Markets

US companies are preparing for pain ahead of tariff hike: 'I can't sit here and cry'

Key Points
  • Management teams at a range of American companies bemoan the effect the U.S.-China trade spat is having on business and supply chain costs.
  • The disputes are "something we have to manage. I can't sit here and cry," says Emerson Electric CEO David Farr. His stock is down 6% this week.
  • But it's not only manufacturers and durable goods makers. Semiconductor executives, too, are critiquing the trade war.
Workers produce some of the specialized valves at Emerson Electric Co.'s factory in Marshalltown, Iowa, July 26, 2018.
Timothy Aeppel | Reuters

Executives at some of the largest U.S. companies are steeling themselves for higher prices and worried customers ahead of a stricter tariff regime on $200 billion of Chinese imports.

Management teams including those at industrial equipment manufacturer Emerson Electric, semiconductor developer Microchip and toolmaker Snap-On all lamented the impact the U.S.-China trade dispute has had on their business this week.

And now, with President Donald Trump threatening to hike the tariff rate to 25% from 10%, they're hoping to pass nearly all of the burden on to the American consumer.

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In a tweet that took many on Wall Street off guard, Trump said Sunday the U.S. would increase levies on $200 billion of Chinese imports starting Friday. Those tariffs, which the administration first implemented in 2018, are set to jump to 25% from 10% Friday morning.

The taxes impact a wide variety of goods, ranging from pumps and turbines to electrical and computer components.

The announcement stunned many investors, who'd expected the U.S.-China trade deliberation to finish on a positive note this week after months of tamer dialogue. Traders punished equities in turn, sending the Dow Jones Industrial Average down more than 650 points so far this week.

The broad S&P 500 index was down about 2.5% week to date at the time this article was published.

The week's losses — currently the worst since the 2018 Christmastime plunge — were likely the impetus for a number of comments by and questions for a slew of S&P 500 companies that reported financial results this week. While many CEOs took the opportunity to explain to shareholders the plans to soften the blow on their post-earnings conference calls, others were more blunt.

The trade disputes are "something we have to manage. I can't sit here and cry and hold my breath. I've got to deal with them," Emerson Electric Chairman and CEO David Farr said Tuesday on his company's earnings conference call. "I still believe we'll get a deal done. I think the issue really boils to — I think both parties are testing each leader on the give and take."

"I'm glad to hear they are going to go ahead and meet this week. But I think this is going to go back and forth a couple more times," he added.

Emerson Electric, which manufactures products and provides engineering services for a wide range of industries, said its global manufacturing end markets saw slower growth in part thanks to inventory rebalancing in the U.S. from last year's tariff impacts and price increases.

Toolmakers Stanley Black & Decker and Snap-On said they're taking steps to ease the pain of higher supply costs as a result of the Trump administration's tariffs. Stanley Black & Decker CEO James Loree said his company's been raising prices for consumers to help offset steeper input expenses.

"When you finally add it all up, I mean, the price recovery against the tariffs only amounted to about 40%, or between 40% and 50%," he said on April 24. "So there was a big chunk of inflation-related cost that was not covered by the price as well as some of the tariffs."

Wrenches dry on a hanging rack after receiving a chrome finish on the production line at the Snap-on Inc.
Luke Sharrett | Bloomberg | Getty Images

Snap-On Chairman and CEO Nicholas Pinchuk echoed those sentiments, saying the Kenosha, Wisconsin-based company is facing materials headaches.

"Look, the last quarter, we had a bunch of headwinds; tariffs were one of them," he said Tuesday. "U.S. steel costs went up by 25%. U.S. plastics went up by 10%."

"I would say this about tariffs: The longer tariffs are on the horizon, the more you get to avoid them. And that's our job," he said. "So, even if you're being dinged a little bit by tariffs, you figure out how to mollify them."

Emerson Electric, Stanley Black & Decker and Snap-On are down 6.1%, 7.2% and 2.1%, respectively, this week.

Meanwhile, Polaris Industries CEO Chairman Scott Wine told CNBC earlier this week that the planned tariff hike would be "catastrophic" for American industry.

"At 25% it's downright catastrophic in terms of impact on the company and employees," Wine told CNBC's Morgan Brennan.

Polaris has continued to pursue an exemption from the U.S. government on China tariffs, and Wine said he remains hopeful that will still happen.

But it's not only manufacturers and durable goods makers that are feeling the pressure. Semiconductor executives, too, bemoaned the trade war for its crippling effect on the industry's ability to forecast sales and tweak pricing.

Executives at Microchip Technology, a $21 billion semiconductor company based in Chandler, Arizona, said earlier this week that the latest trade developments have people wondering whether to shift where they do business.

"Just imagine if you were a supplier. And you didn't know whether you'll be able to pass on a 25% tariff increase to your customers. Whether your customer will then choose to buy that product from Korea or Taiwan or somewhere else and not from the Chinese supplier," Microchip CEO Steve Sanghi said.

"A lot of our U.S. customers are impacted because of the same trade issues," he added. "Industrial customers build a lot of their products in China and are having to pay the tariff costs."

The VanEck Vectors Semiconductor ETF, which tracks a variety of U.S.-listed chip stocks, is down more than 5.7% this week, on pace for its worst week since December.

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