Navigating the Ever-Changing Tariff Landscape

ATL Technology has been manufacturing medical-based devices, consumer goods and industrial products in our wholly-owned China facility for more than 20 years. The World Trade Organization (WTO) accepted China as a member in 2001 which really opened up manufacturing in China and eased the burdens of exporting and importing. Our history, and the fact that many of our China managers have been with us for most of this time, has provided our customers with comfort with sourcing their complex medical device products in China. The tariffs imposed on products imported from China starting in July 2018 has impacted many of our customers’ supply chains and has made us analyze the situation differently for the first time since 2001. With the recent announcement of the tariffs on Mexican goods starting in June 2019, supply chains are even more under stress.

Of ATL’s  five global manufacturing locations, our largest manufacturing facility is in Dongguan, China. We are continuously monitoring the tariff situation, but also other issues that could impact our customers. There are many good sources of education on the changing tariff environment – one that we think is a good general overview was given by PwC on May 30, “Strategic supply chain in the changing trade environment.” To more fully get an understanding of the subject matter, we recommend delving into the presentation for yourself.

Tariffs and Duties, what are they and where did they come from?

A Tariff is a form of a tax whose legal precedent was set early in our country’s history – the first tariff law passed in 1788. Tariffs were the greatest source of US federal revenue prior to the introduction of federal income tax in 1913.

Much like a sales or value added tax, tariffs are assessed when the goods or products are imported by the receiving government, and they must be paid to gain possession of the goods in most instances.

When will this latest round of tariffs with China go away?

Going back to webinar provided by PwC on May 30, the expert panel conveyed the following opinions:

  • The tariffs ARE NOT going away any time soon, regardless of what happens with the US presidential election in 2020.
  • There is evidence that both American political parties, as well as other global governments, support the new tariffs that have been imposed and, therefore, quick change is not likely.
  • It is likely these tariffs could remain in place for 4-6 years, if not longer

As of May 30th, there are four lists for goods and products affected by the tariffs, to learn more visit:

List 1 List 3
List 2 List 4

How can you approach dealing with the tariffs

If you haven’t started dealing with how the tariffs are affecting your company assuming there might be a deal, START TODAY!

It was recommended by PwC that any company impacted by tariffs should start by gaining insight from various departments within their organization about the impact to each department. Tariffs are not only a finance issue, but impacts many different areas within the organization.  One area that is commonly overlooked is the extra time it might add to your supply chain, especially if there is a certain expertise resident in China that you desire to maintain for the short and medium term.

For example, at ATL we also have a production facility in Costa Rica. For several new projects, we will have our Chinese facility continue with the fine wire termination sub-assemblies and/or specialty extrusions. Those pieces then ship it to our Costa Rica facility where many value-added steps such as injection molding, welding and advanced assembly complete the device.  Having the main device assembled in Costa Rica adds about 6 weeks to the supply chain. This means we will have more inventory floating on the water at any one time and will need to plan with our customers better.

Approaches and decisions on how to best to manage your supply chain are highly unique to each company. At ATL, we have seen a broad spectrum of customer responses from:

  1. discontinued certain products within their offerings
  2. “broken” the supply chain as outlined above into multiple facilities based on expertise in China
  3. transfer from China to vendors in other countries, and finally
  4. some have paid the tariff and either invoiced their customers or absorbed the tariff costs as a part of the cost of doing business.

There is no one right answer, but rather ensuring that all impacts from within your organization is considered.

Conclusion

Prior to the tariff announcements by the US government last year, the medical device community had already been rethinking supply chain risks especially after the significant hurricanes in the Caribbean that interrupted supply chains. These risk mitigation methodologies can be used again when considering the impacts of the trade war with China. 

Major changes are never easy, but the cost of doing nothing is almost always more.  Our advice after receiving feedback is to look out 3-5 years and come up with the best diversification of the supply chain that dovetails into your organization’s vision for the future.