Tariffs exert a ripple effect throughout the economy, and Michigan manufacturing is feeling the first wave of impact. The dependence of the automotive and steel industries on imports exposes Michigan manufacturers to the early impact of tariffs, requiring rapid adjustments. 

Here's a guide for Michigan businesses on how tariffs are affecting supply chains, costs, and customer relationships, and what this means for adjusting your financial planning and business strategy.

Understanding the Tariff Ripple Effect

Steel and aluminum tariffs are higher than those for most other products, with 50% duty rates for most countries (excluding the UK). These extend to include not only raw materials but also derivative products such as compressors and pumps. For manufacturers such as auto suppliers and machinery makers, this raises input costs not only directly for imported products, but indirectly throughout the production cycle.

In addition to raising costs on purchases of goods, tariffs impact supply chain strategies. While tariffs are designed to bring supply chains back to U.S. companies, the short-term impact is disrupting supply chains, causing delays and forcing adjustments such as sourcing alternatives and contract renegotiation. For instance, GM will be investing $4 billion in Michigan and other states, but cars produced from those investments won't hit the market until 2027.

Altogether, tariffs will cost the U.S. auto industry $100 billion a year, estimates Cox Automotive Chief Economist Jonathan Smoke. Tariffs will raise costs on producing imported vehicles by an average of $5,500 and on U.S.-produced vehicles by an average of $1,000, not counting steel and aluminum. These costs are passed on to consumers, affecting sales projections and requiring marketing adjustments. Smoke anticipates sales will pick up after tax refunds in the spring; meanwhile, manufacturers must make adjustments.

The Cost Equation for Tariffs and Manufacturing

Sites such as NerdWallet provide simplified tariff impact calculators that estimate costs using variables such as cost per unit, quantity, shipping cost, tariff rate, and sales price. However, such basic calculations only reveal part of the big picture.

Product sourcing platform Sourcify helps manufacturers gain a broader perspective on the total costs of tariffs by considering variables such as:

• Landed costs
• Cost of goods sold
• Fulfillment and storage
• Return-related costs and write-offs
• Cash flow and inventory financing

PricewaterhouseCoopers provides additional guidance for assessing the accounting implications of tariffs on areas such as inventory, asset impairment stemming from factors such as pricing changes, and income taxes.

Turning Tariff Challenges into Business Strategy

Calculating the costs of tariffs provides a basis for developing a proactive strategy to manage tariff challenges. Areas where you can make strategic adjustments to factor in the impact of tariffs include:

• Financial planning strategy: After calculating how tariffs will impact your profits, losses, balance, and cash flow, identify the necessary adjustments to meet your target numbers.
• Financing strategy: If your calculations indicate you'll need financing to achieve your goals, take steps to secure a commercial loan or other funding.
• Supply chain strategy: Review your supply chain, particularly high-volume sales items, and determine whether you could cut costs by changing suppliers
• Marketing strategy: Estimate how tariffs will affect your pricing and consider whether you need to change your prices or adopt new marketing and sales tactics to support pricing adjustments, such as emphasizing value over cost

To optimize your strategy, review your business plan in consultation with your accounting, tax, operations, and marketing teams to identify ways you can adjust to the impact of tariffs.

Factor Tariffs into Your Business Strategy

Adjusting effectively to the short-term and long-term impact of tariffs may require adjustments to your financing strategy. Northstar Bank provides lines of credit, term loans, and commercial mortgages to help Michigan businesses finance their expenses and fuel profitability and growth. Explore our commercial financing options on our website and talk to our lending experts about how we can help you find a customized loan that meets your business needs.

 

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