Like more than half of Michigan’s manufacturers, business runs in the family at Grand Rapids-based Pridgeon & Clay Inc.
Third-generation owner Kevin Clay is taking cues from the company’s previous two generations of family ownership, while also looking ahead to chart a path to success for the supplier of automotive stampings. These days, that roadmap faces its share of uncertainty and threats from an escalating trade war and a series of metal tariffs imposed by President Donald Trump as part of his administration’s economic policy.
Pridgeon & Clay’s previous generations of family ownership have faced similar challenges in the past, including dealing with tariffs during the George W. Bush administration.
According to Clay, the company’s vice president of sales and business development, the current situation has cost the company in terms of margin and profits, and threatens to make executives think long and hard about investing in their hometown.
“We’re constantly under threat,” Clay told MiBiz, estimating his company’s current losses related to tariffs at about $10 million. “If this continues, quite frankly, there’s no reason that we couldn’t lose a major portion of the business.
“The raw material that we use to make parts is taxed, but the parts themselves are not taxed or tariffed. And it’s interchangeable to me: Tariffs are taxes.”
Last year, the Trump administration set nearly universal tariffs of 25 percent on steel and 10 percent for aluminum. That initiated a period of financial hardship for U.S. stamping shops like Pridgeon & Clay, which generates around $350 million in annual revenues. The tariffs have opened up direct competition from emerging markets like China and India because the policies artificially incentivize the supply chain to buy from lower-cost, off-shore producers, according to Clay.
“It’s a really awful thing for a lot of reasons. Here in Grand Rapids, it’s cost us quite a lot of business,” he said. “Secondarily, the working conditions and the human conditions in those areas are just really not something the industry should be proud of taking part in. It just opens us up to some very non-competitive situations, especially when some of the steel mills from these foreign companies are nationalized.”
Pridgeon & Clay is part of a much larger group of auto suppliers in West Michigan and around the country that are feeling the brunt of the tariffs, according to Steve Wybo, a senior restructuring and management consultant at the Grand Rapids office of Conway MacKenzie Inc., a turnaround firm.
“It’s on the minds of every CEO and every auto supplier in the world right now, but certainly in North America, just because some of these margins are thin,” Wybo told MiBiz. “If you’re a metal stamper or a metal bender of some sort, your input costs went up big time. They went up pretty sharply, almost overnight.”
The tariffs have increased all steel prices — from both domestic and foreign sources — which has helped the steel industry, according to Katie Roskam, a tax attorney at Varnum LLP.
“The North American steel producers have basically been given a green light to charge more or less whatever they want, and it will certainly help to bolster the steel industry,” Roskam said.
Nucor Corp., the largest U.S. steel company, reported record-breaking annual earnings last year, and the company said it expects its first quarter 2019 earnings to be much stronger than in the same period a year ago. Since the 25-percent tariff was imposed in March last year, the company’s steel prices have surged 21 percent.
Yet, Roskam fears steel tariffs and record earnings throughout the steel industry will cost “way more” jobs than they preserve.
“We’ve been very busy with all of this,” she said. “In most cases, with everybody I work with, they’re not calling me because they have an easy solution for doing this domestically.”
'Life over limb'
Affected companies can follow a procedure to request exclusion from the tariffs, but exclusions are only temporary. As well, the chances of those requests being granted are “slim,” according to Roskam. Some of her clients have “taken a deep dive” into the classifications of their products, she said.
Roskam suggests manufacturers with a global footprint ensure they are classifying the country of origin effectively for each product and utilizing free-trade zones, if possible.
“There are some strategies out there for trying to handle this, but they’re all really case-specific,” she said. “Trying to think strategically about all the things that can happen and trying to keep your finger on the pulse of the U.S.’s relationship with other nations is now more important to businesses than in recent years where things have been more smooth sailing.”
With no predictable end to the tariffs, tier-2 suppliers are reaching a ceiling where they will have to make “life over limb decisions,” according to Clay.
“Really, the only way to get around a section 232 tariff is to play by the rules that it has set forth, and that would be to move business to one of our foreign facilities and ship into the United States,” he said. “Because we’re a family-owned company and we still have a sort of moral compass, that’s not something we’re amenable to doing. We’ll struggle it out for our people.”
Pridgeon & Clay employs approximately 1,300 people globally, 900 of whom work at the company’s headquarters in Grand Rapids.
“I’ll tell you the next piece of capital equipment that you put in, you are very unlikely to put in America. And that’s the prudent decision to make — really the only decision to make,” Clay said.
Feeling the crunch
For now, Pridgeon & Clay and other West Michigan suppliers that use raw steel or aluminum must develop strategies to pass the costs along the value chain, according to Clay.
“It’s been a real necessary fight that we’ve had to have with a lot of our customers because, obviously, we are trying to pass through this cost and they clearly don’t want to, so it ends up being necessarily sort of a nasty situation,” Clay said. “This business is already notoriously tough. Adding these other external factors certainly doesn’t make it any easier.”
Ford Motor Co. and General Motors each have reported that to date, they have absorbed approximately $1 billion in tariff costs. These hits have also cost UAW workers an average of $750 out of their profit-sharing checks, according to Michelle Krebs, Detroit-based executive analyst for Autotrader.com Inc.
Ultimately, the price of the tariffs will be kicked on to the American consumer. According to Krebs, aluminum and steel tariffs have already added $200-$300 to the current sticker price of every new vehicle.
Clay sees that continuing to ratchet up as long as the tariffs remain in effect.
“At some point, we are partners in this and we’re all feeling the same sort of crunch,” he said. “Ultimately, it will have to end up in high prices for goods because at the end of the day, corporations don’t pay the taxes; the consumer ultimately bears the brunt of the taxes. That’s just how it works.”
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