YWR: The Secret beneficiaries of tariffs and Manufacturing 3.0
You know what I love about you?
You’re always on offence.
In the midst of last month’s sell-off while everyone else was running round in circles clucking about ‘tariffs’…
You were quietly thinking ahead to how this changes manufacturing permanently.
You were figuring out the new trends and how to make money from this.
The Set Up
A friend of mine works for a high-end bike company in the US, which sells bikes globally. The company used to make bikes in the US, but eventually joined the rest of the industry and moved manufacturing to China in 2005.
So 145% tariffs on the bikes they made in China were a shock to this company.
What do you do?
‘Make it in the USA’. Yes, doable, but it’s going to take years to implement.
And appreciate the complications a little more. The bikes going on sale this year incorporate cool, new features which they’ve been designing with their suppliers since 2019. This year’s bikes have been 6 years in development.
Here is their game plan for now.
Temporarily halt China production for now.
Divert any Chinese origin inventory to Europe and sell it there.
Shift US origin bike manufacturing to Vietnam and Mexico.
Increase prices in the US +10% to start.
Join the industry association’s People for Bikes letter to Trump begging for tariff relief.
Note the change they are not making (yet), is to build the US factory.
Which is understandable. Building a factory in the US takes years, is super expensive, and requires moving not just one factory, but the entire supply chain. You only want to do it if you are sure you have to.
What if the tariffs go back to 0%? Or, the next President changes everything back to how it was before.
It’s maximum uncertainty.
Let’s game this situation out further.
How long before Europe, Canada, India and the rest of the world don’t want to be a dumping ground for Made in China inventory which can’t be sold in the US?
Each country decides “We need Chinese tariffs too”. To protect their jobs.
Tariffs are like mustard gas. Once one side uses it, it’s hard to reverse.
And maybe the European tariffs will have some unique considerations around carbon usage too, because you know, it’s Europe.
And likely there will be retaliatory tariffs against the US. So expect that new US bike factory won’t be much good for anything, except selling bikes in the US.
European tariffs, Canadian tariffs, Indian tariffs.
Before you know it WTO and GATT are dead. Every country has their own bespoke bilateral trade agreements.
The Challenge
Now go back to our bike company, or Hyundai, or Apple.
What do you do? What’s the future?
You have a world of dynamically changing tariffs with every country trying to protect their jobs and promote local manufacturing.
You can’t be expected to have a factory in every country or region?
And what if there is another pandemic?
Or, more shipping disruptions?
Manufacturing seems like it’s getting more complicated.
But usually one company’s problem is another’s opportunity.
Who benefits?
How do we make money from this?