Companies strategize to lessen blow of tariffs

A recent decision between the United States and China to restart discussions and strike at least a temporary truce in the ongoing trade war is a mixed bag for local industries.

President Donald Trump had threatened to impose tariffs on another $300 billion of goods from China, in addition to the $250 billion already levied since early 2018. The additional tariffs have been held off for now amid a meeting of Trump and Chinese President Xi Jinping held June 29 in Osaka, Japan.

While the announcement alleviates any additional tariffs on Chinese imports covering tech-related items, clothing and fireworks, the temporary cease-fire doesn’t mean an end is in sight for the tariffs already in place. Those impact a broad range of consumer goods, including internet modems and routers, printed circuit boards and lighting. The tariff amount ratcheted up in May to 25% from 10%.

For Pitt Technology Group LLC, the impact is starting to be felt.

“We’ve seen some price increases, there’s no question,” said co-owner and General Manager Kevin Waterland.

He said some vendors have increased prices up to 25%, mostly in information technology and audio-visual equipment, such as wireless access points and stage lighting. Company officials are trying to steer clear of acquiring equipment that utilizes Chinese-made parts.

Waterland said about half of the company’s vendors, including Cisco Systems Inc. (Nasdaq: CSCO) and Cisco Meraki, have a price increase in the pipeline.

With 2018 revenue at roughly $6 million for Pitt Technology, Waterland said about $2 million of its business could be affected by the tariff increase in May. Still, the impact so far has been minimal, he added.

“We’ve been pretty fortunate that our vendors have been willing to work with us, absorbing a lot of costs,” he said. “And the ones that haven’t have been small enough where we could absorb it.”

Cost increases
Early planning has been a key to minimizing the tariff’s impact at SRC Holdings Corp., said Steve Huffman, director of supply chain and engineering at NewStream Enterprises, one of the company’s subsidiaries.

“Our culture of projecting forward – than looking back – really helps us out with external forces,” said Huffman, who worked a decade as director of supply chain for SRC Electrical LLC before transferring to NewStream in December 2018.

SRC Electrical officials had discussed the tariffs last October during its budgeting period. The company was tracking the tariffs, which previously included the Trump administration levying 25% on steel and 10% on aluminum from Canada and Mexico, beginning in June 2018. In mid-May, Trump agreed to withdraw the tariff on those products, while Canada and Mexico lifted retaliatory duties.

But it was the tariff increase with Chinese products that had SRC more concerned, Huffman said.

“That was the one that was really going to impact us to a bigger extent,” he said, adding that a lot of components the company uses to remanufacture alternators and starters, such as celluloids and bearings, are no longer made in the U.S.

Those products are coming from China, Mexico, Canada and India.

“We’ve had to pass it through to our customers,” he said of the cost increases at SRC Electrical.

The company’s expected purchase costs equate to $700,000 on an annualized basis. However, the total impact of the 25% tariff is diluted to a 3%-4% cost increase because the company uses reclaimed core materials along with some new materials. It’s a much smaller amount passed onto the user in the supply chain than those selling a whole good, he said, which would face the full 25%.

The short-term reaction was to pass it through to the customer base, while working on long-term actions if the tariffs continue, Huffman said. That includes resourcing opportunities to other countries, such as India or Taiwan.

“We’re already thinking about gathering information for our next budget in 2020,” he said, noting tariffs are top of mind and already have been accounted for next year. Planning ahead allows the opportunity to make cost adjustments if suppliers other than China are deemed necessary.

“This gives you a bit more incentive to look harder at things you may have already looked at before,” he said.

Passing cost increases to customers haven’t occurred yet at Pitt Technology, but officials say that decision is only a few months away if the tariffs continue.

“We’re going to absorb as much as we can of it, but it’s got to be passed on down,” said Kevin Reagan, Pitt Technology’s sales manager.

Dodging tariffs
One group breathing a little easier after the late June U.S.-China discussion is the fireworks industry. It has avoided becoming a tariff target.

All imported consumer and commercial fireworks were subject to a 25% tariff, if Trump chose to make good on his recent threat against China, said Mike Ingram, president and CEO of Ingram Enterprises. The company owns Springfield-based retailer Fireworks Supermarket, which operates 20 retail locations in nine states.

Almost all fireworks sold in the U.S. are imported from China, he said. In 2018, U.S. fireworks consumption totaled 277.5 million pounds, up 9% from the year prior, according to the American Pyrotechnics Association.

“No companies to my knowledge manufacture or export any fireworks to China,” Ingram said. “We’re almost 100% on the receiving end.”

In advance of the June meeting, the APA spoke out against the tariffs, aiming to keep its products exempted from the list.

Prices certainly would have increased for next year, Ingram said, and it would have been difficult for fireworks companies to plan as orders already are being placed for the 2020 season.

“We work a year out, basically,” Ingram said, questioning if the public would even accept a 25% increase in the cost of fireworks.

Ingram said his company’s fireworks sales were a little off for 2018, declining to disclose figures. The July 4 holiday fell on a Wednesday.

“Tuesday and Wednesday are bad days of the week in the fireworks industry,” he said. “We were probably off 10% in 2017 and 2018.”

While the fireworks industry doesn’t have to worry about tariffs – at least for now – Pitt Technology’s Reagan is among those hoping the U.S.-China trade war finally reaches an amicable solution.

“It’s just a waiting game,” Reagan said.