The proposals being made would fundamentally change the economics on a lot of business decisions relative to the development and build out of supply chains. One example is the proposed "Border Tax" which could be as much as 35% on imports. As the Wall Street Journal pointed out, President Elect Trump is even threatening a foreign company, BMW, with a "border tax" if they move production to Mexico. The Wall Street Journal reports toy manufacturers are struggling with what should they do in this age of the popular uprising against global supply chains. And, even Constellation Brands is "bracing themselves" for this tax.
For those deeply involved in global supply chains the question being asked is just exactly what should they do in 2017? Do they develop supply chains as if this is not happening? Do they retreat and prepare for this tax by re-shoring? Do they automate (keep plants in the US but eliminate people? All of these questions are up in the air and the uncertainty of whether the threats are real or just political positioning will cause supply chain investment to slow down.
Companies can do one of three things:
- Stop major investment and wait for more certainty.
- Continue to invest and "take a bet" where this will land
- Ignore it and fight it - risking one morning that the CEO wakes up one morning and finds their stock down 10% due to a pointed tweet.
So far what I think we are seeing is number 1 in action. When Ford decided to not move production to Mexico it really was not about moving jobs back to the US but rather about stopping production, leaving the investment half done and just using the current facilities they have.
When Carrier said they would not move production they did say they would automate. This has the same effect as moving.
In conclusion, I think a couple of things (non political, just economics):
- Global supply chains are here to stay and no one can stop them or revert them. How can toy manufacturers all of a sudden make affordable toys in the US? The infrastructure for the global supply chains have already been built. They are not changing.
- Any time you introduce economic distortion (i.e. a border tax or favoring one industry over another) you risk abnormal behavior in investment. Eventually this falls apart and a collapse occurs.
- When you threaten major disruption you force things to get put on hold until clarity emerges.
So, I believe 2017 could be a year of a standstill in terms of capital investment. Far more clarity is needed before major investments can be made. The job of the new administration will be to give that clarity sooner rather than later and this will allow supply chain experts to move on and continue to develop sophisticated and global supply chains.