When geopolitics creates barriers, how will you deliver for your customers?

By

Jonathan Phillips

EY Americas Consumer Products Leader

EY Americas Consumer Products Leader. Consumer products industry veteran. Trusted advisor and strategist.

3 minute read 6 Feb 2020
Related topics Tax Global trade

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How consumer products companies can cope with tariff uncertainty

The consumer products sector is faced with a world governed by uncertainty. Not only are changing consumer demands and new market entrants disrupting traditional models, but critical market pressures are only compounding this disruption.

Of those critical market pressures, geopolitical and trade tensions are high on the list. Whether it’s tax on wine, new trade tensions with France or BEPS 2.0, there’s a new change in the trade and tariff landscape almost weekly. And just because trade deals with China are on the table for now, it doesn’t indicate the end of tariff uncertainty anytime soon, especially in and following an election year.

With the impact of tariffs evident to manufacturers and consumers alike, consumer products companies must think about how they both play it safe, to endure uncertainty today and double down on the advancements to move them forward for tomorrow. So, what’s the play it safe and double down checklist for consumer goods companies trying to manage tariff uncertainty?

Play it safe on short-term efforts to alleviate tariff pressures today.

Short-term: Identify immediate opportunities to reduce landed costs.

A recent National Bureau of Economic Research report titled, Who's Paying for the US Tariffs? A Longer-Term Perspective, found that 100% of costs associated with tariffs have been passed to US importers and consumers. Finding ways to offset those costs for consumer products companies is imperative to not only mitigate the impact on revenue and profit, but also to avoid passing price on to consumers.

Identify credit opportunities available to reduce duties applied and relieve landed costs. For example, savings via the supply chain through Free Trade Agreements, operating in special economic zones and identifying duty drawbacks can reduce duty cost basis. And if you know your supply chain well, there could be an opportunity to take advantage of First Sale.

Double down on the medium and long-term efforts to create the agility to respond to known and unknown changes in the trade landscape.

Medium-term: Understand the current cost of tariffs on your business and use baseline data to implement a modeling approach.

Do you have a full view of the impact today’s tariffs have on total sales? Retail sales? Other product categories? There’s a direct correlation between increases in sales/VAT tax and declines in total retail sales. At some point, consumers will stop purchasing the items they want if the price for the items they need continue to increase. With the appropriate data in place, you can identify that tipping point.

But it’s not only important to understand the cost of tariffs now, you should also model the impact of proposed tariffs. Build trade modeling into procurement and network design strategies to lower landed costs of materials and finished and semi-finished products. You can also build this modeling into your pricing strategy to manage costs passed on to consumers.

Duty classification analytics, where you break down and understand the duty value of the products you’re importing and exporting, is a core component of modeling the future impact of tariffs. If you’re able to anticipate what could be coming in the medium-term, you can shift production around to more cost-effective means within your existing footprint. 

Long-term: Reinvent your supply chain.

To better respond to the long-term implications of trade uncertainty, double down on more transformational efforts linked to smart factories and smart supply chains.

  • With the reduced labor load associated with data and AI-enabled supply chain operations, there’s less pressure or need for manufacturing in lower cost geographies.
  • Even still, the resulting agility allows you to more easily move manufacturing operations to more tax-efficient and cost-effective locations should operations still exist in international locations.
  • End-to-end supply chain visibility helps identify and eliminate compliance gaps, including availing of trusted trader programs to reduce lead times.

 

The views reflected in this article are those of the author and do not necessarily reflect the views of the global EY organization or its member firms.

Summary

Play it safe on short-term efforts to alleviate tariff pressures today. Double down on the medium and long-term efforts to respond to known and unknown changes in the trade landscape.

About this article

By

Jonathan Phillips

EY Americas Consumer Products Leader

EY Americas Consumer Products Leader. Consumer products industry veteran. Trusted advisor and strategist.

Related topics Tax Global trade