President Donald Trump says his trade policies and tariff strategies are intended to ultimately bring more manufacturing activity and jobs back to the United States. But for now, many Wisconsin manufacturers are trying to navigate the ever-changing global economic landscape set into motion by Trump's tariffs.
Last week, Trump announced a minimum 10% tariff on several countries. Certain countries face much larger tariffs including China (34%), Vietnam (46%), Thailand (36%) Cambodia (49%), Bangladesh (37%) and Pakistan (29%).
The president’s sweeping tariff announcement has already led to retaliatory action from China, which also announced last week it planned to match the 34% tariffs unveiled by Trump.
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Rich Ballenger[/caption]
Then, on Monday, President Trump again threatened to raise tariffs on China to 50% unless Beijing lifted its retaliatory tariffs on the United States.
The back and forth of Trump's tariff moves this year have caused several local manufacturers to completely re-work how they handle pricing.
“We have a lot of steel, aluminum and copper cost input in the business, and no one can predict the future, so we just stayed the course (when it comes to sourcing material),” said
Rich Ballenger, co-owner of Cudahy-based
C R Industries, a metal design and fabrication shop.
This means C R Industries is currently quoting on a spot basis and passing on any rising costs to customers. The company won’t speculate on material pricing because if they get things wrong, it will have a significant impact on the business.
“Even if there is an announcement tomorrow that the tariffs are gone, I don’t foresee market pricing changing,” said Ballenger. “If overall the business is softening, of course we’ll have to change our cost structure. We aren’t at that point yet, but we’re preparing for that.”
Milwaukee-based manufacturer
Stratus Industries is another company changing its pricing and quotation process.
Stratus Industries specializes in long-run and short-run contract manufacturing of wood, plastics and metals as well as product fulfillment and kitting services. Last year, the company shipped products to 37 different countries.
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Tom Daugherty[/caption]
Tom Daugherty, CEO of Stratus Industries, has seen an influx of requests for quotations as more clients consider reshoring operations. He said Trump’s tariffs are completely reshaping what is considered acceptable during the pricing and quotation process.
What used to be a “reasonable window” to consider quotes from metal and other material suppliers has quickly dwindled down to as little as 24 hours.
"That's making it really difficult to circle back to customers and make final pricing decisions," said Daugherty. "We have less than a day sometimes to get in touch with everyone to make the call on purchasing materials at that price. And rarely does the price go down the next day."
In turn, Stratus is reworking its quoting process and giving customers less time to commit to orders. For example, one of the company’s larger customers is now accepting week-by-week pricing adjustments for metal components.
Stratus is also shrinking the size of its production runs so new pricing can be implemented before each run. Labor is now being quoted separately from the cost of materials.
“Things are changing so rapidly,” said Daughtery. “We can’t take the risk and guess on pricing.”
Stratus has several clients in China, so the manufacturer worked with those clients to bring in extra amounts of raw material prior to the election. Some Chinese companies are also sending components to the United States for final assembly to circumvent tariffs.
One unexpected impact of the tariffs was losing some work from a large customer out of Australia.
Stratus had been handling some of the company’s North American logistics and helping them coordinate tooling and kitting work. The added cost of exporting products from the U.S. into Canada caused that customer to find another warehouse in Canada as opposed to continue sending those parts through Stratus.
"(They're) importing directly into Canada instead of the U.S. then Canada," he said. "We didn't see that coming. They were a great customer for us, and we still have their business in the U.S., but it was a noticeable drop.”
Cost-benefit analysis
For some manufacturers, it simply doesn't make financial sense to completely restructure supply chains to circumvent tariffs.
Ben Caya, founder and president of Milwaukee-based
Spike Brewing, plans to introduce a 5% surcharge this month to cover the rising costs of sourcing materials from China.
Spike Brewing makes stainless steel brewing equipment and currently imports about 90% of its materials from China. Caya said tariffs on imports from China would need to reach nearly 200% just to be cost neutral for the business.
“My big takeaway from the last month or so is everything is going to change,” said Caya. “With pretty much no data coming in, it’s really hard to make decisions. I didn’t want to change anything core to our business, like where things are being manufactured or how things are being imported. It just takes way too long.”
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Ben Caya[/caption]
This led Caya to the idea of a surcharge. A surcharge means Spike Brewing can respond to any new tariffs with speed and nimbleness. Regardless of what political viewpoint a customer has on tariffs, Caya said adding a surcharge is a transparent way of handling costs that most clients respect.
“I think people look at this approach positively and if they’re upset, it won’t be at us as a company,” said Caya.
