Trump’s “America First” trade policy has introduced tremendous uncertainty for global companies operating in the US with significant offshore manufacturing or import exposure. [1,2] Immediately after his election, global manufacturers urgently began to assess their risk to potential trade shocks, a task made more difficult by the lack of clarity about policy specifics in the GOP blueprint available at the time . Many of these manufacturing firms called on consultancies to help size the likely impact and develop plans to mitigate risks or take advantage of any new competitive opportunities. Companies with high exposure relative to their competitors developed contingency plans for a time when foreign sourcing and manufacturing might become a disadvantage. Conversely, domestic manufacturing supply chains that have yet to seize the opportunity for lower labor costs in other countries held a potential advantage over offshored competitors. Bain argues that the automotive industry will likely be hit the hardest by any changes to NAFTA or by the imposition of a border adjustment tax, given the extent to which those supply chains rely on goods manufactured or sourced outside of the US .
To illustrate the potential impact of these changes, consider Rassini, an autoparts producer headquartered in Mexico that primarily serves automakers operating in the US (e.g., Ford, GM, Toyota, Honda, Volkswagen, Audi) via manufacturing sites in Mexico, the US, and Brazil. US customers comprised ~90% of its total 2016 sales of ~$900M, suggesting a substantial portion of its revenues are vulnerable to policy changes under consideration by the Trump administration [5, 6, 7]. There is little consensus about the specific policy to be implemented, but for the sake of clarity, let’s consider a simple scenario revealing the impact that a 20% penalty, like the one Trump’s former White House press secretary suggested earlier this year, might have on the company if we assume all of their products sold in the US are manufactured outside its borders [7, 8].
This scenario may be unlikely, but it approximately bounds the worst case impact of Rassini’s US trade exposure and can serve as a helpful starting place for developing contingency plans. In the implausible event of a 20% tariff on the ~90% of sales in North America, Rassini risks becoming unprofitable.
Rassini has proactively taken several actions that help mitigate these risks, including:
- Shifting more production to the US by improving plant competitiveness in their Ohio facility, including new automation projects . By serving US customers with a domestic facility, Rassini reduces the share of North American revenue exposed to tariffs
- Strengthening global presence to become less reliant on its US customer base. Rassini recently opened engineering and customer service offices in Japan and Germany [4,5]. This will ultimately reduce the share of revenue exposed to US import penalties in addition to better positioning them to take advantage of growth opportunities outside of the US
- Improving operational efficiency: Rassini invested in modernizing its production to become more competitive globally, which resulted in savings of $1.6M last year . They also invested in “high-tech tools” and the “automation and robotization of manufacturing process in all of [their] facilities” . By improving efficiency, Rassini will have the option of passing only partial cost increases to consumers without necessarily hurting its profit margins
These are critical actions to ensure Rassini has a chance of remaining competitive with US manufacturers in the event unfavorable trade policies are imposed on Mexico, but they’re hardly enough to offset costs in the event of a more punititive tariff. Rassini should considers the conditions under which it may benefit from pulling the following additional levers:
- Increase prices: Rassini may be able to pass cost increases on to their customers, but doing so poses substantial volume risks if US-based manufacturers have more competitive domestic supplier alternatives
- Adjust supply chain sourcing: by considering alternative sources for raw and WIP materials for US manufacturing, Rassini may reduce its tariff burden
- Relocate Mexico facilities: shifting more production to the US can reduce tariff exposure, but at a high cost, not only to relocate facilities but also due to higher labor rates
- Consider M&A: acquiring a US competitor or manufacturing facility may enable them to serve US customers domestically and avoid the tariff
Given the uncertainty of the political climate and policy specifics, Rassini likely cannot yet justify the high cost actions mentioned directly above. However, to be in a position to act fast in the event policy changes are implemented, they need to evaluate bold potential mitigating options in addition to the incremental adjustments already underway.
Going forward, how should manufacturing companies like Rassini approach strategic decisions in the face of such uncertainty? To what extent can exposed organizations build in the operational flexibility to deal with change in the event new policies have a seismic impact on their existing competitive landscape? (800 words)
 Pankaj Ghemawat, “Trump, Globalization, and Trade’s Uncertain Future,” Harvard Business Review, November 11, 2016, link, accessed November 2017.
 Nick Timiraos, “Donald Trump’s Upset Ushers in Economic Uncertainty,” Wall Street Journal, November 9, 2016, link, accessed November 2017.
 GOP Blueprint, “A Better Way: Tax Policy Paper,” 2016, link, accessed November 2017.
 Rodrigo Rubio et al., “Is Your Supply Chain Ready for a Nafta Overhaul,” Bain Brief, August, 2017, link accessed November 2017.
 Rassini, 2016 Annual Report, link, accessed November 2017.
 XE Currency converter, link, accessed November 2017.
 Isabella Cota and Maria Levitov, “Mexico’s Peso Plunges as Trump Victory Casts Doubt on Trade Ties,” Bloomberg, November 8, 2016, link, accessed November 2017.
 Jeremy Diamond, “Trump floats 20% Tax on Mexican Imports to Pay for Wall, but Considering Other Options,” CNN Politics, January 2017, link, accessed November 2017.
 Morningstar, Key Ratios for Rassini SAB de CV A, link, accessed November 2017.