Nick Leopard, Founder and CEO of Accordion.
For some, it’s a long-held dream: a return to a land-based, goods-producing economy with traditional factories. Economists say an increase in domestic manufacturing is one of two potential outcomes of the new administration’s proposed tariffs (the other is that they would still be imposed on products that are imported). (This is an increase in consumer prices to absorb the tariffs.)
But before we open the bottle to celebrate good ol’ America, we need to realize that the implications of escalating tariffs are more complex than a hurdle-free path to adding a “Made in the USA” tag. Reshoring is full of opportunities and challenges, especially for the private equity (PE) community where the limits of multi-arbitrage have been demonstrated and cost control is a priority.
Maybe tariffs are a negotiating tactic. Probably not. What is certain is that private equity-backed companies with global sourcing networks and heavy manufacturing processes need to plan now for if that becomes a reality. CFOs and COOs of such companies would be wise to consider the following five tariff mitigation strategies.
1. Maintain the current supply chain.
The simplest option, continuing with current offshore manufacturing and imports, is also the most costly. President-elect Donald Trump has made tariffs a mainstay of his campaign. He has since doubled down, imposing 25% tariffs on goods from Canada and Mexico and a 10% increase on imports from China (possibly higher than the 60% he had previously promised). promised.
For portfolio companies with manufacturing facilities in, or import networks with, one of the United States’ top three trading partners, maintaining the status quo is likely to be cost-prohibitive and impede short-term profitability. Any EBITDA gains needed for improvement or long-term exit valuation would be erased. .
2. Tweak traditional areas.
Perhaps you are the CFO/COO of a portfolio company considering a short-term exit. You may not feel like you have the runway you need to overhaul your logistics operations, but President Trump’s proposed 60+10% tariffs could make doing business in China more costly. I’m sure you’re aware that it will take too long. You may also consider adjusting your Asia-based sourcing/manufacturing strategy to leverage alternative locations in Asia (such as Vietnam or Malaysia) with similar cost/production characteristics.
Having said that, it is likely that there will still be hefty tariffs that will hurt profitability. Investing in alternative locations in Asia does little to address the stability issues that have plagued the effectiveness of Asia-based sourcing since COVID-19.
Finally, for buyers who view “future value” as a key determinant of bid price, if target companies fail to drastically rethink logistics away from Asia in response to President Trump’s tariff proposals, “first mile” ”, the burden on buyers may become too large and the exit multiple may decline. .
3. Be aware of the nuances of nearshoring.
Moving manufacturing and imports from China to offshore outposts could have several benefits, including addressing the recent supply chain instability of securing goods from Asia. be. For companies looking to limit costs, Mexico remains a low-cost region compared to the United States.
But President Trump still promises to impose tariffs on both of America’s neighbors. While not as harsh as those imposed on China, any benefits derived from labor awards are likely to be nullified. Moreover, as the southern border remains a hotbed of political controversy, it may be wise for companies to explore regional alternatives that promise more stability.
4. Return to reshoring.
After 25 years of offshore outsourcing, President Trump’s tariff policy presents an opportunity to swing the pendulum back toward reshoring. Reshoring can serve both as value protection (relative to cost of goods) and as a source of value creation in an era of declining multiples.
More specifically, while domestic manufacturing/sourcing has cost implications, it also significantly reduces lead times (up to 5x in my company’s work with customers), greatly reduces inventory and Allows for associated liquidity increases. . Shorter lead times also increase speed to market. This is a particularly important factor for new product launches.
Additionally, the need to land may also act as a force to force operational/process re-engineering (e.g., simplifying products that previously required the import of China-specific parts). Finally, regaining domestic business can also improve the brand’s reputation in some markets.
This is true for both sides, apart from the fact that companies need to alleviate some very real reshoring challenges related not only to cost, but also to the availability of production capacity, technical skills, and quality assurance. It seems to be advantageous for Competence is the key factor here and can be the ultimate differentiator.
After 25 years of offshore outsourcing, America has even more limited manufacturing footprint, both in terms of equipment and expertise. In the immediate aftermath of the proposed tariffs, demand for these facilities will likely outstrip supply, making first-mover advantage a very real advantage.
Additionally, many products produced overseas have been manufactured overseas for many years. Replicating processes that took time to perfect into land-based production takes time, investment, patience, and training.
5. Reshore, Retain, Redesign.
For many companies, especially those in the early stages of the hold period, the best strategy will be a combination of the strategies listed above. More specifically, smart CFOs/COOs follow the “3R” rule.
• Where possible, re-land facilities and expertise as much as possible while production capacity is still available.
• Keep (or invest in) some overseas operations, looking from China and Mexico to alternative locations in Asia. By changing sourcing and manufacturing, companies can better avoid capacity issues and reduce vulnerability to strikes and other unforeseen disruptions that can disproportionately impact a single region. .
• Redesign manufacturing processes. Tariffs provide an opportunity to reexamine manufacturing programs, supply chains, and other business processes and explore where companies can reduce costs, simplify production, and find additional efficiencies.
The three Rs (reshore, retain, reengineer) provide a practical framework for PE-backed CFOs and COOs looking to navigate potential tariff policy challenges and seize opportunities.
However, the key to success is speed. These companies literally cannot afford to take a wait-and-see approach. Smart CFOs/COOs will now do more than plan scenarios. They will take immediate action to ensure a rapid response if the tariff proposals become reality.
The information provided here is not investment, tax, or financial advice. You should consult a qualified professional for advice regarding your specific situation.
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