Trade Wars—How Are You Impacted?

Early last month, President Donald J. Trump ignited a firestorm on Twitter by expressing confidence that America would prevail in an international trade war on steel and aluminum. “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,” he said in a March 2 tweet. “When we are down $100 billion with a certain country and they get cute, don’t trade anymore—we win big. It’s easy!”

Is it really that easy, though?

Indeed, there are good reasons for imposing targeted tariffs on some countries for certain types of materials and/or products. And while those tariffs should be equal, more often than not, they’re lopsided.

The reasons behind the imbalance, however, are not as important to medtech manufacturers as the impact this disparity has on the supply chain.

Let’s start with the basics. President Trump’s tweet is obviously a blatant negotiation statement; the world has been in a “trade war” for most of the last 40 years, if not longer. For proof, look no further than China, a country that is somewhat averse to new international business startups within its borders. As the Middle Kingdom has developed into a formidable economic force, the world has generally overlooked the country’s trade imbalances and market inequities. There are two primary reasons for this: (1) developed economies have benefited from China’s low-cost supply chain; and (2) as an economic powerhouse (think large market possibilities), China represents significant growth potential for multi-national corporations (MNC).

We’re not implying this was a wrong approach. But it’s important to understand history when considering current policies and future implications. We are also not suggesting the world escalate a trade war with China. However, businesses should prepare for the potential impacts from the current “trade negotiations.”

Fortunately, many MPO readers have had experience with international supply chain issues and opportunities and will understand some of the benefits as well as some of the pitfalls and challenges associated with trade imbalances.

Before exploring the potential impacts of trade wars on the medtech supply chain, let’s review the various approaches taken by supply chain professionals:

• Sole Source: Maximum volume and maximize cost reduction pressure on vendors while maintaining quality and delivery performance.

• Dual Source: Maintain cost pressure through competitive sourcing among two (or more) suppliers while possibly giving up some cost benefit—due to less volume at any one supplier.

• Act Globally, Source Locally: True multi-national corporations, both large and small, think of their supply chain not only as a vehicle for lower costs, but also as a tool for growing worldwide sales in local regions. For example, a MNC might establish a supply chain source in China primarily to sell into the Chinese market. The same MNC company might also set up a supply chain source concurrently in Europe to sell products there. Following that logic, it would also make sense to consider a North American supply chain source for product sales on that continent.

• Complex (combination of any or all of the aforementioned): A sophisticated MNC supply chain may deploy a complex combination of these strategies depending on materials and local market requirements.

Figure 1: Supply Chain Risk Assessment (Trade War Scenario) - MedWorld Advisors 2018. Let’s consider the impacts of a possible trade escalation on each of these types of supply chains (Figure 1).

Sole Source—Same Region (in-shoring):Companies with sole-source supply chains contained within their own regions will not be impacted much by a trade war. They should, however, be mindful of the underlying costs at suppliers to ensure they won’t incur (previously) unanticipated expenses due to material sourcing activities.

Sole Source—Across the Ocean (offshoring): Companies with (primarily) sole source supply chains in regions where increased tariffs are a distinct possibility should consider re-examining their vendor base. They also should think about the prospects of various anticipated and unanticipated tariff scenarios as well as the financial impact to both product costs and price competition. If it’s a small part of the overall component costs, it might be worth the risk to leave things as they are. If it’s a large portion of the product costs, however, companies may need to look for alternative suppliers to minimize the impact of an escalated trade war.

Dual Source—Same Region: Companies maintaining two suppliers in the same region are mostly safe from the impacts of a trade war, as its unlikely that both suppliers will have component cost issues. These companies should still assess whether there is an underlying component (or a few) that both of suppliers use, particularly if those component(s) are coming “across the ocean.”

Dual Source—Across the Ocean: Companies with two suppliers from a globally outsourced region face a significant risk of tariff increases. These firms should conduct a complete risk assessment with consideration of other supply sources (preferably in the same region). Obviously, any changeover should be gradual—perhaps starting with a “Dual Source—Mixed” approach initially. This should allow for the least disruption in the short term. Nevertheless, companies should ensure the bill of materials (BOM) is not too laden with outsourced (“across the ocean”) materials or the risk will continue to be high.

Dual Source—Mixed (locally and across the ocean): This one is tricky. The risk potential is low for companies with suppliers in different regions (in-shore vs. offshore) but the possibility exists that one or more key component(s) may be offshore even through the in-shore vendor. In this case, there remains a higher risk threat of cost increases.

Act Globally—Source Locally: Companies that localize their supply chains based on the product market are relatively safe from increased trade tariffs. It’s still possible, however, to have a core component (or two) that are sourced locally in one region and farmed out for the other regions. In that case, companies should review the BOM for each region to ensure they are maximizing the in-shoring effort in each region—through the component level.

Complex—Combination of the Above: Companies that organize their suppliers in this manner likely already understand the risks of various scenarios. They may be using sole-sourced models for components where the cost benefits have been too great to ignore. Or, they may employ a combination of in-shoring and offshoring to capitalize on their knowledge of supplier capabilities and product marketing/sales efforts. In this scenario, as a good pilot of the (supply) cockpit/dashboard, companies should conduct a checklist review of key products and their BOMs in all markets to verify they are ready for the challenges associated with various evolving tariff scenarios.

What Is the Best Action Plan? The best course of action may be to take no action, but companies cannot possibly know that without a reassessment of risk scenarios. Medtech manufacturers must evaluate their supply chains at both the product level and BOM component level to determine potential first level threats as well as second-tier component risks.

Supply chains are the lifeblood of any business. Companies that have successfully navigated their flow to assure cost and supply for current market conditions should invest the time and effort to ensure they are prepared for various evolving trade scenarios globally. In the meantime, let’s hope President Trump reconsiders his position on trade wars. If not, the medtech industry is in for a bumpy ride.

Florence Joffroy-Black is CEO of MedWorld Advisors and has significant executive experience in the medtech industry, including working for Draeger Medical. She can be reached at florencejblack@medworldadvisors.com.

Dave Sheppard is a former Fortune 500 medtech executive and is now a principal at MedWorld Advisors. He can be reached at davesheppard@medworldadvisors.com.

This article as well as other articles can be found at https://www.mpo-mag.com/issues/2018-04-01/view_columns/trade-wars-how-are-you-impacted/