Working With TrumpTrade: CEOs Face Uncertainty

A lot of business leaders support President Donald Trump’s attempts to reform trade with China, to open markets there, to knock down barriers to American exports and, most of all, force Chinese compliance with international law for IP protection. But if you wanted to see the short-term impact of Trump’s efforts to remake the rules of global trade, January’s Detroit auto show was a pretty good place to go.

It was a somber affair, especially when you consider that the U.S. auto industry has been enjoying the softest of soft landings after several years of record sales. Dependable newsmakers Sergio Marchionne, the deceased CEO of Fiat Chrysler, and Nissan-Renault chief Carlos Ghosn, languishing in a Tokyo jail, were gone. Meanwhile, reminders of how electric cars and autonomous driving are turning the industry upside down were all over the hall.

But in the cavernous, hushed Cobo Center, the real cloud following CEOs was the president’s policies on trade—and a bigger sense of foreboding than they’d felt since the global financial collapse in 2008 presaged a major crash in auto sales.

“The one thing our industry craves is clarity because of our lead times,” William Ford Jr., executive chairman of Ford Motor, said in an on-stage interview. “Right now there’s very little clarity… It makes it hard for businesses to operate. We make decisions, and they’re billion-dollar-plus decisions, and we’re doing it right now kind of flying blind. That’s not the way to do it.”

German auto executives at the show worried about President Trump’s threat of a 25 percent tax on European luxury-car imports; U.S. tariffs on European steel and aluminum imports were pinching domestic CEOs; many were concerned about how a deceleration of the Chinese economy would devalue huge investments in China by Western auto companies; and the trade mess was freezing most CEOs in their tracks.

Guangzhou Automobile Group of China (GAC) felt the biggest punch to the gut. After several years of showing its wares in the lobby—alongside other marginal players, including radio stations, not-for-profit groups and supplier organizations—GAC finally moved into the big time of the show floor inside Cobo.

GAC staged a huge, glitzy exhibit around a concept, the Entranze EV utility vehicle, aimed at American consumers. But ironically, because of China’s trade war with Trump, GAC’s prospects of importing any production car to America now are at their lowest ebb ever.

“Tariffs won’t bring more manufacturing and jobs,” said Dan Sandberg, North America CEO for Italian brake-maker Brembo. “We can’t find enough people to work now. Where would we get more people anyway?”

The auto industry, of course, is far from alone. CEOs across every sector have spent the last two years trying to discern what to do in the face of Trump’s trade policy—whether they agree with his goals or not. Their impulse toward paralysis is reminiscent of when President Obama’s regulatory war on business prompted a capital strike by CEOs and produced chronic slow growth during his administration.

Some CEOs are just waiting things out. Others are moving tactically, passing along higher costs or seeking duty-free loopholes. Still other leaders are accelerating long-term decisions on production and business investment, hoping they haven’t bet the wrong way.

“Policymakers don’t really comprehend the fact that global supply chains have to be borderless, so CEOs are having to rethink their supply chains,” says Craig Giffi, leader of the U.S. consumer and industrial-products practice for consultants Deloitte. “They’ll have to make products based on where they sell them, but in some cases that becomes economically unfeasible. They need to hedge their bets on a supply chain that’s increasingly vulnerable to global politics.”

Nowhere is this more clear than in Wisconsin, a state that helped Trump win in 2016 but where his approach to trade is likely to make a repeat problematic in 2020. It’s a telling microcosm for business throughout the U.S. After two straight years of record sales and profits, for instance, Helen Johnson-Leipold, CEO of Racine, Wisconsin-based Johnson Outdoors, is scrambling for ways to mitigate the impact of tariffs on a product line that relies heavily on manufacturing in China. Cindy Brown, CEO of Chippewa Valley Bean, a kidney-bean producer in Menomonie, canceled two scheduled expansion projects. Apple-supplier Foxconn is rethinking its Wisconsin factory.

Husco International CEO Austin Ramirez is also rethinking recently announced plans for U.S. expansion, including at the Waukesha, Wisconsin, headquarters of the maker of components for auto and construction-equipment markets. That was because Husco gets about one-third of the components used in its North American plants from Chinese suppliers, and the higher tariffs on these components were costing an extra $1 million a month.

“Right now we have an incentive not to manufacture products in the U.S. that require Chinese-supplied content,” Ramirez said at a public forum in January. “I think there are much more targeted actions that the administration could take to punish China’s bad behavior while still protecting free trade, fair trade, and allowing U.S. manufacturers like Husco to build our business around the world.”

Of course, not everyone disagrees with the White House. President Trump “is the first one actually saying enough is enough,” says Tom Shorma, CEO of WCCO Belting, a maker of industrial fabrics in Wahpeton, North Dakota, that has been hit by tariff-related price increases on raw materials imported from China. “All his predecessors simply kicked the can down the road. This president is saying we’re not going to kick the can down the road anymore.”

Still, says Johan Gott, principal at A.T. Kearney consultants, in Washington, D.C., “Donald Trump is driving this, but his concerns are widely shared by CEOs. It would be welcome if IP concerns could be resolved, for instance, but CEOs are asking if there will be collateral damage—and is it worth it?”

