What's your company doing about tariffs?
On August 2nd, President Trump announced a fourth round of China-centered tariffs. While past rounds devastated the supply chains and profitability of companies in the agricultural, industrial, and some tech spaces, this last round crushed (some) retailers. While the USTR just walked back their statement to a degree by delaying some of the 10% tariffs to December 15, compared to September 1, as a way to lighten the blow to holiday shopping, the newest round of taxes on foreign imports from China may impact the consumer. Vital economic indicators like inflation (or deflation), consumer price index (CPI), and consumer confidence may get impacted and influence the sway
of large forces like the Federal Reserve or corporate cap ex levels.
Companies affected by the China Trade War have 3 choices to make when reacting to the tariffs: 1) Absorb them, 2) Pass them onto the consumer, or 3) Find new supply chain destinations. We analyze the benefits and detriments of each option, below
1. Absorb the Tariffs
Take the hit and absorb the tariff. This option keeps the consumer happy as they experience no price hike and shop as usual. But your customer’s happiness and continued satisfaction comes at the price of your profit margin. Business owners and price-setters can view the absorbtion of tariffs as an investment in customer satisfaction. The core question to ask, is, will absorbing these tariffs enable my company to get a smaller piece of a bigger pie? And is that piece bigger than getting a bigger piece of a smaller pie?
Let’s say the answer is yes, and you swallow the price hike on your inventory. While customers are happy, your liquidity dries up and balance sheet gets constrained. This could mean delaying pay raises for deserving employees, or not investing in new marketing materials. Companies are pressured to absorb the tariffs in order to remain competitive with their consumers. But if they can’t give a raise, they might lose competitiveness with talent retention.
2. Pass the Tariffs onto Your Customer
In order to avoid a cut in margins, companies have the option of passing the tariffs onto their customers. This means that instead of taking on the extra costs as a business, companies can instead raise the prices of their products. Taking this route allows margins to stay in tact and keeps shareholders happy. It also allows companies to sustain their cash flow in order to fulfill other initiatives like hiring more workers, offering raises, and buying new computers, amongst many others. The downside of this option is that raising prices can be a dangerous game. Yes, it may allow you to stay profitable, but you risk losing customers -- which can damage your revenue. Going back to the pie reference, this is the bigger piece of a smaller pie. In general, favorability and perception go down with price hikes. People might buy less of your products, or worse, just stop buying in general. You need to understand your pricing in comparison to the market, while also understanding your customers and what they value. For example, if your competitors are passing the tariffs along to their customers, you could: 1) View it as a safe move to hike your prices up and maintain margins, or 2) Absorb the tariffs, maintain lower prices, and attract more customers to get a bigger piece of a smaller pie. This will help you decide what kind -- and how much -- of a price increase your particular market can tolerate.
3. Find a New Supply Chain
Instead of absorbing or passing along tariffs, the better option may be for companies to instead look to find a new supply chain. Many companies are already moving to Vietnam as an option for an updated supply chain, with Vietnam imports to the U.S. skyrocketing 36% year-over-year. But, Vietnam can only take on so much new business with their current infrastructure, so where do companies look next? Cisco, for example, changed their supply chain in record time. They said they have been slowly reducing their manufacturing in China in anticipation of this White House decision. While Cisco may have shifted quickly and avoided further downside, companies may still face issues of time and capital consumption when moving supply chains. , However, in the long term, a new supply chain can save your margins and keep your customers happy. Even if you end up going back to China following a trade agreement, diversifying your supply chain is accretive to risk management and pricing. One option is to go local and provide jobs for community. This might cost more than international production, but you can boast about your products being American-made and providing jobs to local workers. Maybe your local government will provide tax incentives for you to do this.
It is inevitable that these new tariffs will affect businesses in some way or another. Instead of just waiting for it to happen, take action and understand your choices. There are clear benefits and detriments to each of the 3 options we outlined. In order to decide which is best for your particular company, you need to gain an understanding of your market and your customers.
Let us know what your company is doing about the tariffs by tagging us on social media @elevategcg or emailing us at firstname.lastname@example.org
(Photo Credit: Andrew Harnik/AP, via Markets Insider)