As supply chains adjust to new realities in international trade, West Michigan manufacturers are entering the final months of 2018 with “caution.”
That’s according to Brian Long, the director of supply chain management research at Grand Valley State University’s Seidman College of Business, who said “uncertainty about the trade talks will limit future economic growth” for the region.
“My indices, both short-term and long-term, are still positive, but they are not as positive as they were back in February,” he told MiBiz. “Part of the problem is I think (manufacturers) are waiting to see what is going on.”
Despite reports that optimism among manufacturers nationally is at a 20-year high, West Michigan-based auto suppliers remain concerned over China’s 40-percent tariff on U.S.-built cars and the United States’ steel and aluminum tariffs. As a result, companies are implementing product price increases or rethinking sales and sourcing strategies.
“Anybody that has something coming in from China right now is worried because the China situation doesn’t look like it has an easy resolution,” Long said.
He added that his short-term business outlook index reading in February was near 50. Now, “we are half of that.” Reflecting that lack of optimism, West Michigan manufacturers are now “holding off on new investment” until the trade and tariff situations get resolved, Long said.
One such company worried about tariffs is the Zeeland-based Gentex Corp., which is considering options to offset additional fees from tariffs, including finding new suppliers.
According to President and CEO Steve Downing, the manufacturer of rearview mirrors and automotive electronics projects an additional tariff impact of $5 million to $8 million for the rest of 2018.
“It’s difficult to say at this early stage how much tolerance OEMs will have towards price change (that) is related to tariff structure,” Downing told analysts during a conference call to discuss the company’s second quarter earnings report. “But it is something that we’re going to be looking at and talking with our OEM customers about as we move forward, that if this becomes very prohibitive to doing business, we’re going to have to get creative with solutions around how we can make sure our costs get to those customers in a cost effective way.”
According to an investor presentation in August, the company said it was experiencing a 20-percent tariff on mirrors and a 24.4-percent tariff on HomeLink systems in China.
“Our preference would be to stick with our current supply base and hopefully find … different countries that they can source those products out of … to hopefully avoid some of those,” Downing said. “That does take time. … The second plan would be obviously to find new suppliers that could produce in different areas that aren’t subject to the tariffs. That validation is quite longer.”
To change “your sub-supplier means you have to redo that validation process,” an expensive process that could take up to 18 months, Downing added.
“It’s not impossible, and if it makes sense we would look at it, but our preference is obviously to try to find other creative ways around those as much as possible,” he said.
Gentex reports its third quarter earnings on Friday, Oct. 19.
Despite pessimism within the automotive supply chain in West Michigan, a survey from the National Association of Manufacturers reported optimism among manufacturers remains exceedingly high at 92.5 percent. According to the survey, the latest four-quarter average rose to 93.9 percent, “making it the highest one-year average on record” as many manufacturers cited recent tax and regulatory reform as driving their sentiment.
While the industry’s overall optimism may be increasing, the Original Equipment Suppliers Association found that sentiment among automotive supplier executives is headed in the opposite direction. For example, optimism the OESA’s third quarter supplier barometer plummeted 14 points since the beginning of 2018.
“Regardless of revenue size, supplier executive responses reflect a universal increase in pessimism compared to prior quarter,” according to the report. “Trade policy continues to be identified as the greatest industry threat.”
An executive at Walker-based Micron Manufacturing Co., a precision machining supplier, noted challenges in the company’s automotive work are acting to tamp down its optimism.
“(The year) started out great, but we are not as busy as we were before,” Plant Manager Dan Vermeesch told MiBiz. “Some of our auto work has been in limbo, but I don’t know if that is model changeover. If I knew more about that, I would be optimistic. … I have been as optimistic as I have ever been in non-automotive, but we don’t know about automotive.”
Concern over the current trade environment is not limited to suppliers, as OEMs also continue to struggle. Earlier this month, Ford Motor Co. announced it would lay off thousands of salaried employees after losing at least $1 billion because of tariffs.
According to Downing at Gentex, “everyone is kind of equally concerned.”
While Michael Davenport understands the concern from some West Michigan companies, he said Grandville-based Jireh Metal Products Inc. is in the “optimistic category.”
One reason: The company has cushion from tariffs because its customers negotiate “directly with the mill, which generally means that as steel prices rise or fall, we have a level of insulation,” said Davenport, president and CEO of the metal stamper.
“We have risk, but it is mitigated by the contract buy of our customers,” he told MiBiz. “When we look at the metrics, especially in West Michigan, we are in a good place. We care about our customers and service the hell of them. There are some labor issues and unemployment is very low, but when I look at and project what will happen, manufacturers and suppliers will start to work together.
“If a person has a need and I have the capacity, I could give them some of that capacity.”