#204: Tariffs and Global Supply Chains with Brian Nemeth of AlixPartners

Hello and welcome to the Leaders in Supply Chain and Logistics podcast. I am your host, Ruddopal Amaru, Group CEO of Elk with Global. Our mission is to connect the supply chain ecosystem by bringing forward some of the most interesting leaders in games. And I'm delighted to have with us today Brian Nemeth, managing director at Alex Partners, where he leads large scale transformations and turnarounds for some of the world's most complex supply chains. He has over 20 years of experience across industries like automotive, aerospace, heavy manufacturing, and logistics. And he is the go-to advisor when companies hit turbulence and need to move fast. He is known to combine deep operational expertise with sharp focus and execution to drive results that stick. And as many of you know, Alex Partners is a global consulting firm that specializes actually in urgent high impact situations when it really matters. Whether it's a turnaround transformation or navigating disruption that we have a lot these days. They work side by side with business leaders to deliver results on the pressure. Offices in 20 countries, deep expertise across industries. Alex Partners is known for rolling up their sleeves and getting it done not just recommending slides, but really driving outcomes. So it's my pleasure to have Brian today with us and thanks for joining us. Thank you, Ruddopal. Looking forward to the conversation today. And we agree that we would talk about the topic most interesting, hot and troubling and headache giving in supply chain for a while now, which is tariffs. And there's been all sorts of discussions and all sorts of updates as early as, you know, a couple of days ago. We don't know what will happen next, but maybe let's start first with what happened in the past because we've seen tariffs in the past. So let's start there and then draw conclusion to what could happen next in the future. So what happened last time there were tariffs. How did the company tackle that and then let's look there. Yeah, that's a good question because I think the one adjective to describe what's going on is is dynamic, you know, even yesterday. Additional news comes out on the reduction on the Chinese tariff side. So so one of the one of the things that we've done from the outspotner side is look at how the past kind of informs the future. And so when we look at what happened that 2017, 2018 period, there were tariffs, you know, single country tariffs with leads to just country hopping, right. If you put a tariff on China, then people moved manufacturing and production to Vietnam or Southeast Asia. And that's where you saw the increase. But there's one unique case study around washing machines where basically everybody received the tariffs. So it was really driving manufacturing to the US in this example. And so about 20 to 50% tariffs on on washing machines are most washing machines. And so so what happened was you basically had roughly $2 billion worth of imports in 2017, 2018 that dropped to 1.3 billion. And then what happened was the tariff eventually it expired in 2023. So the last year before the tariff, it was still in the 1.6 billion range immediately after it popped right back on its old trajectory went to 2.2 billion in 2023. So basically the tariff did drive the behavior that it was expected to drive the import drop significantly large companies, LG Samsung, they switched production to the United States. And they were able to produce in the United States the pricing went up and it went up more than inflation. So I think roughly the first year the pricing went up about 12% or so. But they were able to drive that behavior right the manufacturing occurred, but the second the tariffs went away. All the companies almost immediately went back to their old manufacturing locations. And immediately basically well basically it kind of stayed on the same trajectory would have went if it would have went from 17, 18, 19, 20, if you think about kind of what the growth would have been and went right back on track. And then what also occurred is the pricing immediately drops. We were looking at what happened to appliances during that time period. And inflation was in the 2 to 3% range, but general appliances were down 5. But guess what washing machines were down almost 11%. And so actually at the end of the period if you go to 24 basically the pricing is exactly the same as all the other appliances it came back. But during that tariff period prices significantly increased, but the manufacturing occurred in the United States. So it's a good case study to see that you know if you don't have a long term view on that tariff staying there right then what types of actions do you take right it costs a lot of money to to create a manufacturing plan or move a manufacturing plant from point A to point B. Is there something different this time around this time around was the sure kind of a global ass it just impacted everything every industry every country right. So I think that you know the scope of it was much larger the speed of it and and it wasn't as telegraphed I think it was I think it took people by surprise on how quickly and how large some of the tariffs were. That that for sure and and what do you see as the reaction of your clients how are they how are they coping now and still it's a bit of a limbo because it's not resolved yeah but what do you see as early early behaviors. So we're seeing you know pretty pretty large range right you're seeing a decent amount of people that are literally just playing the wait and see pay what are my competitors doing you know should I just sit and sit back and let this kind of settle a little bit or should I be taking action now right. There's an element of that but then there are very quickly it's which to kind of what should I do in the short term are their actions I could take immediately and so that's where we started seeing some some behaviors