The US Government announced higher tariffs on certain goods imported from China in May 2018. One of the stated objectives was to assist the aluminum and steel industries that had been hit hard by cheaper Chinese imports and facilitate an increase in domestic production. Bloomberg has recently reported that as a result of the tariffs, US companies paid an additional $1 billion on technology products in October than the year earlier. Not surprisingly, there has been a significant reaction to the increased costs resulting from the tariffs. The primary focus of experts has been the tariffs’ impact on larger businesses, such as Caterpillar, Harley Davison and the auto industry; however, smaller businesses that account for a significant amount of commercial transactions have also been impacted. It is essential to understand the impact of the tariffs on these smaller businesses.
We spoke with several small to medium-size businesses who’s supply ranges from retail to construction, providing home goods, pet supplies, and plumbing to name a few, many of which are being hit by the tariffs. Note that none of them deal with wholly steel or aluminum goods, but are hit indirectly through parts, that play a large part in the goods they manufacture and/or distribute.
One of the most consistent comments from these businesses was the lack of notice in regards to timing and costs. The majority of the businesses had goods on the water when the tariffs were imposed; often these Items were being shipped to complete fixed-price purchase orders. Overnight these companies were hit with a 10% incremental cost, which could not be recovered through price increases. Because goods had to be released from port for shipment, these companies could not take the risk of delay and therefore had to pay the increased price. Many of these businesses had a tight gross profit margin, and the unanticipated cost increases resulted in a declination in their gross profit margins.
So how much of the tariff was passed onto the customer? We were expecting to hear that the large retailers would refuse to accept price increases, or perhaps begin working with other suppliers. Surprisingly, the majority of these companies have been strongly supported by their customers; many of whom have had long relationships with their customers; however one must not forget that alternative suppliers may be willing to undercut the products’ price points to gain market share. Because retail has its own struggles, their customers may find alternative sourcing at reduced price points enticing.
Startup businesses are struggling the most because typically they have little-negotiating power and desperately need sales to sustain themselves. One company, a start-up, advised that it is actively looking for US vendors to produce their products to avoid the price increases that have had a devastating effect on their business. Whether or not they can effectuate price hikes, their gross profit margins will be reduced. Overall, as expected, the consumer will take the fall.
Many companies have taken steps to secure their products from alternative countries, which has proven to be difficult and expensive. Additional costs included multiple trips, to find the right supplier who can duplicate the Chinese manufacturers’ attention to detail. And since so many competitors are seeking alternative sources of supply, factories can closely vet new customers. Larger businesses are attempting to identify alternative supply sources and the smaller firms, are winning this battle. Larger businesses are placing larger orders and don’t have the need for separate packing requirements. Small businesses feel more effort is being made, and higher costs are being realized to develop alternative sources for the production of their product. Establishing these new relationships are eating into profits.
Currently, Indonesia, Vietnam, Cambodia, and Thailand are the “go to” locations. Many manufacturers in these countries offer less expensive products than China, but have longer lead times and a lack of skilled labor resulting in quality control issues. Manufacturers in these countries cannot produce at the same speed, and quality as China with many commenting that although final assembly is being diverted, the source of raw materials is likely from China, especially in the apparel industry.
To add more concerns, logistic infrastructures of these countries struggle in contrast to the Chinese.. Ports cannot cope with the expected increase in freight shipments and the extended fulfillment time frames increase the cash cycle timeline.
We asked those we spoke with, “what keeps you awake at night?” to which many responded that it is the fear of the unknown. While many companies remain optimistic, they cannot sit back and wait to see how the trade imbroglio unfolds as it is their livelihood. If a treaty between the US and China is not consummated and more tariffs are imposed, some companies will have no choice but to close their businesses. And the imposition of, or changes relating to tariffs can change quickly and not always for the better.
The reduction in orders and the inability to purchase inventory is affecting workloads, margins and eventually on staffing. Some of these businesses cannot sustain their employment levels and may have to make staff reductions. We know that nobody wants to lay off staff, but to a small business, the pain of doing this gets personal, especially in companies with few employees.
While the future is a bit unknown in regards to how tariffs will impact small and medium-sized businesses many companies are adjusting and making hard decisions that can seem to change day-by-day.
Tom Novembrino and Mark Polinsky are Principals at Gateway Trade Funding specializing purchase order/trade finance for small and medium-sized businesses, typically by providing letters of credit to domestic and international suppliers (or paying against documents), so our clients can fulfill large orders from creditworthy customers. Tom can be reach at (714) 671-0999 or email
firstname.lastname@example.org and Mark can be reached at (847) 612-9817 or email email@example.com.