President Donald Trump’s tweets on escalating tariffs on Chinese goods caught investors off guard. Following his announcement on Sunday, the stock market, on the hope that a U.S.-China trade deal is imminent, tanked Monday morning then recovered most of its losses as China said it would still be sending delegates to meet with the U.S. this week.
Some U.S. businesses, while hoping for the long-awaited truce on trade, have been preparing for the 25% tariffs that were supposed to take effect in March but was postponed. From furniture makers to wholesale retailers, companies are working relentlessly to move their supply chains outside of China and say the 25% tariffs will put pressure on them to pass the additional costs on to consumers. It could also stifle their investment in innovations.
When the 10% tariffs on $200 billion worth of imported goods from China went into effect in September, many businesses were able to mitigate it by taking early orders. The nearly 10% devaluation of yuan also gave companies, which sourced from Chinese manufacturers, more bargaining power. But if a 25% tariff goes into effect on Friday as Trump claimed, it would have a larger impact on companies.
“If the negotiations break down and it goes to 25% tariffs, that will have a negative impact on our valve business just from the standpoint of higher cost, and we're going to have to pass that on to the customers,” Andrew Lane, CEO of MRC Global, a Houston-based distributor of pipes, valves, fittings, automation, told analysts on Friday.
Since firms were hit with 10% tariffs, retailers have been careful about passing costs on to price-sensitive customers. Edward Decker, Home Depot’s executive vice president of merchandising, told analysts the home goods retailer has been paying for every import since September. “Hopefully, we don't see the increase to 25%,” he said.
Richard Galanti, CFO of Costco Wholesale, acknowledges that a 25% tariff is much bigger than 10%. “In some cases, you've got your vendors along with us eating into that a little bit, sometimes not,” he said on an earnings call in March.
Steve Madden Chairman Edward Rosenfeld said the shoemaker was able to mitigate the 10% tariff without raising retail prices. But it was in talks with wholesale customers about raising prices in 2019 based on a 25% tariff. Those talks were put on hold because of the postponement.
Businesses with deep pockets can absorb the cost and let it eat into their profit margins, but they worry the added tax could take away the money that it would invest otherwise.
“I think we were able to deal with those fairly seamlessly,” Cisco CEO Chuck Robbins told Yahoo Finance at the World Economic Forum in January, referring to the 10% tariffs. “But it is pretty clear that the 25% tariffs will be problematic for all of us. What we don’t want to see is the 25% for some of us technology companies to actually cut back another area like research and development at a time where we need to be driving innovation on a global basis.”
Shifting supply chains
Furniture companies, which are highly dependent on imports from China, are rushing into diversifying their manufacturing lines.
“We are continuing to diversify our countries of origin to reduce business risk and expect to show meaningful diversification progress in 2019 and beyond,” Trevor Lang, CFO at Floor & Decor Holdings, told investors in March.
Lang said this doesn’t mean the specialty retailer of hard surface flooring needs to find new vendors. “Most of where we're derisking in China is going with an existing vendor who has the capacity in a different location, or a vendor that we already buy from that we're just expanding the amount we're going to buy from them.”
Yeti, the outdoor products brand, has been manufacturing new products in factories outside of China this year. Under the assumption the tariffs on Chinese products would go to 25% at the beginning of June, executives emphasized it would carry on with its plan to shift production outside of China quickly, despite the actual effective date of the tariffs.
“The push out of the 25% or the maintenance of the 10% hasn't changed anything about our strategy to move our bag and soft cooler supply chain. That's a process and project that's well underway.“ said Matthew Reintjes, Yeti CEO.