by Nick Bova and Faisal Muhammed
RSM US LLP is an IMA Member
U.S. companies are currently dealing with a level of tariffs that has not been experienced in almost a century. While the Trump administration began instituting tariffs in early 2018, with retaliatory tariffs coming shortly thereafter, many middle market companies are still evaluating strategies to retain margin. However, more effective insight into where specific cost pressures exist and how to adjust business strategies can help companies better address tariff challenges.
Initially, the Trump administration announced section 232 tariffs on washing machines and solar panels, as well as nearly all steel and aluminum imported into the United States. Almost every country is subject to the duties, with only Argentina, Brazil and South Korea exempted. Subsequently, hundreds of products from China received additional section 301 tariffs, after the country was singled out for unfair trade practices and intellectual property theft.
In response to the 232 and 301 tariffs, many nations put retaliatory duties on U.S. products, including China, the European Union , Turkey, Canada and Mexico. For example, China has placed tariffs on over $100 billion of goods from the United States, while Canada has added taxes to $12.8 billion of American products, and Mexico and the EU have each taxed $3.5 billion of goods. Agriculture is the industry most affected, seeing 15 percent of the impact from tariffs, followed by motor vehicles (11 percent), and iron and steel products (5 percent each).
The pronounced tariff impact in agriculture is mainly due to a slowdown of goods imported into China. According to the Congressional Research Service, China was the leading market for agriculture exports in fiscal year 2017, but fell to the third-largest market in 2018. China is projected to slip to the fifth-largest agriculture export market for the United States in 2019, as the country continues to look for alternate sources.
Conversely, many companies that traditionally imported goods from China are moving their sourcing out of the country to avoid the tariffs. While industrial products and consumer product companies have seen the biggest impact, many industries are seeing indirect or secondary effects, from health care to financial services, including banks, private equity firms and portfolio companies.
Ultimately, suppliers for many goods—especially aluminum and steel—are raising prices across the board. If companies can pass the cost increases along to customers, they will have less difficulty weathering the tariff storm. However, many competitive regions and industries cannot sustain a price increase, with eroding margins as the result.
Middle market leaders are looking for ways to eliminate uncertainty and reduce risk, but the immediate future for tariffs is far from certain. Section 301 tariffs on Chinese goods were set to increase from 10 percent to 25 percent in January 2019, but a moratorium on increases was established in January with an indefinite delay announced in March by President Donald Trump . The delays are a positive outcome for many middle market businesses, but companies are unsure about whether increases will occur and when, making it difficult to plan for the future.
Beyond tariffs, the United Kingdom’s decision to leave the EU—Brexit —could cause additional financial and operational strain for many companies. For example, many organizations participate in triangular trade—importing goods, performing value-added processes and then exporting them back to the original country. With uncertainty surrounding Brexit, companies are having difficulty projecting future trading and supply chain structures, as well as tax treatments and transfer pricing frameworks.
Tariffs affect almost every industry, and middle market companies are adjusting several key business processes in response. But how do organizations know whether they are making the right moves to remain competitive and retain margin? In many cases, increasing business intelligence (BI) efforts can provide enhanced data and insight to develop successful strategies to offset tariff challenges.
The companies that are most affected by tariffs have a domestic and international presence, and often have subsidiaries on multiple, disparate enterprise resource planning (ERP) systems which makes it difficult to produce meaningful analytics. BI solutions can bring this information together into a single, trusted repository, helping businesses gain a new perspective on operations and creating a basis to make more informed business decisions.
For example, we recently worked with a global manufacturer that needed increased visibility to understand how tariffs would affect the company. The expansive organization has 95 individual subsidiaries and over 40 different ERP systems. Previously, the company’s sales information was widely scattered, with several manual processes necessary to evaluate sales on a monthly basis.
We created a reporting and analytics solution for the company that connects to each ERP system and aggregates sales across business units, enabling stakeholders to view high-level information in real time, and also drill down into specific regions and groups. Our solution also allowed business users to create their own reports and analytics in addition to the built-in dashboards to gain additional insights.
The company was initially worried about the retaliatory tariffs, but it did not have enough data to understand how they could affect business units. However, we took the data compiled from previous years and applied the tariffs to historical data, extrapolating the impact forward. The company could then evaluate the tariffs by business unit, market, division, location, etc., with comprehensive and intuitive dashboards to help executives quickly evaluate where process changes could counteract existing, new and even potential tariffs on goods.
By implementing an extensive BI and data analytics strategy, companies can obtain timely, valuable and actionable information to support or discourage process changes, including:
- Altering the supply chain: If tariffs affect key products, analytics can help to determine whether the company has the capacity to build them in—or ship them from—another country.
- Changing marketing strategies: If tariffs have a larger impact on some products than others, data and analytics can help the company choose what products to market more and what products may be more profitable in alternate markets.
- Modifying pricing processes: Predictive analytics and machine learning models can efficiently evaluate prices in multiple different countries and help determine advantageous pricing strategies.
Many companies reactively respond to tariff challenges with price increases, when changes to the supply chain or marketing might be the best answer. Not all goods have the same price elasticity, and analytics solutions can help companies utilize data to extrapolate how adjustments throughout the import and export process can positively or negatively influence the company.
Tariffs have created a new, significant challenge to the sustainability of many middle market companies. Organizations are generally unsure of whether they need to restructure their supply chain, move manufacturing or change the very nature of the product they import or export—and the wrong move could be more damaging than the tariffs themselves. Implementing an effective BI framework can provide your organization with the insight to create more certainty around tariff decisions and ultimately a more profitable path forward.
If you would like to learn more about this topic or speak with RSM please contact Linda Peddle.
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