that you know supply chain experts we see like the bowl of effect right you see all these companies. Oh how do I bring cargo forward do I move stuff air freight do I start to kind of build up inventory until I have a better view of what's going on. So I think the initial reactions were around that is how do I bring in inventory ASAP until I have a better feel for what's going on and a lot of companies were saying hey if I haven't made a resilient kind of risk adverse supply chain you know back in the 2017 18 period or during that China plus one strategy period you know then what am I you know what do I do at this moment in time. And you know like you said I mean the big announcement was with China and US and and now it's been significantly reduced yeah I think it's 30% on Chinese goods and the Chinese are kept 10% on US goods I hope I'm not me speaking still like because there's also an element of first mover and the you know there's some advantages at the same time there's also disadvantages that you can make the wrong moves. And it also feels a little bit like and we're going to you know we're going to get this for another three years and a half at least or it's my opinion it's not a fact that subjective personal opinion this administration is not to necessarily be trusted for taking a very long term or sustained view on things and there's changes from one week to the next so it's almost it becomes almost like the new norm is. Prepare for unexpected daily right so what do you do you achieve supply to the chief operations office how do you even think about this. So I think there's a few a few things right and this is kind of a long question to unpack right there's the what do you do how do you react to this news of yesterday which I think this is great for supply chain professionals who took the ops courses during their MBAs or undergrad right the ball at the fact in the in the beer game if you remember those. Those games right where everyone in the supply chain couldn't talk in the demand signal kind of was given in it in it basically remain the same and change once we're going to see this all play out in full effect I think that announcement yesterday i'm sure the container shipping lines were very happy to hear that the the tariffs reduced because now basically all those ships all those orders are going to kind of there's going to be huge Russian the next 90 days to bring all this freight in. So I think you're going to see air freight and ocean freight they're going to go potentially crazy again I can see the spot market skyrocketing everyone trying to bring volume in ASAP and then you're going to have similar effects to what happened the COVID right you're going to have this huge congestion at the word reports which is going to create huge congestion at the destination for its which is going to create equipment shortages at the destination locations and it's going to kind of you know move up and downstream again and we're going to see this kind of this is what I mean by the bowl of effects it's always. It's all going to come and then 90 days after if there's no deal then it's going to stop again and we're set right and so I think that. Understanding kind of that these things are going to occur in an excessive communication and I think there's a lot of learnings from the tariff time period that the supply chain officers and supply chain managers can kind of take into account of extra communication hey this is a huge risk this is potentially happening prioritized the purchase orders you. On the ship prioritized the purchase orders that we can afford to air freight let's take advantage right now that the the tariffs are reduced a lot of companies were bringing product into bond and so for those who don't know it exactly that means right you could bring your product in to North America physically but it hasn't entered the United States because it hasn't cleared customs right. all the bonded facilities probably in the United States right now. how I have an excess amount of inventory. And they're all probably about to release it. I'm gonna take the 30% 'cause I don't know what's gonna happen in 90 days. And so you went from probably a lack of bonded facilities. Now the bond of facilities are probably gonna have a bunch of supply to get a flow to the warehouse. But then you have people potentially looking to bring some of the product coming in and bond, right? And so you have all these little levers and different aspects to take into account. But I think the most, if there's just one takeaway from this, it's communicate, communicate, communicate, because I think executives have a much better understanding 'cause of COVID about what could happen, right? As a result of all the cost increases in congestion. But I think it just requires constant communication. Hey, there's a lot of concern. We went from shit to being canceled to now all of a sudden, which is gonna be very difficult for us to even get a booking. And oh, by the way, it might be hard for us to get what used to take two days to get our container out of the port, might take a week or two. And I think if you can do that now, you start to prepare people and you allow people to make decisions. Like one of the things we did or are doing with clients is setting up a tariff war room. And what that means is just getting everybody on the same page on the implications, right? What does it mean for our cost of goods? What does it mean for our inventory on hand? What's the total cost of the ownership and how does that link to the bill of materials? And basically getting all the functions together. And so everyone understands the implications. So there's no surprises. And so this alone is, it sounds so simple on the surface, right? Like everyone should just be aligned on the implications. But the reality of that is it can be hard to do. And especially when you're doing it cross-functional with different areas of knowledge and expertise. But this is an area where, you