By Allen Proithis, Chief Executive Officer, Capstone Partners. According to a recent survey published by the Manufacturing Alliance, 73 percent of U.S. manufacturers believe tariffs distract them from core responsibilities, and 65 percent say it impacts their ability to conduct long term planning.

The economic impact of tariffs has been discussed ad nauseum, and few pundits can agree whether the outcomes of these economic instruments will be detrimental, neutral, or even positive to North American and offshore businesses.

But one thing that cannot be disputed is the fact that the ever-changing rollout of tariffs is causing uncertainty among companies that compete in the manufacturing sector. The inconsistency of policies and formulas are wreaking havoc on those who have to re-calculate pricing based on fluctuations in rates, categories and nation of origin, and new suppliers, creating an environment where confusion is common, and financial duress is expected.

According to a recent survey published by the Manufacturing Alliance, 73 percent of U.S. manufacturers believe tariffs distract them from core responsibilities, and 65 percent say it impacts their ability to conduct long term planning.

Ever Changing Dynamics
The complexity of tariffs is determined by the complexity of goods produced. According to Mike Sibley, partner at James Moore & Company, a Florida-based advisory that helps manufacturers and other businesses navigate complex financial and operational issues, the math necessary to calculate tariffs changes regularly.

"We work with a broad range of firms including fabricated metal manufacturers, aerospace companies, and medical device providers, and the common concerns we hear are in the form of supply-chain orchestration, cost accounting, and the difficulty to plan appropriately," says Sibley. "All of these are strategic issues that can impact the long-term viability of a manufacturer. We advise our clients to try to build as much elasticity into their pricing models and operations as they can to minimize any financial impact caused by tariffs."

Working the Math
As Sibley explains, tariff policies as they exist today affect manufacturers differently based on what they produce and where their components are sourced.

"If you look at a sheet metal fabricator in the Midwest, it may import steel from Canada," notes Sibley. "In this scenario, the math and the potential outcomes are easy to predict. The most recent regulations imposed on that commodity originating in Canada call for a tariff of 35 percent, instantly increasing the cost of goods. At that point, the manufacturer has three options: seek out a domestic supplier or from a region with a lower tariff, which may or not be realistic; pass along the higher costs to customers; or eat those added expenses in the hope that tariffs will be short-lived."

But in more complex manufacturing situations, such as with medical devices, the dynamics change significantly. Certain components may be subject to tariffs, while others are not.
"A device that uses a sensor built in Germany is subject to a 10 percent tariff as it stands today, while circuit boards sourced from Taiwan are subject to a 15 percent tariff," explains Sibley. "The plastic used in the device may come from Mexico, and in this unique situation it is not subject to a tariff because of the current USMCA trade agreement—which is always subject to change. Finally, if any Chinese-built lithium batteries are used, tack on another 145 percent to comply with that tariff, so the costs can jump pretty dramatically."

American manufacturers that assemble products in the U.S. are likely not eligible for any "America-made" benefits. This forces the company to seek out new suppliers, preferably domestically, if they even exist. It all depends on supply chain diversification, which can take some time to accomplish.

A Different Picture in the North
This process is well underway in Canada, where heavy equipment and industrial providers are actively seeking out new sources to circumvent American tariffs. The Canadian government has been aggressively helping businesses identify new supply options, launching its tariffinder.ca website which lists potential partners in countries that have free trade agreements with Canada.
The impact is becoming apparent. American-built concrete, construction, and other heavy equipment manufacturers, which once owned Canadian market share, are watching their business quickly erode as foreign entities like Komatsu, Volvo, and Liebherr become cost-competitive virtually overnight.

One illustration of how fast this transition is occurring is in the equipment finance space where Canadian companies are now actively leveraging national free trade agreements with the EU and Asian nations to bypass U.S. tariffs.

"Over the past six months, we're seeing finance applications for non-American equipment escalate dramatically," said Jim Case, co-founder and chief executive officer for Travelers Financial Group (TFG), which provides funding to both U.S. and Canadian-based companies and dealers. "The shift to diversify supply chains is real, and is only gaining momentum. American tariffs are causing Canadian companies to pursue suppliers in ‘free trade' areas, while reciprocal tariffs are forcing American industry to look for domestic sources. The common thread on both sides of the border is that managing tariffs will continue to threaten short-term profitability and disrupt long-term planning."

Conclusion
The reality is that there is no playbook to navigate the impact of tariffs as they are formulated today. Policies, product categories, and tariff rates change far too frequently to plan accordingly. The most appropriate course of action for manufacturers—both in the U.S. and in other countries—is to remain flexible. Recognize that costs and pricing will fluctuate, profits will most likely be cut, and suppliers will change. Take the time to restructure the supply chain, and communicate with customers regarding price realities. The one thing we can confidently say is that tariff policy will continue to evolve, but where it lands is anyone's guess.

About the Author: Allen Proithis serves as founder and chief executive officer at Capstone Partners, a consultancy that helps industrial and technology companies reimagine their go-to-market strategies. Proithis has served in executive positions at several established market leaders, including HP, GXC and Sigfox.