We import a few raw materials for our manufactured products such as yttrium oxide, which is derived from a rare earth metal. We also import technical ceramic parts mainly produced by two exceptional suppliers from China. One immediate effect of the tariff is that we had a shipment of raw materials en route when the 145 percent tariff was imposed — so our cost has just increased dramatically.
We also have 15 to 20 transactions pending with Chinese suppliers of technical ceramic parts, and our margins will be trimmed significantly — by as much as 35 to 45 percent.
We are now factoring tariffs into any new price quotations. For example, a part we ordered in January, that cost $1.57 per unit, in April costs $2.97 because of the new tariffs. Even though we anticipated paying the January rate, we have to pay the higher April rate since it’s dependent on when the part comes in. Even with that price increase, we are trimming our own margins. Our customers will definitely have to pay higher prices going forward, but it is too early to tell whether they will accept higher prices or postpone or cancel projects.
We did receive a letter recently from a major customer stating they would not accept any price increases attributable to tariffs.
We’re also dealing with inbound shipping problems. This has to do with the end of the de minimis exemption. Many of the parts we import qualify for this exemption, but not anymore. Now, companies like FedEx are required to collect a tariff on any shipment valued at more than $1, so we think the end of de minimis is causing deliveries to be delayed. The bottom line is we’re having problems getting shipments now.
On the export side of our business, we have a major China customer that purchased approximately $60,000 worth of our goods in March, and the shipment was prepared to leave just as China said it would apply reciprocal tariffs after President Trump announced his tariffs of 145 percent on “Liberation Day.” As a result, our customer asked us to store the product, hoping that the issue will be resolved shortly. I wrote to them and said, “We’re glad to hold it, but I strongly doubt that it will be resolved shortly.”
Before this, our China business had been growing significantly. About 40 percent of our sales come from exports. I would not be surprised if our China sales now drop by 50 to 75 percent. And the hit may not be reversible because our customers in China will likely search for domestic suppliers.
The tariffs have already baked in a recession. I expect our total sales to decrease by 15 to 20 percent if a recession hits. We experienced an 18 percent decline in 2008, so we have some basis for our prediction. And this is all being brought on by an unforced error, namely the 145 percent tariffs on China and around the globe. We find that our China suppliers are extremely competent and very responsive, and we enjoy working with them. We have no plans to change our supply chain.
It’s a bit like an earthquake in the Indian Ocean. It’s not felt thousands of miles away, but the tsunami will eventually hit us, and that’s what this feels like. The tsunami is inflation and unemployment.
We’d like to know how the tariffs are affecting your business. Have you changed suppliers? Negotiated lower prices? Paused investments or hiring? Made plans to move manufacturing to the U.S.? Or have the tariffs helped your business? Please let us know what you’re doing.
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