Life is good today, unemployment is low while sales and profits are up for many companies. But, our economy is cyclical and there are already some dark clouds on the horizon that you should be thinking about and prepare for. Here are two that are in the news almost every night.
NAFTA – The potential dissolution or abridgement of NAFTA with our two key trading partners, Mexico and Canada, could have a serious impact for everyone on both sides of the borders. While it is good to have trade agreements with other countries that are fair, that concept is subjective to a certain extent and depends on who is looking at it. Nevertheless, the concept is, well, fair. But the dismantling of the agreement that is currently in place would affect a wide range of companies here in the USA. Companies that rely on deals with our counterparts in Mexico and Canada will have to re-examine the impact of any changes in the agreement on their P&Ls and on their ability to absorb undesirable increases in costs that may result. Of course, if costs go up and there is no offset available by improving efficiency then prices will have to rise. And, an increase in prices will drive some customers away. So, watch out and prepare for this issue.
Tariffs – Unlike the NAFTA issue, tariffs just make products more expensive and don’t encourage cooperation. So, if you have a foreign market in which you sell a product that is subject to tariffs then keep a close eye on this issue. Obviously, the impact of an increase in the tariff applied to your product will make it more expensive to your customers and they will be forced to look for less expensive alternatives. Similarly, for products you buy as raw materials from other countries, if the cost of those products rises, then you will need to determine at what point they will become too expensive. There may or may not be good alternatives. If you have to live with it, then at some point your prices will have to be increased and that puts a new burden on your customers. The world of tariffs is dark and dank. They quickly can get out of control and no one wins. But, in today’s world in the U.S. of A. this is a risk to be aware of.
So, what to do – the first step is to prepare for the possibility that either of these two ugly scenarios could become reality and create a contingency plan. You may have to create several “what if” analyses and contingency plans. Get help if you need someone who has experience doing this. Then Identify the customers and vendors who would be affected and strengthen your relationship with them. Eventually the storm will pass, and sanity will prevail. But, it might take a while. The 2nd thing you can do is to look for any structural changes that can be made to your internal processes or even to your facilities that can reduce costs and give you a better chance of taking some of the edge off these two plagues. Remember the old adage; hope for the best but prepare for the worst.