President Trump’s 90-day “pause” creates a critical window of opportunity for companies and investors. They need to use it wisely to plan for the likely major impact of his Tariff War on their business.
Importantly, they need to think about the key Scenarios they are likely to face over the next 12-18 months. And then they need to develop robust Action Plans focused on the super-critical risks that these Scenarios create.
HOW WILL A TARIFF WAR IMPACT YOUR BUSINESS?
It is tempting, of course, to sit back and wait for more details of Trump’s plans to emerge. But the evidence since the Inauguration suggests this is a luxury we cannot afford. As the Wall Street Journal warns, in relation to the critical auto industry tariffs:
“When President Trump enacted the 25% tariff on all vehicle imports, he gave automakers some relief. They would be allowed to pay a lower tariff based on the percentage of US-produced parts and materials used. But the White House has yet to provide many details on what exactly constitutes “US content”. (Our emphasis)
So for the moment, at least, auto companies are going to have to pay the tariff up-front when it starts on 3 May. And even if a definition is provided, it will not be easy to understand how this might apply:
- The tariffs could cost upwards of $7,500 per car. So the downside of getting them wrong is considerable
- Modern cars have 20k-30k parts and their supply chains routinely cross the US border several times before being installed in a car
- At the moment, the tariffs are expected to increase costs by $100bn. And any company making a claim that is disallowed will have to pay these retrospectively
The risk is increased by the fact that most observers now expect the US to go into recession. So auto companies face a Catch-22.
- If they increase prices to reflect the tariffs, they will lose sales
- If they don’t increase prices, their margins will likely disappear
- If their refund claim is rejected, they will have a very large bill to pay.
THE BREXIT EXPERIENCE HIGHLIGHTS THE RISKS AHEAD
The auto industry dilemma highlights the urgent need for Boards to appoint high-level task forces to (a) identify the key problem areas and (b) develop and implement viable contingency plans:
- Manufacturers need to understand their best options, and how to implement them
- Logistics companies need to prepare for major shifts in trade patterns
Scenario Planning also needs to include an assessment of how key supply chain partners might react.
The UK’s experience with Brexit highlights this risk.
Most companies believed the government when it told them everything would be “better”. And it was too late when they discovered this wasn’t true.
Official estimates suggest Brexit has so far cost the UK 4% of GDP. The bill for the US Trade War may yet be higher:
- Other countries may well retaliate with their own tariffs
- We are also likely to see trade blocs reappear as countries band together
COMPANIES NEED TO REFOCUS ON DEMAND
Customers rather than cost-curves are now critical for profitability
The key issue is to focus on demand.
Globalisation was supply-driven and assumed customers would always want to buy what was being produced. The key to maximising profits was to be the lowest-cost producer, as the chart suggests.
Today, that is no longer true. Instead, there are 3 urgent questions that need to be answered as we move to a demand-led world:
- Will your customers survive the Tariff War?
- Will your suppliers survive the Tariff War?
- What can you do to help them survive?
Essentially, we are entering a world of Winners and Losers. Staying close to customers, and helping them to survive is now key to success.