know, we've seen that there's a lot of value to be added on this piece. Yeah, no, I mean, for sure. And I'm, I mean, I'm nowhere close to your level of experience. And but the comment complained that I hear from Chief Supply Chain Officer in Chief Operations officers is, well, the CEO and the board doesn't understand supply chain. They don't understand the implications. They, you know, they don't understand how X connects to Y and they haven't played the beer game. They don't, they might have drank beer, but they didn't play the beer game. So they don't understand the implication of bullwhip and all of that, those good stuff. And I'm almost, you know, maybe back to where we started with the washing machine example that you gave. How do you think it's going to play out this time? I mean, we're reading the crystal ball because nobody knows. But, you know, what's your take? Brian. I think it's just going to, there's going to be this volatility. I think that if you look at the reaction to the tariffs, it's creating another reaction or a counter reaction, right? And so good or bad, it's having an effect. And so what I think will happen is they'll keep popping up until they no longer have an effect. And so what it leads to is, is you just have to be nimble and extra communicative, right? Like, okay, it's 30% today. But what happens in 90 days if they don't solve something and it goes up to about 100? What are you going to do, right? And I think the scenario planning is another aspect of this is fly chain managers. We have to do that all the time, right? What happens to vessels a week laid? What happens if our vendor doesn't deliver on time? What happens to vendor only delivers 80% of the order instead of 100%? You need to kind of have this scenario planning in the back of your head. And again, it's constant communication. If I was a chief supply chain officer today, I'd say, assuming we get space, this is how much inventory we are going to be able to bring in the next 90 days. This is, we know what the tariffs going to be in the next 90 days is the goal then from the executive team to bring in as much inventory as humanly possible. Or do we want to kind of dollar cost average and bring in some and then wait and see what the outcome is because what happens that goes to 20%. You can go down or you can then go back up, right? And so you just don't know. And so again, it comes down to communication and telling your fellow functions and executives, this is what I'm able to do. And you now have to tell me kind of tactically how you want me to execute off that. I'm just simplistically, right? So and I might be wrong and I might be oversimplifying. China has done that. It's just created ecosystems, manufacturing ecosystems like nobody else, right? So clearly, there's been some decoupling or there's been some things happening Vietnam, some things move to, but India, there's Apple move. I don't know what in India, most of those components in which come to from China and I just assembled in India. So in reality, I don't see how China's role is the world's factory is going anywhere. Nobody can challenge that. And it takes time to put a factory and skill and expertise and investment to put a factory in US. I just don't see how that is going to happen. So irrespective almost of like, how are you going to bring back manufacturing jobs in the US? It's like it to me, it seems utopic. Unless you want to put robots and automate fully, almost the factories. And even that takes a while. I mean, it takes one, two, three, four years if you're good. How are we going to do that? So to me, it seems like inevitable that we're going to stick more or less back to the scenario with the washing machines. You're going to pay more as long as the tariffs are there and then once the tariffs are out, you just go back to, or am I wrong? Or am I oversimplifying? Love your view. No, no, I actually think you're right. It's always going to end up going to the most cost-effective solution. And I think there are certain aspects. That's another finding from that 2017-18. There were tariffs put on toys. And if you look where toys are manufactured, it's actually that's in the news even now, right? You just heard this thing about the dolls and all this other stuff. Tariff on toys. I think I might not be exact on these numbers, but order of magnitude I'm there. I think China had like 99% of the toys that were imported in the US. In '18 they put the tariffs on. To this day I think it's now, they only have 97%. And Vietnam went up a lot, right? So even with the tariffs, the expertise, the capability, it still makes sense, right? The price goes up, but there's still not a better place or a better option at the moment. And so China still has its role to play. So I agree. I think one of the things I've been hearing is this, it was China plus one, now it's China plus two. So now it's, again, it's diversifying where you source from and making sure you have additional options. I think the other thing that's come out of this is a lot of our customers are asking to go further and further up and downstream. They want to say, OK, I understand, and I think in the automotive industry, they have a better understanding of this. But in other, like if you do a parallel, it's like, oh, where did the cotton come from? Or where did the raw materials come from? So they're going further back in the supply chain to try to understand kind of how dependent they are on certain countries, certain locations. And do they need to make partnerships with those suppliers? Or do they need to diversify that base? Like, hey, can that raw material only come from China? Or can it also come from Bangladesh or whatever the place may be? And the answer to your last part about the US, it's interesting. We have a very strong manufacturing team as part of our overall operations practice. And one of the things that we're being asked is that is a lot about automation, right? So it wasn't about bringing necessarily