M2S Bikes

‘We Are at the Limit’: Trump’s Tariffs Turn Small Businesses Upside Down

The firm, which employs five people in Asheville, N.C., imports the bikes it designs from a factory in Jinhua City, China, and says it can’t find comparable motors in the U.S. The tariffs would add $425 to the cost of its bikes, which currently retail for as much as $3,250. The dealership idea is now on hold while the company tries to figure out a new wholesale price that dealers will accept and that won’t kill its profit.

The Trump administration says tariffs on thousands of items from ball bearings to circuit boards are designed to counter what it sees as unfair trade practices that give Chinese firms a leg-up over their U.S. rivals.

The U.S. has imposed 25% tariffs on $34 billion of Chinese imports, and on Tuesday finalized a list of $16 billion in Chinese imports that will be subject to 25% tariffs. U.S. officials have also said they are considering duties on $200 billion more. China has started to respond in kind and is threatening to impose tariffs on up to $110 billion of U.S. goods if Washington moves ahead.

The impact is now being felt particularly acutely by small businesses and startups. Broadly, this class of company, like others, feels good about the economy. But compared with larger operations, they have less ability to deflect higher materials prices or pass along new costs to customers.

Tariffs throw a wrench into pricing calculations and eat into profit margins. Smaller firms also are less able to shift production to other locations and have smaller reserves to draw on when times get tough.

Even those that benefit from a surge in domestic business are struggling to ramp up quickly enough to take advantage.

As a result, small firms selling all manner of goods, including high-tech light switches and the coated paper used to handle deli meats, are rethinking their strategies, suppliers, manufacturing locations and pricing.

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Large companies have mostly shrugged off concerns over tariffs, as lower tax rates plus strong demand has helped deliver larger than expected profit. Among smaller firms, optimism for growth fell in July to its lowest level since the 2016 presidential election, according to a monthly survey of more than 750 small firms for The Wall Street Journal by Vistage Worldwide Inc.

“The tariff makes us feel we need to take our foot off the gas,” said M2S founder Eric Crews.

Scott Yates, sales director for Smokey Mountain Trailers in Lenoir City, Tenn., says the firm has been hit with “materials surcharges” of as much as 7% on the trailers it sells. That is because of tariffs on steel and aluminum. As new higher-priced trailers arrive on the lot, the company is charging more for them.

“At the end of the day, the consumer is paying,” said Mr. Yates.

Brilliant Home Technology Inc., a three-year-old Silicon Valley startup, had planned to launch its Wi-Fi-connected “smart” light switches in September at a price of $249. The threat of 10% tariffs on Chinese-made electronics forced the 30-person company, which is backed by $21 million in venture capital, to boost the price to $299.

Brilliant Home Technology is raising the price of its “smart” light switches because of the threat of tariff-related costs.


David Paul Morris/Bloomberg News

Company co-founder Aaron Emigh said the latest proposed increase in tariffs to 25% put him in an even tougher spot and could force him to seek another round of funding earlier than he planned. “We are at the limit of what we believe we can charge,” he said. Moving manufacturing out of China isn’t practical, he said.

Some companies worry that parts and materials distributors are using the tariff standoff as an opportunity to raise prices. Adam Aronson, chief executive of Lilitab, a San Rafael, Calif., maker of tablet kiosks, said one of his vendor’s distributors has raised prices for aluminum signage materials ahead of actual price increases. Mr. Aronson said he is even more concerned about future tariffs on other imported materials and components.

Tusco Display, a maker of custom store fixtures and precision metal fabrications in Gnadenhutten, Ohio, laid off 20 contract workers at the end of the first quarter and furloughed 10 employees for a month in June. It put off plans to spend $1 million on a new system for washing, drying, powder coating and curing metal products.

Tusco is paying more for U.S. and foreign-made steel and aluminum. Tariffs are also adding to the worries of its retail customers, who are struggling to compete with Amazon.com Inc. and seem to be taking a “wait and see attitude,” said Mike Lauber, Tusco’s chief executive.

“Many of us have our heads down, working hard,” he said. At Tusco, “we are conserving where we can and redoubling our efforts to find new clients.”

Tusco Display, a maker of custom store fixtures and precision metal fabrications, laid off 20 contract workers and furloughed 10 employees for a month in June.


