We had a cup of coffee yesterday with the CEO of one of the nation’s largest residential building materials distributors. Things are going well. Demand is good. Innovation in his business makes his geographical infrastructure and service offerings the solution for more and more builders, especially ones in need of an offset to labor capacity constraint.
One area of our otherwise fairly upbeat conversation caused him to shake his head, roll his eyes, and grimace.
My question was, “what happens to materials prices if and when border tariffs and other protectionist trade policies start to kick in?”
He hardly wanted to think about the consequences.
A timely analysis showed up here in the Harvard Business Review, looking at “Rethinking Your Supply Chain in an Era of Protectionism,” by Boston Consulting Group executives Justin Rose and Martin Reeves. The authors explore two very strong motivations for manufacturers to look at new strategic sourcing. One is that the East Asia panacea, whereby companies leveraged “labor-arbitrage” and burgeoning middle-class economic growth to reduce costs, has inflected, and will start declining. The other, our current administration’s oppositional stance on expanding global interdependent trade deals.
Rose and Reeve see tipping point shifts on international sourcing trends suddenly spiking up as robotics, automation, and machine learning kick into gear among building materials supply chain players, reducing the costs domestically, and eliminating shipping, taxes, and tariffs.
Equally important, they view “a shift toward protectionism” as a game-changer. They write:
Exhibits A and B are the United Kingdom’s vote to exit the Europe Union and Donald Trump’s victory in the U.S. presidential election. But there may be more to come. All this adds up to an unprecedented level of uncertainty about trade policies and their effect. Take the idea of a U.S. border tax, which President Trump has floated. Such a policy alone could have a major impact on companies operating in the United States. Some retailers that are big importers could see their net profits plummet by almost 80%, while exporters of manufactured goods could see their net profits soar by 50% or more (see these exhibits). Yet whether and how such a policy will be implemented remains uncertain; so does its impact on exchange rates and a large number of other policies that could influence trade economics.
Who’ll pay if builders’ prices on input costs soar due to border taxes and tariffs?
That’s why our guest this week was unhappy at the thought of such a scenario.
Amid the uncertainty, builders had better join their manufacturer compadres in taking every measure possible to secure their supply chains in the event of dislocation in the months to come. Here’s the low-down from Rose and Reeves:
- Evaluate your existing and future customer footprint and map it against your existing manufacturing and supply chain capabilities.
- Analyze the total costs of supply for each alternative location.
- Explore advanced manufacturing technologies and possibilities, especially flexible robotics and automation and understand how these change the equation.
- Proactively try to rebuild your atrophied supply-chain ecosystems, if possible in conjunction with similar manufacturers and large customers.
- Engineer your supply chains to be resilient to further shifts and instabilities in trade policies and exchange rates.
Good advice for whatever the nearer term outcomes are on the policy front.
