Managing Director of Supply Chain Institute Provides Expert Opinion to Bloomberg

Sunday, June 30, 2019TOPICS: Research

Joel Sutherland, Managing Director of the Supply Chain Management at University of San Diego
begin quote'The smaller companies have a significant problem,' says Joel Sutherland. 'We have an administration that says one thing today and does something else tomorrow, which poses tremendous risks.'

Article as it appears in Bloomberg

Raising prices to offset the cost of tariffs could hurt sales, and if the standoff worsens, Amazon also could be affected.

Over the past several years, Shanghai entrepreneur Yung Lin has built a decent business selling wrenches, screwdrivers and other tools on Amazon.com. Then President Donald Trump imposed tariffs on thousands of goods made in China, and Lin faced a difficult choice: eat the additional cost or try and pass it onto his mostly American customers. He chose to raise prices and watched sales of some products dive by as much as one third in just two weeks. 

Amazon.com Inc. merchants around the world are scrambling to navigate an unpredictable trade war that’s upending their proven business model of buying inexpensive goods in China and selling them at a markup in the U.S. The problem is particularly acute now as Trump weighs another $300 billion worth of tariffs, many on consumer goods.

Mom and pop sellers won’t be able to wait for Trump’s decision: They have to place factory orders now and figure out pricing if they want to get their goods made in time for the lucrative Christmas shopping season, when they make as much as half their annual revenue. The most obvious solutions—raising prices, shifting production to other countries, stockpiling inventory—all have costs and complications of their own.

These businesses—many of them one-person shops—are especially vulnerable because they lack big companies’ wherewithal to ride out the uncertainty as well as the negotiating power to shift tariff costs onto their suppliers. “The smaller companies have a significant problem,” says Joel Sutherland, Managing Director of the Supply Chain Management Institute at the University of San Diego. “We have an administration that says one thing today and does something else tomorrow, which poses tremendous risks.”

Amazon is more insulated than the merchants in the near term but it too could take a hit if sales slow and cut into the commissions and fees the company charges merchants to use its online store. The shares were down less than 1 percent at 12:08 p.m. in New York.

Much depends on whether the U.S. and China can come to terms. Trump will meet Chinese President Xi Jinping for the G20 summit in Osaka, Japan, on June 28-29, and both sides have agreed to resume trade talks after a weeks-long stalemate. But even if they hammer out an agreement, the trading relationship between the world’s two largest economies probably will never be the same.

“We’re going to assume the tariffs are here to stay,” says Chuck Gregorich, who sells China-made hammocks, patio furniture and 2,000 other products on Amazon. “We can’t have this happen in a year or two and get caught with our pants down again.”

Like many other importers, Gregorich tried to move up orders early last year to beat a Jan. 1 tariff hike on Chinese imports from 10% to 25%. He wound up spending an extra $400,000 on shipping only to see the tariff hike delayed. Burned once by the guessing game, Gregorich  is looking to shift about 30% of his production to factories in Vietnam and elsewhere. He’s not alone. Many other Amazon merchants are considering having their goods made in India, Southeast Asia and Central America. 

Michael Michelini relocated to China from New York in 2007 to make Italian coffee presses and upscale bar supplies for U.S shoppers. Eight months ago he decided to move with his wife and kids to Thailand, where he’s working with a new factory to develop a line of high-end kitchenware. “Now when I think of China, I think of ...

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Renata Ramirez
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