Supply Chain News - Trump Tariffs Force Tough Choices at U.S. Auto Suppliers

Supply Chain News - Trump Tariffs Force Tough Choices at U.S. Auto Suppliers

Tariffs on the steel industry in the USA has hit the automotive industries hard, and the story below reveals how US automotive suppliers have been struggling with the introduction of the tariffs.

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Bob Roth makes no bones about his feelings towards U.S. manufacturing.

The co-owner and chief executive of RoMan Manufacturing Inc. in Grand Rapids, Michigan, which makes transformers and glass-molding equipment for automakers and other industries, asks callers on his voicemail: “What have you done today to support U.S. manufacturing?”

His procurement team has been under long-standing orders to source all parts and materials as near as possible to his western Michigan factory, even with President Donald Trump’s tariffs on steel and aluminum.

But with those tariffs dragging into a new year and steel comprising a quarter of RoMan’s fixed costs, Roth says his company has now begun the lengthy process of switching from its U.S. suppliers to an Israeli company for a key component for its products.

It is a strategic decision that RoMan and other auto suppliers have put off since the tariffs kicked in last spring. With tariffs firmly part of the landscape, some are now starting to shift their own supply chain to keep costs in check, according to more than a dozen interviews with U.S. auto suppliers and industry consultants. 

The choice is stark for most suppliers: absorb the extra cost, pass them on to customers or find ways to slash material costs.

The transformers Roth’s 150 workers at RoMan produce require a magnetized steel core that is now more expensive as tariffs have allowed U.S. steel producers to raise prices. The Israeli supplier has access to cheaper steel and its cores qualify as finished products, so they are not subject to tariffs — making them a cheaper alternative.

Losing Business

The issue stretches up and down the supply chain for cars. Ford and GM have already warned metals tariffs will cost them $1 billion each in profits, setting in motion a complex dance over who foots the bill.

If automakers have to cover the cost, they typically raise vehicle prices to pass it onto consumers. Just this week, a Toyota Motor Corp (7203.T) executive said industry wide tariffs have increased the average U.S. vehicle price by around $600.

Peter Bible, chief risk officer at tax advisory firm EisnerAmper and former chief accounting officer at GM, said suppliers making parts for less-popular vehicles will have trouble passing on higher costs. Automakers will resist price increases, but will be also be wary of pushing suppliers too hard, Bible said.

Problems at a single supplier can be disastrous, as Ford discovered last May when a fire at a supplier halted production of some highly-profitable pickup trucks.

Some suppliers have adapted quickly to cut costs.

They have cost Gentherm Inc (THRM.O), which makes climate control systems for vehicles and had revenue of close to $1 billion in 2017, a “few million” dollars, according to CEO Phil Eyler.

“We’ve worked really fast to change supplier locations in a couple cases,” he said.

Mark Wakefield, a managing director at consultancy AlixPartners, said suppliers providing more commoditized parts will find adjusting harder.

That’s the case for Grand Rapids, Michigan-based Pridgeon & Clay, which supplies stamped steel and stainless steel parts to automakers, with annual revenue of more than $350 million.

Third-generation owner Kevin Clay has lost business to low-cost overseas competitors in India who use cheaper tariff-free steel, and whose finished products are not subject to Trump’s U.S. tariffs.

Metal tariffs have shaved 25 percent off Clay’s pre-tax profit. Banks still wary of his sector following the Great Recession are growing reluctant to issue loans, and his company has mothballed some spending plans and cut staff more than usual for this time of year, according to Clay.

“These tariffs have cost me business,” said Clay, who describes himself as a moderate conservative who fervently believes in free trade. “If the aim is to get to a tariff-free world, this is a crappy way to get there.”

Source: Supply Chain Brain from Reuters


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