CEO VOICES

CEOs, of course, don’t have the luxury of academic debate over the issue. Chief Executive reached out to business leaders across the nation to get a sense of how you’re handling the third year of TrumpTrade. Here’s some of what we heard:

Standing pat: Some CEOs say they have little choice but to do nothing. “Business is frozen,” Ramirez said, “because these tariffs might go away tomorrow, they might go away in two months, they might be permanent. That really handcuffs us.”

Other CEOs are making a tactical choice to maintain the status quo as the tariff drama plays out because it would be riskier to do anything else for now. “CEOs just raise the hurdle rate that they need to make a particular investment and still know that it’s going to be profitable,” says Jeff French, managing partner for consumer industrial products for consultants Grant Thornton. “But now with more projects on the edge of the hurdle rate, CEOs won’t do them right now until there’s more clarity.”

Boosting prices: Crystal Morris, president of Tampa-based Gator Industries, which makes musical-instrument accessories, was sitting on price increases that she would spread over the company’s thousands of SKUs after a 10-percent tariff kicked in last fall on the 70 percent of her goods that are made in China. “We’ve thought about which products we could raise prices on and which we wouldn’t be able to,” Morris says. “But you can’t just change the price—maybe only once a year. It’s a pretty arduous process.”

Being transparent: Shorma, of WCCO Belting, believes being transparent with his customers can relieve much of the pain of having to raise prices after new tariffs. “There’s the challenge for how to plan,” he says. “But if companies are open and able to communicate effectively with customers, and put a structure in place [for price increases] that’s transparent and directly attributed to the tariff, we haven’t had a lot of pushback from customers.”

Appealing for exemptions: Companies can request exemptions from the steel and aluminum tariffs if they prove they can’t find what they need domestically. Tens of thousands of companies have applied, but few have been processed. Gator’s Morris determined that her company wasn’t even eligible to apply. “We were enthusiastic about filing one,” she says. “I mean, is this who we really want to be penalizing? A company that sells guitar cases to musicians and band cases to students?”

Enhancing flexibility: Some CEOs have begun “renegotiating terms or moving parts of their supply chain,” French says. “They’re getting impatient.”

Mahle CEO Jorg Stratmann is among chiefs who have realized “the need for more flexibility in our entire value chain, making it more systematic in our own operations and with our suppliers.” The chief of the Germany-based auto-parts maker says he’s “used to managing our business without barriers and producing and sourcing components in the areas with the best costs, but [this] has changed with the tariffs.

“We’ve been trying to mitigate by moving production and localizing products and having intense discussions with customers.”

Rebooting the supply chain: A.T. Kearney’s Gott says some CEOs are also moving up decisions about their supply chains “not just to shift out of costs but also to reduce risks in a much more fraught relationship.”

Some CEOs we spoke to are looking to move Chinese production to Mexico, now that the new North American Free Trade Agreement (NAFTA) has taken shape. And it’s becoming a seller’s market for owners of industrial capacity in Vietnam, Indonesia, India and other countries that give Western companies a non-Chinese manufacturing outlet.

Finding loopholes: Many U.S. manufacturers can get “drawbacks” that compensate them for higher tariffs if the end goods they make in America end up as exports. WCCO Belting, for instance, receives drawbacks from its exports to more than 20 countries. CEOs also can look to move output to foreign-trade zones in the United States where they can escape many customs, duties and tariffs. There are more than 230 foreign trade-zone projects and about 400 subzones across the country.

Looking beyond: Some CEOs insist they can see past the craggy landscape of current trade tensions. Craig Bouchard, CEO of Braidy Industries, has been building relationships and an oversubscribed customer list for the aluminum sheet steel that his company is supposed to begin turning out of a new $1.7billion mill in Ashland, Kentucky, in 2021.

“If the [current aluminum] tariffs go away, we’re still in good shape,” Bouchard says. “I make the assumption they’re going away, and if they don’t, it’s gravy. Every decision we make is based on sound business logic and good customers and suppliers. Our goal is to be the low-cost producer of high-quality aluminum in the world. I think that will be the case the day we open our door.”

Some CEOs are willing to bite their lips, bide their time and back their president, in part because “China hasn’t been as remotely available a market as anywhere else in the world,” says Harding of TMF. “The CEOs of U.S. companies operating in China have had their hands massively tied behind their backs. Whatever the changes we get, that will be better rather than worse.”

Back at the auto show, Joerg Weisgerber, CEO for North and South America of Hella Electronics, a Germany-based producer of automotive lighting and electronics components agreed that Trump going after Chinese protectionism in general is “a good cause,” he said. “But are all these issues with tariffs producing a great result?”

It’s still too soon to tell—the jury is out on whether President Trump will be able to pull off a historic revamping of the global post-war marketplace, or whether he’ll simply drive the economy into recession.

Weisgerber, for one, takes solace from the results of Trump’s efforts to remake NAFTA. For all the angst caused by his saber-rattling, in the end, provisions of a new, as-yet-unratified trade agreement didn’t result in much material change. And that was okay by him. “I was nervous, nervous, nervous” about the replacement for NAFTA, said Weisgerber. “But in the end it wasn’t that much different.”

Read more: Will China’s Xi Play Trump’s Trade Game?