Middle Market Supply Chain Worries Grow Amid China Trade Tension
How some are responding to recent price increases
INSIGHT ARTICLE |
Although tennis Grand Slam tournaments aren’t scheduled in March or April, the United States and China seemed determined to fill that void with an actionpacked tariff volley—one that hasn’t been particularly entertaining for business owners.
In early March, the U.S. government announced tariffs of 25 percent for foreign-made steel and 10 percent for aluminum—and then gave exemptions (at least temporarily) to nearly all countries except China. Within six weeks, more than 1,200 U.S. companies applied for waivers from the steel tariffs alone. In early April, the U.S. government also published a list that threatened China with 25 percent tariffs on a wide array of about 1,300 products, including auto parts and bakery ovens. China responded with its own extensive list of U.S. targets, including whiskey, planes, soybeans and SUVs.
As companies assess possible repercussions for their supply chains, the only thing that’s certain is uncertainty. “That uncertainty causes firms to really pull back on purchases they would otherwise make until the tensions are resolved,” says RSM Chief Economist Joe Brusuelas. Based on survey information he’s seen, as well as anecdotal evidence and discussions with clients, he characterizes the middle market’s concerns about tariffs as elevated.
“Middle market business owners deeply understand their supply chains and know where the value is extracted. Once those value chains are disrupted, it has an enormous impact on medium-sized businesses that don't have access to deep pools of capital,” says Brusuelas. He also notes that cost shifts from tariffs will reach middle market firms early, considering large firms tend to immediately pass along their price increases.
In April, costs for raw materials reached their highest point in seven years, based on a price index from the Institute for Supply Management. “Firms are actively looking to alternatively source materials at better pricing then what they're seeing currently,” says Brusuelas.
"IN RESPONSE TO THE RECENT PRICE INCREASES, AND AS A HEDGE AGAINST TRADE TENSIONS’ POTENTIAL EFFECTS, WE PLAN TO SHIFT ABOUT 10 PERCENT OF OUR CHINA SOURCING ELSEWHERE." Jeff Marshall, CFO Trademark Global
That’s the case at Trademark Global, a Lorain, Ohio-based company that sources, warehouses and ships products for big e-commerce business, including Amazon and Target. Since the fourth quarter of last year, it has seen price increases (ranging from 2 percent to 30 percent) for about 300 products from suppliers. CFO Jeff Marshall attributes that to currency fluctuations and says the company hasn’t been affected by tariffs yet. But it’s closely monitoring trade tensions, considering that Trademark sources about 70 percent of products from China. “We have a high level of concern,” says Marshall. “Anything you hear about tensions or potential retribution—that always raises our eyebrows.”
In response to the recent price increases, and as a hedge against trade tensions’ potential effects, Marshall says the company plans to shift about 10 percent of its China sourcing elsewhere. That diversification could include Thailand, Peru, Turkey, Malaysia, India and Pakistan.
But Trademark doesn’t plan to sever ties to China any time soon. Since 2014, it’s had an office in Shanghai—and this year, it plans to add two or three employees to the current staff of six. In April, the new director of global sourcing spent two weeks in China. “He didn't come back with any sort of doom and gloom [about trade tensions],” Marshall says. “Everybody's just still focused on cranking out product and making money.”
Marshall says Trademark will be able to respond to supplier cost increases with higher pricing for some of its products. But its large e-commerce customers sometimes say no to those requests. “When we're not able to pass that [price increase] on, unfortunately we have to eat that—and usually, we start looking at resourcing that product through another company,” he adds. Marshall expects Trademark will need to do that for about one-third of the products that have increased in price during the past few months.
GLE-Precision, a Michigan-based precision manufacturing company that makes specialized components for customers such as NASA and IBM, isn’t directly affected by the trade tensions. None of its raw materials are sourced outside North America, says Clint Bucholz, president of GLE. “We're also not seeing any pullbacks—about 30 percent of our products go internationally, of which maybe 20 percent is in the China market, and it's not impacted going that way,” says Bucholz.
Around 55 percent of the company’s materials are carbide-based, and Bucholz has seen costs for that material increase about 8 percent since the start of the year. He attributes this to inflation pressure, considering the increase began weeks before the tariff frenzy.
But raw material costs aren’t dampening business. “We are having an incredibly strong year-over-year,” he says, noting that if the company could hire enough qualified machinists to meet demand, revenue could potentially increase about 40 percent from a year ago.
“We're fairly shielded from the [tariffs on] commodities. But in six or eight months, perhaps, we'll see some of that push through to us,” Bucholz says. “Right now, it feels more just like standard inflationary push.”
Although GLE hasn’t experienced tariff anxiety, the company did notice that a few customers are worrying. Bucholz says in early March, three customers called to try to assess any potential cost increases. “They’d say, ‘We've got a lot of steel in our material. What do you anticipate that it's going to go up this year?’” says Bucholz, who can only remember one other occasion when a single GLE customer tried to assess potential cost increases. “That's pretty unusual, and that was totally driven by the tariffs.”