Despite the fact that the U.S. economy is strong, farmers, manufacturers, and U.S. companies are experiencing serious distress because other major economies, including China, are on the decline. The slowing world economy combined with recently imposed tariffs on China and other countries are quickly and drastically impacting middle market suppliers and manufacturers in the U.S.
With the second largest economy, China is one of the biggest importers of American-manufactured goods and materials. But as the economy slows, so do the purchasing habits of individuals and companies in that country. The major manufacturers and farmers in the U.S. are selling goods to a shrinking market, so they stop manufacturing products at the pace they were in 2018. As manufacturing slows, so does the need to purchase parts and raw materials from middle market U.S. companies. While some of the larger companies can take the hit, the abrupt halt will put many middle market companies in a position where they can’t recover. And as the effects ripple down into three-, four-, and five-tier suppliers, the impact becomes much greater.
To make matters worse, newly imposed tariffs on China, Mexico, and Canada make importing goods even more expensive for businesses. Philip Franz, EVP and Practice Director, Supply Chain & Operations at FortéOne, notes that the slowed economy and tariffs are acting like a double whammy on middle market businesses.
Unfortunately, the impact of the slowed economy and tariffs has been fairly drastic. That’s because from 2015 to 2018, the economy was booming. After recovering from the 2008 financial crisis, Americans were ready to spend their money and manufacturers increased demand for parts and raw materials—so much so, that some middle market companies couldn’t keep up with demand. These companies were limited by facility space and laborers and were racing to keep up with demand. But by early 2019, many of the manufacturers saw a sharp turn in demand due to the slowing of China’s economy, and they nearly stopped ordering parts from suppliers down the line.
“Tier three suppliers went from profitable to bankrupt in almost no time,” claims Franz. “When tier-two and tier-three suppliers are cut off by the big manufacturers, the impact is drastic, and it takes years to recover from.”
The current tariffs and economic situation affect a number of industries and will continue to widen its reach, eventually trickling down to consumers.
“Just about every durable goods manufacturer is feeling the effects of the increased cost of commodities due to tariffs and a slowed market in China, Southeast Asia, Europe, and South America,” says Franz. “Farmers, specifically those who grow soybeans and corn, are affected by the dwindling market. Any business working with steel has been affected by tariffs. And even the cost of electronics has gone up.”
Retailers are likely next in line to feel the pain caused by these tariffs, which have made supplies more expensive. Retailers must either pass those costs on to the consumer and raise prices, which is unlikely to work, or take a hit on profit margins. Unfortunately, many retailers are most profitable in Q4, so the tariffs are striking retailers at a time when they rely on a boost in sales.
The auto industry is also being hit harder than other industries because tariffs and the slowed global economy are only a part of its problem—Americans are also not buying cars. After the economy recovered from the 2008 financial crisis, Americans were finally able to trade in their old cars and purchase new ones. Because the lifespan of vehicles is so long and many Americans purchased a new car in one big wave, there’s no need for Americans to buy a new car for several years. That combined with a diminishing global market and tariffs on steel has been trying on the suppliers of car parts like seats, radios, and tires.
Though middle market manufacturers can’t solve the slowed global economy, leadership can take steps to better prepare for economic turns, so they don’t have as extreme an effect on the business. Company leaders need to be far more attune to global changes and how an economic turn could affect their business. Because the impact will be sudden, leadership and supply chain managers should have a plan in place so they can react to the market more quickly. Multi-year supply chain plans should also exist so that when demand fluctuates, five-year earning goals will still be met. And if you’re unable to put such plans in place, call in the experts at FortéOne.
FortéOne helps middle market businesses streamline and improve their supply chains to have the most positive impact on the bottom line. Our experts evaluate and build processes and programs, restructure operations, and ensure you have the skilled workers to make your business as efficient as possible. Call in the experts today to see how you can keep your business afloat regardless of an undulating economy.
Contributor: Philip Franz