jobs or different jobs, you're going to need engineers instead of the traditional factory labor. Because the people who have been reaching out to us saying, hey, we want to potentially start a plant in the US, kind of what can we automate and what needs to be done manually. And if you create automation, then again, you need high education engineers and technicians to be able to maintain and tweak and operate the robots and the automation appropriately. But they realize the fundamental issue. And as you know, I've been living in Asia for a long time, I speak to executives almost all. I dare say, CO, CSCO, CEOs that I talked of global multinationals. I mean, when I ask them what's your best run operation, they say China. I like-- OK, maybe not all, but a lot of them say that. From operations, manufacturing, best advanced factories, just the work ethic. You name it creativity, innovation, constant and relentless pursuit of getting and doing better. You go to China if you've been there recently. I mean, people say it's five years ahead of-- is living in the future now. I just don't say-- and I'm European. I'm Western. I mean, I'm clearly-- I mean, it's taken me a while to appreciate the Asian style, the Chinese style, for sure. But I'm struggling with how do you even compete with that run? They are the number one. They installed more industrial robots last year than the whole world combined. I looked at some data. It's more industrial robots that have been installed in China than all the world, all countries of the whole world. How can you get to a point where it's even feasible to think you can catch up? It might not be a matter of catching up, right? Obviously, the tariffs are a tool that's making it uncompetitive, right? And me now sitting in Europe, moving from the US, sitting in Copenhagen, I'm looking at this and going, now the tariffs percentage has changed. But let's say it stayed. That would be all right. all these suppliers in China with all this product, where is it going to go? I assume the first people you call, that was what's your European consumption. And you go, hey, I have all this great inventory. I'm willing to offer you discount and send it to you. And then what happens, right? Then the you potentially goes, well, maybe there's an anti dumping. And then you kind of run out of places to go. So I think the, you know, that's the alternatives are one is it is the best, but people get afraid of that. And so they look for alternatives. And when they look for alternatives, then what it leads, I think a country like China is, and you already seeing it, is they go to Southeast Asia, they go to other countries, they apply that technology and they kind of just lever it in another locations and still find ways to take advantage of it. I think when I worked in Vietnam with Merck, you know, in, you know, 2004, five, six time period, right? They basically, I think it was Taiwanese owners of Chinese factories recreating their Chinese factories in Vietnam and bringing their Chinese workers to Vietnam to trade the Vietnamese workers. Right. So you have this transfer of knowledge. And even now, you're hearing about factories full. Full. No, there's no Vietnamese. Full of. Yeah. And they're being moved even to like Mexico. So you're here saying factory X was here. It's going to take us 18 months. We're going to move literally the whole factory and teach the people how to do the work over in location X. So I think what you'll start to see is that type of thing. Like if you can't, if they can't find a way to get it out and it's better than everything else out there, they'll find other ways, right? If it's not direct, they'll find other ways to get to take advantage of the technology they've created. Yeah. What does it all mean with the terrorist for companies that are not US centric in their trade? Yeah, that's the, it's been again, a big question for me sitting in in Europe. A lot of them, you know, a lot of the, a lot of the European companies that have probably less than 30% exposure to the US and revenue or profit or whatever it is. Most of them are to saying the wait and see method, right? They're just saying, I'm going to watch, watching my competitors do some of them front run some inventory to make sure they got it over. Some of them are saying we have enough inventory will, will kind of wait it out. So I think in the short term, they're basically going to kind of play this wait and see method, which to me makes sense if you're not overly indexed to the US, you know, you're, you're careful on what you're bringing in the US. And it goes back to my last comment about like this potential, hey, Europe, look at all this product I have. I would be very opportunistic the other way if I'm a European based company to say, hey, I, you know, I'm already sourcing a little out of China to this. How do I front run and take advantage of a really low, maybe run on my product and take advantage of a low cost opportunity, right? It's kind of seizing, seizing the moment to take advantage of it in some warmer way. Yes. No, definitely a lot of a lot of wait and see. I think it's a, it's, it's almost the whole market is kind of holding its breath. And, and also by the way, investments in the US have stalled. I know a couple of companies that have publicly declared astronomics to some extent amounts of investment in the US. And then let's say that the European companies and then a prime minister or president said, hey, look, let's, let's see first what happens with the tariffs. And then you go ahead with your investments or not. I actually, I mean, I'm not going to name it, but there's a few cases like that. So I think it's just stalled everything and or a lot of a lot of different projects. Unless you're really, really sure that it's going to make sense in five years, you don't do it for now. Yeah. Well, we talked, I mean, we talked about something, you know, we previously spoke. If in 2017 and 2018 you built kind of your own