Tribalism, tariffs and trade tensions
Tribalism, tariffs and trade tensions
Understanding how the proposed tariffs between the US and China could indicate evidence of a shift towards tribalism in the world economy.
What do the tariffs look like?
How is UK industrial manufacturing affected?
Even if the tariffs imposed are not felt directly, the impact will be felt in Britain in two ways. Unsurprisingly, manufacturers buying and selling direct to US or China are likely to be affected by price volatility and supply issues. Yet there’s likely to be indirect effects, where inputs or outputs are transported to/from markets heavily influenced by US or Chinese commodities, such as Mexico or Israel.
To quantify the potential impact of tariffs on the UK IM sector, we looked at different scenarios for a cross-section of UK IM companies, all of which had significant revenue coming from the US and/or China.
In our KPMG study, a 10 percent drop in revenue resulting from the US/China trade issues would result in a negative earnings before interest, taxes, depreciation, and amortization (EBITDA) for nearly one-quarter of the companies reviewed.
It is fair to point out that manufacturers are often high operationally geared and increasingly operate on razor-thin margins, resulting in small changes in the top line having disproportionately large impacts further down the income statement. That said, this change is still material, especially in the context of Brexit, global economic volatility and the AI-powered technological transformation.
Despite the potential risks from an escalating dispute, less than one-fifth of these companies flagged the US – China tariffs as a specific risk in their most recent accounts. Brexit, by way of comparison, receives such a mention in almost 80 percent of cases. The risk that British businesses underestimate the potential impact of a prolonged dispute is very real.
What headwinds are companies facing?
The tariffs stretch beyond manufacturers in the US and China. Some companies within the UK have already commented on the potential impact that the ‘tit-for-tat’ tariffs will have on their businesses. Some common trends we’ve observed include:
- Volatility of order flow from customers creating uncertainty in sales and creating difficulties in forecasting performance;
- Increased costs, which lead to higher prices, and an associated potential loss of market share; and
- Other residual effects from changes in economic activity in the US, China and elsewhere around the world.
What can I do?
Whilst it may not be possible to avoid the impact of tariffs entirely, it is possible for manufacturers to mitigate the impact.
Customer/Product profitability health check
Contracts, products or clients that were once profitable may no longer generate a sustainable return. It is the perfect time for manufacturers to independently check the profitability of each customer/product and take some practical steps to retain margin. It is also worth reviewing terms and conditions and whether to enforce any rights to pass on unavoidable additional costs.
Business Model Review
This is a good opportunity to review your business model to ensure it remains resilient and fit-for-purpose. Critically assessing your target market, product/service lines and operating model may help to flush out efficiencies and bolder strategic decisions.
Using robust profit and cash flow models, manufacturers should be trying to predict what the tariffs mean for financial performance and how well their contingency plans will address them.
Working capital optimisation
Manufacturers should minimise the effect of tariffs on their cash position by analysing transaction-level data across receivables, inventory and payables.
Manufacturers should be building stronger, more integrated relationships with global suppliers that can source from neutral locations and can quickly adjust to rapidly changing demand.
Supplier / Customer risk management
Manufacturers need to consider the risk of key suppliers or customers failing as a consequence, and how that may impact on ongoing operations and sales.
Who can I talk to?
We have experts based across the UK, with the practical experience to support businesses through some exceptional political and economic events.
If you think we can help you extract more from your business, please get in touch.
Mark Raddan, Partner, Global Head of Turnaround
P: +44 207 6943580
Stephen Cooper, Partner, UK Industrial Manufacturing Sector Lead
P: +44 207 3118838
Andrew Burn, Partner, Midlands & South
P: +44 121 6095966
Kenny McKay, Partner, North and Scotland
P: +44 113 2313830
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