Tariff Quote Watch: Seven Supply Chain Strategies Firms Are Using To Tackle Tariffs — Panjiva
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Tariff Quote Watch: Seven Supply Chain Strategies Firms Are Using To Tackle Tariffs

Cons. Discr. - Autos 661 Industrials - Capital Goods 265 Info Tech - Tech Hardware 378 Materials - Metals/Mining 482 Tariff Quote Watch 91 Tariffs 1169 U.S. 3297

Frank Zhao from S&P Global Market Intelligence’s Quantamental Research group contributed data to this report.

Tariffs may have become part of the business-as-usual for most American companies. Panjiva analysis of 369 of the S&P 500 companies’ conference call transcripts retrieved via S&P Global Market Intelligence shows 142 mentioned tariffs during their third quarter earnings calls. That was down from 154 in the second quarter with 102 having discussed them in both calls while 175 did not discuss them in either call. A detailed analysis of 24 calls indicates there are at least seven strategic responses being pursued by corporations.

TARIFFS A PERSISTENT CONCERN FOR ONE-FIFTH OF S&P 500 FIRMS

Chart shows number of S&P 500 firms that mentioned “tariffs” or related terms in either their second or third quarter conference calls. Sample size = 369 firms that have had calls as of Nov. 9 2018.   Source: Panjiva

One option, in effect, is to do nothing and accept that there will be a negative impact on earnings. Panasonic’s contracts with Tesla cover components that face higher tariffs, which it has indicated it may not be able to pass on. Chinese suppliers accounted for 33.2% of Panasonic’s U.S. seaborne imports in the past 12 months. There’s actually been an increase in imports with a 22.5% surge in imports from China in the third quarter on a year earlier, suggesting Panasonic has few options but to accept the higher tariffs rather than realigning its supply chain.

BATTERIES AND MOTORS LEAD PANASONIC COMPONENT IMPORTS FROM CHINA

Chart segments U.S. seaborne imports by Panasonic by origin and product (HS-4).   Source: Panjiva

The first stage in an active defense though is to request an exemption from the duties. That’s possible for the section 232 metals duties and the initial round of section 301 tariffs on Chinese exports. FMC’s CEO Pierre Brondeau has indicated the company is attempting to get tariff exemptions in the first instance, though it should be noted that none have so far been granted by the U.S. government for any importer.

The company already appears to have scaled back its seaborne imports from China by 58.6% in the third quarter vs. the second quarter. It may struggle to find alternatives for its imports of pesticides where shipments India and Japan were just one-fifth those from China in the past year.

FMC CUTS BACK CHINA IMPORTS AS TARIFFS TAKE EFFECT

Chart segments U.S. seaborne imports by FMC Corp. by country of origin.   Source: Panjiva

Passing on the tariffs, which are in effect a consumption tax, to downstream customers. That’s been a widespread strategy for both the metals and China duties which have so far focused on industrial supply chain products. U.S. tariffs on imports of Chinese tires have led to price increases for consumers, Cooper Tire’s CEO Bradley Hughes has indicated. That’s been implemented by “several industry peers” too.

Despite the price rises the company has already started scaling back its imports from China, shown by a 28.8% drop in September vs. a year earlier compared to a 5.2% rise in the prior three months. While Cooper Tire could increase imports from Serbia instead of China the former only represented 12.5% of the volume of imports vs. the latter in the past 12 months.

COOPER TIRE ALREADY DEFLATING ITS IMPORTS FROM CHINA

Chart segments Cooper Tires’ U.S. seaborne imports by origin.   Source: Panjiva

If the tariff increases can’t be entirely offset against earnings it may be necessary to cut cost more aggressively across the firm to ensure that profitability remains intact. It’s also worth noting that tariffs are being bundled with other cost-increases within company earnings guidance updates.

Construction equipment maker Terex has cut its 2018 earnings guidance by as much as 10.0% for a mixture of reasons including “tariff headwinds”. While CFO John Sheehan is confident the construction equipment maker’s extra costs can be passed through in price increases and efficiency improvements.

Terex’s exposure to China is relatively low with 18.7% of U.S. seaborne imports sourced there in the past 12 months. A 39.5% surge in imports in the third quarter on a year earlier from China may indicate concerns that duty rates may be increased in the new year.

LATE SURGE IN CHINESE IMPORTS BY TEREX

Chart segments U.S. seaborne imports by Terex by country of origin.   Source: Panjiva

Terex also indicated that its cost cutting will include “transitioning considerable volumes to new suppliers”, presumably to cut its exposure to duties. A change in supplier base is also being pursued by transmission component maker Timken, which has flagged that U.S. tariffs on Chinese ball-bearing exports could raise its costs equivalent to 6.2% of 3Q pre-tax profits during the fourth quarter.

Yet, CEO Richard Kyle is confident the company can offset those costs by “shifting of our production” as well as “through pricing”. The company has already started that process after tariffs on ball-bearings were applied in the July round of section 301 tariffs of 25%. Imports from China accounted for 38.1% of all its shipments in the 12 months to Sept. 30, but imports from China fell 36.8% on a year earlier in September whereas those from India surged 180%. Further shifts may be difficult given it does not currently import basic ball bearings from outside of China.

FEW ALTERNATIVES FOR BASIC BALL-BEARINGS

Chart segments U.S. seaborne imports by Timken by product (HS-6) and origin in the 12 months to Sept. 30, denominated in TEUs.   Source: Panjiva

A more extreme version of that strategy, particularly where a company runs lengthy, globalized supply chains between its own facilities, is to localize production – and especially final assembly – to optimize the firm’s tariff exposure.

BMW’s CFO, Nicolas Peter, has indicated that price rises of 7% to 8% weren’t enough to offset tariffs’ drag on earnings, which may be equivalent to 6.1% of pre-tax profits in 2019. The firm will soon decide “which model to localize” production of in China as a response to China’s tariffs. BMW may also need to localize parts sourcing for its U.S. operations, though it has already cut its U.S. imports of Chinese parts by 59.2% in the third quarter vs. a year earlier

BMW ALREADY BACKING AWAY FROM CHINA FOR U.S. SUPPLY CHAIN

Chart shows U.S. seaborne imports by BMW from China.   Source: Panjiva

Finally, many companies are not waiting for tariffs to be applied before retooling their supply chains. Steve Madden CEO Edward Rosenfeld has stated the company’s main response is to “aggressively shift production out of China” as well as trying to renegotiate supplier terms. China, including Hong Kong, accounted for 78.5% of the company’s total U.S. seaborne imports – mostly footwear not currently covered by tariffs. A 13.3% drop in shipments in September vs. a year earlier and a 65.9% rise in rest-of-world imports suggests the company is already making good on its strategy.

TAIWAN ALREADY GROWING IN IMPORTANCE FOR STEVE MADDEN

Chart segments U.S. seaborne imports by Steve Madden by origin.   Source: Panjiva

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