart Cube, responsible for conducting strategic and procurement research, including market entry strategies, market opportunity assessment, commercial due diligence, supply market analysis, supply chain analysis, procurement best practices, competitive intelligence, supplier due diligence, dashboard reporting and supplier identification. He also has extensive experience in commodity analysis (price analysis, cost and demand drivers, and supply–demand) in direct materials (commodities). Shailesh, an ISM-certified professional in supply management, joined The Smart Cube in 2011 and prior to that he was a senior research analyst at Pipal Research.