By Ian McCue, content manager at NetSuite
⏰ 6-minute read
The recent tariff hike on $200 billion worth of Chinese imports is forcing many businesses to change their strategies for manufacturing, pricing and sales.
A set of common coping strategies has emerged among manufacturers, distributors and retailers, whom the tariffs hit especially hard.
The tariffs aren’t disappearing anytime soon, so all businesses would benefit from adjusting their strategies while learning from each other’s solutions.
After multiple delays, the U.S. government instituted 25% tariffs last week on $200 billion worth of goods imported from China, posing an undeniable challenge for American companies.
The increase hit the same goods that were previously subject to a 10% tariff. (Prior to this change, $50 billion in goods already faced a 25% duty.) The higher tariff was originally scheduled to take effect on Jan. 1, and then March 1, but the announcement on Friday came as a surprise to many because it appeared the U.S. and China had been close to an agreement.
We caught up with several companies to find out how they’re mitigating this latest round of tariffs and grappling with the potential for taxes to change again soon. Here are five strategies that businesses have developed to reduce the impact of these latest tariffs:
1. Increase prices where necessary.
Some companies were able to avoid raising the prices of their goods under the 10% tariff, but that’s far less feasible under the 25% tax.
Lighting and home décor brand Regina Andrew Design plans to raise prices where it makes sense, COO Jim Bonomo said. If a certain product is selling well, there may be freedom to bump up the price; however, if the product is not selling well, a price increase could exacerbate the problem.
The Detroit-based manufacturer sells to interior designers, small shops, large retailers and directly to consumers, which gives it flexibility when tweaking prices.
“We have different pricing for different customers, so this is not a one-shot increase,” Bonomo said.
Similarly, MotoAlliance, a manufacturer of accessories for four-wheelers and side-by-sides, is charging customers more now in the wake of the 25% tariffs, said operations manager Kristy Kapsner. It also adjusted prices after the first round of tariffs.
Many customers will not be deterred by these slight price increases, especially if they’re interested in items that are not widely available such as an ATV plow from MotoAlliance or an alabaster table lamp from Regina Andrew.
The tariffs have not yet impacted prices at Becker Safety & Supply, a distributor of work safety apparel and equipment, but the company expects its vendors to raise prices if the import taxes persist. If that happens, it will be key to explain the situation to customers, said Clint Swain, systems administrator at the Colorado-based company.
“In the past when we have had increased costs from a vendor on items and we communicate that information to our customer, they either accept the reality of the situation, or in some cases we are able to find a like item from another source in order to keep the costs down,” Swain said.
2. Cut down your product catalog.
It may not make sense to continue selling certain goods given the current extra costs of importing them to the U.S. MotoAlliance, for example, has stopped selling low-margin products and consolidated others. It now only offers winches in 3,000-, 4,500- and 6,000-pound pulling strength instead of the seven different pulling capacities it previously sold.
The strategy “allows us to buy a large volume of fewer options so we have to order less frequently,” Kapsner said.
Regina Andrew, meanwhile, is evaluating a couple hundred products to figure out if it should continue offering them, and it’s not re-ordering any products it was on the fence about keeping in its line. This evaluation includes some goods that the brand formerly discounted in an effort to stay cost-competitive but can no longer afford to mark down.
3. Explore new markets.
MotoAlliance is hoping to sell more to Canadian consumers in the near future, because it could avoid tariffs entirely on those sales. Its goods would be imported straight from China to Canada, then sold in that country. While the Minnesota company is not doing this yet, it’s currently working out the logistics and hopes to start shipping straight to Canada in the fall.
For the same reason, Regina Andrew is also looking into shipping some of its products straight to Canada. With the savings from avoiding tariffs, the company could pass value on to Canadian customers, Bonomo said.
On the production side, moving manufacturing operations to another country may seem like an obvious solution to the tariff problem. But it is far easier said than done. Most other nations lack the immense infrastructure and resources available in China, home of the world’s second-largest economy.
Still, Regina Andrew manufactures some goods in other Asian countries and is looking into producing limited runs of specialty products in the U.S. Bonomo said he knows of other businesses that source goods from Mexico, Bangladesh and North Africa.
4. Build up inventory reserves, then order less.
MotoAlliance placed larger orders over the past six months -- when tariffs were still at 10% -- in anticipation of rising taxes. The delay gave it and other businesses that manufacture the majority of their products in China time to fill up their warehouses.
Regina Andrew followed this strategy as well. It’s fulfilling as many orders as possible with existing inventory while paring back purchase orders. Bonomo noted Regina Andrew is in a better position than many other businesses because it does not have large purchasing agreements with big-box retailers. These agreements, which allow retailers to pay a set price for a certain number of products, were signed long before this set of tariffs surfaced.
5. Continue negotiating with suppliers and vendors.
The most recent tariff decisions are sending shockwaves through the global economy and affect countless industries, meaning your suppliers should be willing to work with you more than ever before. They don’t want to lose your business, and you can use that desire to temporarily negotiate better rates. Both Regina Andrew and MotoAlliance have worked with vendors to lower costs across their supply chain and continue to do so.
How to build your strategy
Industry peers are an extremely valuable resource in a situation like this tariff increase. Thousands of companies similar to your own are also trying to figure out creative solutions for these tariffs, and their advice and insights may inform your own strategy.
This predicament also presents an ideal opportunity to perform an internal audit. Regina Andrew is performing a SWOT analysis, taking a big-picture view of sales, inventory, customers and other expenses, then digging into the details of each to identify any cost-cutting opportunities. MotoAlliance is reviewing each of its sales channels to maximize profits and has regular sessions with its management team to brainstorm new strategies.
The bottom line
There’s a good chance the tariffs on Chinese imports will continue to change. The White House is already working on a plan to tax the remaining $300 billion of Chinese imports that are not currently subject to tariffs.
Thus, businesses must operate under the assumption that any goods manufactured in China will be subject to a 25% duty soon if they aren’t already. Tariffs with China are no longer just a short-term problem, and companies that rely on Chinese imports must figure out how to stay afloat with these duties in place.