He believes simply raising prices to deal with tariffs can be a dangerous game because it can be difficult to lower those prices later on. With a surcharge, if tariffs are eliminated, then the surcharge can be as well.
As for how big of a surcharge customers can stomach, Caya says increases of around 5% remain "relatively unnoticed.”
“For us I think a surcharge of between 5% and 10% is pretty palatable, especially in the short term when everything seems like Armageddon,” he said.
A mixed bag
Small and mid-sized manufacturers have fewer resources available to immediately react to tariffs. Some of these businesses are also potentially less involved in global trading. When you look at larger companies that have both supply and sell sides spread across the globe, that’s when you start to see some nervousness, said
Marko Bastl, director of the
Center for Supply Chain Management at
Marquette University.
"Many companies are not just trading in one direction, meaning getting supplies, but they're also trading back with the same company,” he said. “The raw materials are more expensive and now the product that I'm trying to sell is also subject to increased pricing."
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Marko Bastl[/caption]
While Bastl understands President Trump hopes to bring some manufacturing back to America and to have more balanced trade, he thinks the consequences of these new tariffs will be much more nuanced.
For high-level manufacturing to come back to the U.S., several other things need to happen first. First on the list would be sourcing the talent needed to work in manufacturing plants.
"For a lot of manufacturing today, you need highly specialized talent, which the United States doesn't have anymore," said Bastl. "We've been outsourcing for four decades so these manufacturing capabilities have really been built in southeast China."
The United States also needs more physical infrastructure, ranging from actual manufacturing facilities to roadways, to support additional manufacturing work.
Finally, companies will need to examine if reshoring manufacturing work is actually a cost-effective option. This will play a large part in what industries look to reshore.
"Everything is more expensive over here. The only way you can disentangle that is by significantly increasing automation... (and) a company's efficiency and productivity," said Bastl.
How hard tariffs are hitting local manufacturers also depends on what markets they serve and who their customers are, said
George Bureau, senior vice president of consulting services at
WMEP Manufacturing Solutions.
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George Bureau, SVP of consulting services at WMEP Manufacturing Solutions, shared a sneak peek of the organization's annual manufacturing survey.[/caption]
"It's very much a mixed bag, although, in general, the bag right now is a little on the uncertain to negative side," said Bureau.
What immediate action a company might take depends on their business model, he explained. A manufacturer that has worked over the years to diversify its supply chain likely has the wherewithal to see its way through this period of economic uncertainty. A company relying heavily on a single supply chain or a single group of customers will need to make more immediate changes.
"This just happens to be an example of the need to get back to the basics and understand where you make money and understand where your margins are getting squeezed," said Bureau.
Possible impacts
President Trump’s tariffs have led to increasing fear of a recession in the coming months and predictions that as prices for goods rise, consumer demand could fall, which could lead to future job loss.
Wisconsin is heavily dependent on imports from China, Mexico and Canada. Nearly half of the state’s imports come from these three countries, according to Bastl.
"We can likely anticipate prices (for goods) will go up," he said. "Any slowdown in consumption because of the increased prices will actually trickle down to the demand that Midwestern suppliers will have."
Given how long it will take to continue building out the United States’ manufacturing infrastructure, Bastl questions what manufacturing work will return.
“I think some industry will come back, but nowhere near how much is being advertised,” he said. “We always need to look at the net effect of both jobs gained and jobs lost.”
Bureau believes Wisconsin’s smartest companies already began looking at reshoring work more than two years ago.
"If you're waiting until now, you've kind of ignored all the signals saying you ought to be thinking about this," he said.
Companies that have a long-term strategic plan in place will continue to make large investments. When markets are down, it’s easier to get new equipment and loans, Bureau explained.
"Manufacturing companies, in general, are very resilient,” he said. “If things aren't working because of pricing, they will adjust. Sadly, the companies that will not adjust are ones that are going to struggle and potentially die over time."
During these uncertain times, Bureau said it’s important for manufacturers to re-examine their value proposition (what makes them indispensable to customers) and play that attribute up.
In the coming months, Bastl predicts some manufacturers will likely start piling up their inventories. However, they will eventually need to cut jobs if tariffs remain in place. This job loss will be offset by whichever companies do decide to reshore.
Some methods manufacturers might use to mitigate any impact from tariffs include diversifying supply chains, re-negotiating pricing with suppliers, re-designing products to decrease dependence on supplies from a certain country and simply stockpiling some inventory for a short amount of time.
"Companies need to take the long play and say, 'This is where we want to go. We're going to have some ups and downs as we get there,’” said Bureau. “It's never a straight line.”
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