Jeff Judy

Jeff's Thoughts - August 22, 2018

Trade War II: Management Responses

In the last issue of Jeff's Thoughts I wrote about the trade war we seem to be in, with tariff raises and retaliations affecting a wide range of geography and industries. Not only do these tariff changes increase credit risk for your customers who are most directly affected -- soy farmers was an example I used -- they increase risk for secondary businesses like retail shops and equipment dealers who will suddenly be faced with customers that are drawing a lot less revenue than they were before the trade war began.

Now it is time to turn our attention to management behavior. How are your customers responding to the pressures resulting from these tariff pressures?

The thing is, this is uncharted territory for almost everyone. It has been a long time since there were dramatic and wide-ranging tariff changes, so neither your customers nor your credit staff have much experience to draw on. And there are some tricky business challenges to address in these exciting times.

Let me give you an example. I'm sure you have seen countless commercials urging you to replace all your windows with new, beautiful, energy-efficient, easy-to-clean products. But the companies that make those windows do not necessarily produce everything in house.

I have a friend who works for a company that creates hardware components that are then part of the supply chain for a major window manufacturer. And my friend's company, in turn, has several plants producing hardware, including one in Mexico. For some items, they import sub-components from abroad.

Theresult is that their costs are going up, due to U.S. tariffs. And that raises difficult questions: Do they pass along the full price increase? Do they eat it for now, to support the customer relationship, in the hopes that things return to normal soon? Do they go halfway, increasing their prices, but not by the full amount suggested by their rising costs?

You may have many customers who are struggling to answer these questions, and there is no right answer for every business.

But as a credit provider, you want to be assured that 1) customers are aware, in detail, of the impact of any tariffs on their businesses, and 2) that they are taking the time and effort to identify the best responses for their situations. This is an important test of management skills, and you need to know what your customers are doing to cope with this change in their business environment.

As I said, these tariff changes certainly increase the credit risk associated with some, perhaps many, of your customers. It is up to you to talk to your customers and find out what they are doing to help manage that risk. Disruptive as it is, this unusual change in the business environment may give you some excellent insights into how the management at your customers' businesses anticipate and respond to new threats to "business as usual".