Published in Manufacturing
Steelcase, whose Mackinac line is shown here, is among the office furniture manufacturers wrestling with how to react to new tariffs on steel, which is causing price inflation in the broader steel market. Steelcase, whose Mackinac line is shown here, is among the office furniture manufacturers wrestling with how to react to new tariffs on steel, which is causing price inflation in the broader steel market. COURTESY PHOTO

Office furniture manufacturers weigh options in wake of tariffs

BY Friday, September 28, 2018 08:12pm

As the U.S. wades deeper into a trade war with countries including China, West Michigan-based office furniture manufacturers have been forced to raise prices and re-evaluate their supply chains to mitigate risks.

Zeeland-based office furniture maker Herman Miller Inc. (Nasdaq: MLHR) has “identified a range of actions” — including a price increase set for January 2019 — that will help mitigate President Trump’s 25-percent tariff on imported goods.

The company imports various Chinese-made components and parts — such as monitor arms, for example — that are affected by the current U.S. tariffs, according to a recent call with analysts to discuss quarterly results.

About 5-6 percent of the company’s cost of goods sold “has potential exposure to tariffs,” which translates into an impact of about $24 million at the high end, said Kevin Veltman, Herman Miller’s vice president of investor relations and treasurer.

Herman Miller has planned a number of steps to offset the cost pressures, in addition to the January price increase and adjusting project discounts, according to Veltman.

“On the supply side, we are performing value chain analysis to minimize tariff impact and identify opportunities for duty drawback and planning in-country supplier re-negotiations,” Veltman said in an email to MiBiz. “More broadly, our profit optimization strategic priority will help to offset this exposure.”

Rising steel costs because of the tariffs also are affecting Grand Rapids-based Steelcase Inc. (NYSE: SCS).

“The biggest issue for us from all the tariff activity has been the fact that steel prices have been able to go up under the cover of the tariffs,” CFO David Sylvester told analysts during the furniture maker’s latest earnings report last month. “They’ve gone up dramatically, which drove our decision to take two price adjustments in four months.”

Sylvester’s sentiments echoed statements from Robert Schneider, chairman and CEO of Kimball International Inc. (Nasdaq: KBAL), a Jasper, Ind.-based office furniture manufacturer.

In a July conference call, Schneider told analysts that while Kimball had no direct exposure to the steel tariffs, the company was experiencing price inflation from its steel sources. He said the tariffs were “creating additional caution” among customers and affecting the company’s margins.

“We are analyzing the cost impact of these proposed tariffs and are proactively working with our supply chain partners in China on ways to mitigate the impact,” Schneider said in the call. “Our suppliers have been very open to our request for pricing concessions to help reduce the overall impact.”

As its members grapple with uncertainty and higher prices, the Grand Rapids-based Business and Institutional Furniture Manufacturers Association (BIFMA) has joined with other national trade groups to oppose the tariffs.

According to Brad Miller, director of advocacy and sustainability for BIFMA, the organization is working with the National Association of Manufacturers and Americans For Free Trade “to oppose tariffs and keep our members informed of ongoing developments and who they need to be communicating with about their concerns.”

“Using tariffs, essentially a tax, instead of diplomatic channels to raise issues of concern between nations is using a blunt instrument unsuited for the complex global marketplace, and it’s an uncontrollable instrument that often backfires,” Miller wrote in an email to MiBiz. “We have committees and task groups from member companies who provide input on these issues and craft industry comments. We also encourage them to tell their individual company stories to elected officials.”

While acknowledging that international trade disputes can pose risks for companies, economist Jim Robey, director of regional economic planning services at the Kalamazoo-based W.E. Upjohn Institute for Employment Research, believes they are simply a part of doing business in the global market.

“Will there be some firms that could be casualties in this because they can’t hold on? There probably will be,” Robey told MiBiz, noting the concerns remain speculative until trade deals are finalized. “Certainly, there’s going to be disruptions in markets if this continues, but I think — at least I am hopeful — that the end goal of this is to get (trade) a little more balanced.”

However, executives in the office furniture industry say the tariffs are hitting their operations particularly hard, which has them scrambling to devise new business strategies.

In a statement to MiBiz, Katie Woodruff, Steelcase’s global audience communications manager, said although steel prices continue to remain high, “fortunately, we’ve been able to minimize the full impact of these factors on our product and service pricing through specific operational efforts and efficiency initiatives — and our commitment is to continue to do so in the future.”

In a conference call with analysts last month, Herman Miller CFO Jeff Stutz said the company is considering various strategies as the tariff situation continues to mount.

“We are looking at all of our options and some of them are obviously easier to implement than others,” Stutz said in the call. “We are looking at other areas to manufacture. You have to layer in freight costs. If we decide to manufacture elsewhere, it means it would be a little bit harder to implement in the longer term, but we are absolutely exploring those options as well.”

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