Roughly one year ago, President-elect Donald Trump pledged the implementation of tariffs as his solution to improving America’s global competitiveness, creating U.S. manufacturing jobs, and fueling a surge in products made in the U.S.A.
During the last 12 months, the President has followed through on his promises by either proposing, implementing or adjusting the products, targeted countries, or rates associated with these tariffs nearly 50 times. Negotiations, reciprocal tariffs and market fluctuations have followed – as have debates on the long-term and short-term impacts.
At the heart of these actions and debates are the manufacturers themselves.
This includes Ohio-based Velocity Group. The contract manufacturer offers product development and low-to-medium volume production runs that leverage precision machining, thermoplastic injection molding, and lean assembly services. The company focuses on electronic and electro-mechanical products, component assemblies and sub-assemblies.
Velocity Group recently touted a significant uptick in new business that it attributes to businesses looking to source from an American company instead of paying the tariffs being placed on competitive offerings from Mexico and China.
Wisconsin-Based Sentry Equipment is a leading provider of specialized parts and equipment used in a number of demanding environments, including oil and gas, wastewater, and food and beverage. The company also offers engineering and maintenance services focused on greater efficiency and end-user safety in processing environments.
Sentry has seen a mix of activity surrounding tariff activity, meshing with trends outlined in a recent Wisconsin Manufacturing Report. It found that 73 percent of manufacturers in the state reported being affected by recent tariff and trade policy – with 52 percent reporting cost increases and 42 percent citing uncertainty or an inability to plan as the greatest impact.
I recently had a chance to sit down with both manufacturers to obtain some deeper insights.
Jeff Reinke, editorial director: From which countries have your seen the biggest influx of new customers?
Jorge Xacur, CEO Velocity Group: At Velocity we have seen significant interest in our services from two different and distinct market segments.
The first, by mostly American firms that had offshored their manufacturing to countries like Mexico or China; and a second, from mostly European companies that want to bypass tariffs and other entry barriers looking for capable and established U.S. manufacturing partners.
JR: Do you feel tariffs were the sole reason for the initial interest in working with Velocity, or did other factors come in to play as well?
JX: Onshoring for us, as a trend, accelerated through COVID. Clients saw how their supply chains were extremely focused on cost, and not enough on resilience. COVID exposed how vulnerable some of our clients had become by relying so heavily in offshore manufacturing. As one client said, “cost is irrelevant if you have nothing to sell.”
After some normalization, tariffs became a new catalyst to this trend. There are always those companies that base their competitive advantage solely on cost. In general, their products are highly commoditized and that is not a market we are interested in. Our clients understand risk and how onshoring with Velocity vastly reduces supply chain disruptions and protects their IP.
There is also a growing awareness that the financial cost and drain on management resources required to manage offshore supply chains, is significant. Another factor that our clients are heavily reliant on is our ability to respond quickly and transparently, without cultural or language barriers, helping them with manufacturability design and rapid sampling of the different product iterations.
Our clear standards and a compliance to American regulatory bodies (like FDA) and having an open door so that our quality can cheaply and easily be audited by the client is another factor that cannot be understated.
JR: What have been some of the most significant challenges that new tariffs have created for Sentry?
Rich Gaffney, Vice President of Commercial Operations, Sentry Equipment: The challenges we’ve seen, more than anything, are more lead time challenges and issues, especially as everybody was rightsizing their inventory trying to get things shipped before tariffs kicked in. Most of our supply chain is U.S.-based, so we have some insulation from that, but the subcomponents of some of our assemblies could be coming from overseas.
We haven’t seen more volatility in pricing yet – not to say we won’t. We have had some adjustments to some OEM pricing agreements, specifically some of our sources have adjusted prices to offset tariffs, such as the removal of or reduction of discounting. It’s unclear if those pricing adjustments are permanent.
Lead times have been the bigger issue, but we’ve been able to get out in front of that. We have been quoting longer lead times and explaining to our customers that some of our suppliers are needing that additional time, and that the sourcing of some of our goods is simply taking more time.