resilience supply chain and you took this seriously, right? Your well positioned in the current environment, right? If you have, you know, duplicative manufacturing and multiple geographies, right? You can flex up and down and handle these things. And so maybe one of the outcomes of this instability or instability or uncertainty is is supply chain managers, which I probably struggle to get funding for their ideas because they, you know, executives historically thought it was a luxury. Maybe this is another moment in time where they can polish off our dust off that business plan and say, hey, maybe we should do things a little bit different because the world keeps changing at a rapid pace. We got burned once. We've now getting burned twice. This plan, I think is still still very valid because if we had it, we wouldn't have burned burned the second time. So maybe it's time to revisit it, right? And so I think that's another thing that we're trying to get on the radar of our customers is, you know, if you're in, if you're a healthy company because that's the other thing we didn't talk about. There's some companies that literally this is like a, you know, a huge blow, right? You know, that never cut boxing, that shell shocks you, right? Like, like for some of them, like they're moving to cash preservation, very different. But other companies are like, oh, I used to make 25% even now. I'm going to make 18 or whatever. Those types of companies might look at it and say, we're fortunate enough. We have capital. Let's think through and let's make sure we're not exposed again. So we don't have to run this fire drill again. And so I think we're looking for those types of companies as well to say, let's, this is a multi-year journey to build up the resiliency. But once you have it, when these things pop up, you know, we're able to say, you know, it's okay. We built a model that allows us to have the flexibility to handle this. And we know the implications to our business. Yeah. Final question from Brian. Recession, do you see this impacting in any way? We have, we haven't had one proper one since 2008. Do you see this triggering or already some potential early science or, you know, some, because like, let's take toys. Yeah. If you're most of the companies that sell toys and not necessarily toys are as size of multi-billion, you know, there might be a couple of million, the margins are not that high. Now if, if now you go ahead with the tariffs of 130%, you basically don't have any margin. You're basically already in a loss. You might not have the cash. You might have gone bankrupt already, even if now it's back to 30. It might be too late for you in a small and mid-size enterprise. I don't know how many of such companies exist. It exists, but there's, you know, there's a possibility that there's enough in not only in toys. I guess there's a number of other factors who's paying for all this. Now it's going to be a rush again to book tariffs. To book cargo, you're going to get the higher price of logistics tariffs. By the way, you just said, clearly, the customer base for the tariffs is not, is not somebody else. You end up paying more hands. You buy less stuff because you have less money. So how is this, does this old plane to a recession? Do you see any risks that are now aggravated or not so much? Yeah, I mean, I think on the macro economics, I'm reading the same news as you write. And so the signals are, is that's the path, right? You hear agencies saying that we're potentially, you know, you know, looking at signals at a global recession, let alone one in the US. But again, I think increased pricing going into the holiday season on things people buy for the holidays is going to make it challenging, right? Yeah, to me, I would definitely be concerned about it because then you also get like this vicious cycle versus the virtuous cycle, right? Like, you're already seeing kind of sentiment, consumer sentiments coming down, right? Because of all this noise in the news. But again, it whips, it whips back and forth so quickly. I bet you, if you survey people this week, now with the new news about the tariffs being reduced on China, you might get a whole different perspective. But if you would have asked me last week, I would say we're on the way to a recession. Now you will use yesterday, maybe maybe there's a way out of it, right? That's the world we limit now. You have to be careful what you say, we have this time stamp it. I made this comment on it. Just in case someone's like, see what he said. The world has changed in the last 34 hours. Now that's fair. And I guess to your point, and then to live this thought with all this does, but it is take it as an opportunity to, because we do have short memory and companies do have short memory, take it as an opportunity to really build a long-term resilient supply chain to really double source, triple source, multi source, to really have the fundamentals, right, as opposed to what's the cheapest cost possible that I can get things at. And then you end up buying from the same vendor that is, by the way, all in the same place in whatever location it is. And then if it is impacted, then you are going to get impacted. Brian has been a great conversation. Thanks for sharing. Good luck with all the work. With the clients, I know you're going to be working non-stop, I think, for the foreseeable future, because destructions will continue. So hang in there. Thanks, Radyo. Yeah, it's been, it has been a pleasure. And yeah, we'll see how these comments kind of play out over time. We'll see you at six months. Exactly. You listen to it. Thanks, Brian. Thank you. Once again, this is Roda Palomario. Thank you so much for listening to this "Leaders in Supply Chain" podcast episode. If you're listening it on iTunes, Spotify, or any other channel, we'd love if you leave us a review. And of course, share this with anyone you think might enjoy it. Thanks again for tuning in and I'll catch you next time.