International business has become more risky in recent months as tariffs have impacted companies in many industries. Buying and selling between the US, China, India and other countries has gotten more expensive and in some cases is causing business owners and financial managers to re-think their supply chain in several ways.
How can businesses cope with the “new norm” of trade uncertainty and increased cost and risk brought about by tariffs? Here are three ideas.
Negotiate with foreign suppliers
An auto industry client recently told me they are negotiating for price reductions with their Chinese suppliers to offset the 25% cost increase brought on by tariffs. Sounds like a simple but potentially effective idea. Chinese companies are feeling the effect of an economic slowdown from the tariffs on sales made to US companies. They may be willing to cut your prices to keep your business.
Bring production in-house
Another strategy is to bring manufacturing back in-house. With the cost of buying overseas increasing, it could make sense to do it yourself in some cases.
According to Gary Aldridge, owner of Aldridge Valuation Advisors, “There are a couple of fundamental questions you should ask yourself before adding new functions or processes. Will adding this process be consistent with our core competency? Will the addition of this process enhance or distract us from what we do best? “
Calculating the cost differences between outsourcing and in-house manufacturing is straightforward. If you have access to the capital to do your own manufacturing, it could be cost effective.
Shift to different suppliers
Many companies are already looking for new sources of supply in other countries to avoid Section 301 tariffs. Mexico, Vietnam and other Asian countries are often mentioned. The key is whether a supplier in another country has the skilled labor and technology to do the job.
Today’s trade landscape changes nearly every day as we’ve seen recently with the threat of tariffs on imports from Mexico. Shifting to a supplier in a country to avoid tariffs may not work since this seems to be a moving target lately.
Also, there can be penalties for moving to a supplier in another country if all the trade and customs regulations aren’t followed.
According to Terence P. Stewart, Managing Partner of Stewart and Stewart in Washington, DC, “Companies who are importing products from China that have become subject to additional duties following Presidential action under Section 301 of the Trade Act of 1974, as amended, may be looking for alternative sources of supply or may be examining whether component parts from China can be assembled in a third country and not be subject to the additional duties. The issue of whether assembly in a third country removes the assembled item from the 301 duties involves an evaluation of whether there has been a substantial transformation. Mere assembly has been found not to constitute such a transformation in some cases. See, e.g., HQ H300226 of September 13, 2018. Companies should consult with their customs counsel and/or seek a ruling from Customs and Border Protection.”
For more on the options for dealing with the tariffs between the US and China, see Terence Stewart’s full article here.
Suggestions
To make the best business decisions, consult your board of directors and team of advisors. There are legal and financial implications to consider and good advice is important. Don’t be “penny wise and pound foolish” by trying to save legal or accounting fees at the risk of much higher costs that come from uninformed decisions.
Finally, market volatility leads to increased risk of non-payment. To learn how to protect cash flow and grow without risk, reply to this email or schedule a call with me.
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