A Manufacturer’s Guide to Finding Alternatives to Tariff Materials
Many manufacturers are finding that their production costs have risen along with recent tariffs on their product components. By identifying potential alternatives to materials that are subject to tariffs, companies can significantly consolidate their production expenditures and achieve greater return on investment over the years. For those in the manufacturing industry dealing with tariffs and their impacts, we provide this guide to finding alternative materials.
Identifying Materials Outside of China
China has become a leading trade partner to the United States in recent years as a result of China's large, highly productive workforce and its access to cheaper raw materials. But due to the tariffs in place on China within the United States, American companies are now finding it more expensive to import metals and metal components from Chinese sources. Trade tensions have only heightened since the recent arrest, at the request of the U.S., of a high profile Chinese business executive. Some manufacturing businesses are now looking to other countries for access to the same quality of material at lower pricing.
Thailand has become one of the leading options for many companies, as the country is known for its stable business environment and access to vast amounts of natural resources. In 2018, the country has also taken steps to significantly improve its technical capacity by pushing investments in innovation and inviting foreign companies to build their facilities within the country.
Other Asian countries like Japan and South Korea are also ramping up their production of steel and other metals to fill the gap in the market left by the drop in Chinese metal imports to the United States. In order to compete with the global marketplace for products, countries are also offering discount pricing specifically to overseas buyers. For example, Japanese and South Korean export prices for steel are 35% lower than their domestic prices for the same product. Growing companies across the United States and around the world can now benefit from this push to compete with the Chinese metal marketplace.
Another country that has benefited significantly from the trade war between the U.S. and China is Brazil. Brazil is exempt from the steel tariffs and is set to become a leading supplier of steel to manufacturers throughout the United States.
Lowering Production Costs with Cheaper Processes
Beyond sourcing materials from different countries and setting up new and complex supply chains for their metal materials, some manufacturers are now turning to new ways to produce the metals they need. We have refined the process for making metals such as iron and steel and can now produce these metals in large amounts. But, from mining the metal ores to smelting and tampering alloys, these processes can be extremely energy intensive and require significant resources beyond those available to the growing American manufacturer.
Studies show that the process has been honed to its maximum potential and any low hanging fruit in terms of process improvements has already been picked. Now, new processes are being tested as a means to consolidate the expenditure of metal production. Rather than using a blast furnace to heat the iron ore and remove oxygen, some manufacturers are dissolving the iron ore in a molten electrolyte and passing a current through it. The process has been shown to yield significant cost savings. The challenge within this process is finding a widely-available, non-consumable anode alternative to iridium and platinum. Chromium-based alloys have been shown in studies to offer the ideal anode material.
Not only might this form of steelmaking help U.S. manufacturers become less reliant on foreign sources for material, but it may significantly reduce greenhouse gas emissions within the metal production process. And with a new technique for producing metal such as steel, some analysts predict that prices will decrease substantially throughout the marketplace.
Flexibility is the Key to Future Success for Manufacturers
One of the leading challenges for manufacturing companies looking to navigate this new complex economic landscape and forge ahead with new strategies is the lack of clarity from a political perspective. Perhaps the key take-home message for manufacturing leaders hoping to protect their infrastructure to retain profitability is that a flexible supply chain is the best defense. Working with key stakeholders across the globe and establishing partnerships in growing economies can help your organization thrive regardless of the political environment.
We hope you have developed several ideas based on the guidance provided in this post. It is the third in a series of recent GJM blog posts about tariffs, including how to communicate with your customers about tariff-related price increases and what to expect when new tariffs are imposed.
Our team is here to work with you in devising new strategies for your business in the years ahead. Learn more about the Gilmore Jasion Mahler manufacturing & distribution team of specialists.
Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.