How the U.S. Tariffs on China are Impacting Capital Projects

Posted on: May 25, 2019 Posted by: Greg Madhere Comments: 0

How the U.S. Tariffs on China are Impacting Capital Projects

The escalating trade war between the United States and China is having a ripple effect across many industries, creating new challenges for those caught in the middle trying to provide goods and services at home and abroad. From small businesses to large enterprises, many are feeling the increased tariffs placed on China impacting their planned and in-flight projects in 2019.

Capital projects requiring equipment manufactured in China are now costings OEMs more to produce. Many, if not all, are passing those costs down their chains resulting in higher price tags for projects in flight. While some organizations allow contingencies for unforeseen events, there are countless others who have kept very small margins for error in their budgets, and are immediately feeling the sticker shock of their planned investments. Some may even delay or cancel projects if the ROI no longer makes senses. Others will have to tap their contingency reserves, or request additional funding to cover costs via project change requests. Projects will need to be reassessed, re-approved, and those approvals can often take time depending on the size of the organization and how streamlined their processes are.

Even the best project risk management practices can’t anticipate all risks, especially external dependencies like global trade wars taking effect midway through a project. However, it proves how integrated the world is and how these risks can manifests themselves.

Mitigation strategies can include:

  • Identifying the potential external risks and listing them in risk registers so they stay on everyone’s radar, even if there’s low probability. The potential high impacts to the projects are why they are listed. If they do come to fruition, there should be no surprises.
  • Always budgeting enough reserve for capital projects when possible. What’s enough? Obviously it depends on the unique nature of the project, but in a world where supply chains are becoming increasingly complex and intertwined, 1.5 to 2x what is thought initially to be enough reserve might negate the impact to your projects later on.
  • Working with vendors and suppliers who have multiple sources for products. This is a bigger challenge in this case because a significant amount of technology hardware is being manufactured by China these days, which highlights a global risk factor by tech companies who sell their customers daily on how reliable their products and services are. Yet, the tariffs on China are clearly illustrating a single point of failure for their supply chains.
  • If planning capital projects for the following year, ordering spare equipment to lock in costs could provide some risk mitigation, however, it’s not a favored approach due to asset depreciation. Not to mention, projects get cancelled for various reasons and having large amounts of unused hardware is rarely a good thing unless there are production equipment failures.

While large enterprises might be able to absorb the higher costs for products manufactured in China, small to midsize businesses are likely the ones to feel the pinch on a wider scale. For many startups and midsize organizations , these capital investments would spur their growths, but thinner budgets than their enterprise competitors put them at a serious disadvantage to keep these projects in flight or to deliver the expected ROI. Given that small businesses are the backbone of the U.S. economy, potentially stunting their growth could have detrimental longer term impacts.