The challenge from the commercial team standpoint is looking at what the ongoing relationships with our global channel partners will look like, including how trade is going to be facilitated and what additional administrative tasks may be implemented. One of the strategies that we’re putting in place is re-evaluating our export compliance and international shipping.
JR: Do you feel “across-the-board” tariffs will be a long-term boost to U.S. manufacturing? Could the sector be better served with a more targeted approach?
RG: In a situation like this, my go-to strategy is always a more targeted approach on specific industries. If it’s going to have a long-term boost to our economy or give us a more stable trade platform across the globe, a targeted approach makes more sense than a sweeping generality. We want to create an ally network and have more longstanding relationships with those allies.
JX: I really cannot speak about other industries where we are not players (Agriculture, for instance); so, an across-the-board tariff is not something I feel comfortable in advocating. However, for the manufacturing sector, I believe that tariffs are a helpful instrument in leveling the playing field.
Unrecognized costs like environmental as well as different legal (liability, for instance) and hidden or open subsidies (electricity, material and labor subsidies, CapEx incentives) distort the true cost of manufacturing overseas.
JR: Have you felt any price pains associated with tariffs when sourcing equipment or raw materials for your operations?
JX: Yes. There has been an effect, mostly in electronics. These costs have been shared by the manufacturer and the client, with little repercussions to our margins.
RG: Price pain is not the leading pain right now. The leading pain is making sure that we’re getting good reliable deliveries and the other pain is understanding what documentation is required to continue to bring things in or export things out.
JR: Was there any initial surprise when prospects compared your prices to their previous foreign partners?
JX: Yes. Interestingly, even with tariffs, if you focus solely on cost, it might still be cheaper to offshore some product lines. We assume that offshore manufacturers are absorbing part of the tariffs – and the speed at which they are on and off has not allowed them to have a significant impact.
We have seen a lot of interest in quoting that has not translated into actual sales. I feel these are just buyers vetting alternatives but not pulling the trigger just yet because of the transient nature of the tariffs.
Making the strategic decision to re-shore a product to a new supplier is big deal. The upside is big. So is the price of getting it wrong or executing poorly. Our sense is that our prospective customers see the value of onshore manufacturing.
JR: Will you need to hire additional staff to accommodate the new business?
JX: We have not seen a need to substantially increase our hiring. We are relying more and more on automating processes and extracting higher productivity by improving tooling and focusing on training.
Hiring and retaining personnel is always a challenge. Machining, for instance, is a very difficult trade that is not alluring for young people. We are addressing this by offering courses and certifications, and giving a path to employees, perhaps with a different skillset, to learn and grow internally.
JR: What do you feel are some of the biggest trends (aside from tariffs) that are impacting your business right now – both positively and negatively?
JX: The trends that are growing our business remain stable; our clients are looking for reliable partners that mitigate supply risks and that can help develop and grow their product lines. We expect this trend to grow remain strong.
We are, like our clients, susceptible to the same supply risks in raw materials and other components. Most importantly, our talent pool and its diminishment by social trends is a high-risk trend we hope can be reversed. We have been quite successful in cultivating a pool of hard-working and talented team members, and we expect this will continue in the future.
RG: To date, we haven’t lost business or gained business as it relates directly to tariffs. What we have seen recently that is not tied to tariff changes has been the resurgence of the power industry. For some time, the power industry was really going green, and we didn’t have many products to play into an entire portfolio of what we would consider green energy.
More recently, with the extended leases of power plants and nuclear becoming a more viable energy option, we’ve seen the potential to lead in that sector. Other areas where we have seen positive impact on our business include the infrastructure for the wastewater part of our business. With so much focus being placed right now on water reuse and recycling, we’re seeing that as a benefit to our business.
It feels a little weird to say, but I don’t really see any negative impacts to our business right now. Though consumer confidence is down and some of our own products ultimately drive the outcome of consumer goods such as food products or other primary products, we haven’t seen a large -scale impact. However, I believe if we don't get inflation under control, we could see some impacts over the next 12 months.