Celuch Creative Imaging

Aluminum tariffs are causing Nebia Inc., a San Francisco startup with 11 employees, to consider shifting manufacturing of its $399 spalike shower heads to Mexico from Minnesota, said Philip Winter, the company’s CEO.

“It puts us in a really tough place,” Mr. Winter said. The four-year-old company had already been trying to lower its costs and prices to boost sales. Now, he said the company is also looking into shifting parts away from aluminum, which accounts for 40% of its costs.

Scott Schroeder, president of RelianceCM, a small contract electronic manufacturer in Corvallis, Ore., says two of his customers have said they expect to move production to a Chinese manufacturer because of rising materials costs. The Chinese company would use the same electronic components as RelianceCM, but won’t face the same 25% tariff.

“We have fought and worked so hard to find a niche where we can compete,” said Mr. Schroeder, who has about 30 employees. “This has the potential to pull the carpet out.”

Nebia, a maker of shower heads, is considering shifting manufacturing to Mexico from Minnesota.


Marie Berriet

Some companies expect little impact from tariffs, either because their competitors face the same economics or because strong demand makes it easier to pass along higher costs.

“I expect to see our costs go up, but my local competition will experience the same increase so I am not too concerned,” said Brian Larson, owner of Amity Graphics Inc. in Bemidji, Minn., which imports more than half of the promotional products it sells from China.

If a price increase is a problem, Mr. Larson said, customers can pick another product that costs less. “It seems we can come out on top if we do the tariffs,” said Mr. Larson, who has eight employees. “I am actually pleased by this whole thing.”

Pak-Sher, a maker of food-service packaging with more than 200 employees, is considering moving some production back to the U.S. because of the tariffs. It had shifted production of plastic sheets used to handle deli meats and bakery goods to a contract manufacturer in China in November.

“We are doing a staffing assessment and a capacity assessment,” said David Kouchoukos, Pak-Sher’s chief customer officer. When Pak-Sher, of Kilgore, Texas, shut down the food-sheet operation, it redeployed workers and didn’t replace those who left.

At Short Run Pro in Belmont, N.C., which provides customized metal manufacturing services, business has picked up since the U.S. imposed tariffs on imported steel and aluminum because the company specializes in making “customized, one-off production runs” and products for niche markets that are less vulnerable to changes in materials costs.

“We have seen an increasing number of opportunities coming from U.S.-based equipment manufacturers that were previously sourced through overseas vendors,” said Scott Toal, Short Run’s president.

U.S. aluminum producers should be among those who benefit. The strong domestic economy and a surge in demand, however, appears to be straining their operations.

Merritt Aluminum Products Co., of Fort Lupton, Colo., is spending more time dealing with late deliveries, quality issues and other supply-chain problems as aluminum producers grapple with increased demand, said Taylor Merritt, its chief executive.

“Even just the anticipation leading up to the tariffs caused a lot of uncertainty in the market, and that uncertainty prompted users of steel and aluminum to start filling orders with domestic producers, which sucked up their capacity.”

In sectors where tariffs have yet to take hold, companies are stocking up ahead of expected price increases, which can be difficult for smaller businesses. David Wallace, president at 5th Avenue Energy, a six-person renewable energy firm in San Diego, said lighting fixtures and other Chinese imports have become more expensive and harder to find as large contractors build inventories ahead of tariffs.

Mr. Wallace said he can’t keep inventory on hand “because I am too small. It raises the bar on my risk.”

In the past 30 days, dozens of companies have asked for help reclassifying products hit by tariffs, said Jeff Jorge, international services practice leader with the accounting and advisory firm Baker Tilly Virchow Krause LLP.

Improper classifications, while common, weren’t much of an issue before tariffs were imposed because they didn’t make a material difference in costs, said Mr. Jorge. Other companies are looking at how to take advantage of foreign trade zones, which allow products to move in and out of the country with reduced or no duties, he added, or rerouting supply chains.

Altraco, a contract manufacturer based in Thousand Oaks, Calif., said one of its customers is considering moving manufacturing offshore, which will cut costs by avoiding steel tariffs.

“If you offshore it, the tariff goes away and the cost of the parts come down,” said Altraco co-owner Scott Williams, who has 18 employees and does most of his manufacturing in China. “The only people that are going to suffer,” he added, are the “U.S. workers that are currently making these parts. Their jobs will no longer be needed.”

Write to Ruth Simon at [email protected]

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