Trade disputes create uncertainty for manufacturers

Mid-year Economic Forecast

President Donald Trump addressed Harley’s actions during remarks at Foxconn’s groundbreaking in late June.

For Milwaukee-based Harley-Davidson Inc., the back and forth over new tariffs imposed by President Donald Trump and the response from the European Union and other countries has led to some unwanted attention, higher costs and long-term business decisions.

Harley estimated the EU’s decision to increase motorcycle tariffs from 6 to 31 percent would add $2,200 to the cost of each motorcycle it sells there. In the short-run, Harley will absorb those increased costs, believing it cannot be competitive by passing them along to dealers and customers. Harley also plans to move production of European motorcycles to facilities in Brazil, India and Thailand to avoid the tariffs.

Harley riders near the company’s headquarters in Milwaukee.

Announcing the foreign production plan drew the ire of Trump, who repeatedly attacked the company on Twitter, in interviews and during remarks at the recent Foxconn Technology Group groundbreaking in Mount Pleasant.

Most manufacturers will not face Trump’s wrath as they approach dealing with new tariffs, but that does not mean there is no impact from the escalating conflicts over trade.

“If there’s an opportunity to raise prices of any kind, people take advantage of the situation,” said Tim Sullivan, chief executive officer of Milwaukee-based specialty vehicle maker Rev Group Inc., which saw a $19 million increase in costs as Trump implemented new steel and aluminum tariffs.

Sullivan acknowledged the increase isn’t huge in the context of $1.8 billion in annual purchases.

“It’s not that bad, but it all came at once,” he said.

The increases did not all come from steel and aluminum products, either. The largest increase was on plywood.

“It’s false inflation driven by the scare and the turmoil,” Sullivan said.

When suppliers begin increasing prices, Sullivan said Rev Group tries to push back and threatens to find other vendors.

“There are alternatives,” he said. “It’s just a matter of doing the heavy lifting to go get them.”

In some cases the company has other pre-qualified suppliers to which it can turn, but in other cases it has to start fresh. Either way, spreading the supply chain over more vendors creates inefficiencies, while also taking focus away from other work.

“It stymies other positive efforts that you could be using to help grow your business,” Sullivan said.

The country’s steel mills and aluminum producers do stand to benefit from the new tariffs, but only a little more than 3 percent of Wisconsin’s manufacturing workforce is in primary metal manufacturing, with the majority in foundries. The state’s largest manufacturing subsectors include fabricated metal products, food and machinery.

“Having spent 30 years in business, I did not ever run across a tariff I enjoyed,” said Doug Fisher, director of the Marquette University Center for Supply Chain Management.

He said tariffs are either protecting an industry that’s not cost competitive or going after an industry another country is supporting, potentially leading to a back and forth escalation. Trump’s actions on trade may be more about addressing abuses of intellectual property protections by other countries, Fisher suggested.

“I think that’s the real long game that Trump is playing,” he said. “We’re kind of the big dog and I think he’s using tariffs because he can’t get anyone’s attention otherwise.”

Whatever the end goal, the question for manufacturers is: How long will the trade disputes continue? Will things revert to more normal conditions after the mid-term elections or will the fight drag on for years?

President Donald Trump addressed Harley’s actions during remarks at Foxconn’s groundbreaking in late June.

“From a supply chain perspective, I hate uncertainty,” Fisher said. “Right now, it’s pretty messy.”

For businesses heavily dependent on imports for raw materials and components, there are a host of options, from finding new suppliers to redesigning products to absorbing increased costs. George Bureau, vice president of consulting services at Wisconsin Manufacturing Extension Partnership, said businesses should also look to improve their operations.

“As people have gotten busy, what we see is there’s a tendency at times for waste factors to increase,” he said. “If you’re running more than 5 percent waste or even 3 percent waste, how do you cut it in half?”

Bureau added businesses should also be proactive and transparent in preparing customers for potential price increases or shipment delays.

“People often will give you a little bit more latitude if you’ve communicated,” he said.

On the export side, Bureau noted not every country is leveling retaliatory tariffs in the same way, so businesses that are shipping into multiple markets have a better chance of weathering the storm.

“This comes back to classic diversification,” he said, adding exporting is just one way to sell internationally, and companies could explore licensing or producing in other countries.

While the trade disputes present challenges for manufacturers, Bureau said companies should focus on what they can change.

“There’s no sense fretting over stuff you can’t control,” he said.

He pointed to developing strategies for addressing workforce shortages as one area to focus instead. Fisher said businesses could also implement advanced manufacturing technology to offset increased costs.

“Maybe this is a catalyst, a little nudge, for some of these companies to step up,” Fisher said.

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Arthur covers banking and finance and the economy at BizTimes while also leading special projects as an associate editor. He also spent five years covering manufacturing at BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.

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