Strategies for Surviving the US – China Trade Wars

Trade War 1

Trade War 1The U.S.-China trade war which started in 2018 is having an impact on the global economy.

If you are an Amazon seller wondering if the U.S. – China trade war is impacting online sellers, the answer is a most emphatic yes

The United States continues to increase U.S tariffs (taxes on Chinese imports), with U.S. tariffs of up to 25%, that could be permanently applied to a number of Chinese imports.

China unveiled on August 23rd,  retaliatory tariffs against about $75 billion worth of U.S. goods, (which include many of the everyday products sold on Amazon), intensifying the ongoing trade war between both countries.

The escalating trade war between the United States and China is leaving many Amazon merchants wondering how to keep their businesses afloat. Companies and small business owners that are selling products through Amazon will have to pay tariffs if they are importing their goods from China. 

Amazon merchants around the world who rely on a business model of buying inexpensive goods in China and selling them for a higher price in the U.S. are scrambling. 

They are faced with the decision of whether to place orders with their Chinese manufactures now and determine pricing later, in order to have the inventory they will need for the lucrative holiday shopping season, which can in some cases, comprise as much as half their annual revenue. 

While the tariffs will impact retailers both big and small, many merchants are one-person shops that cannot wait it out and are especially vulnerable because they lack the larger companies’ wherewithal to ride out the uncertainty, as well as their negotiating power to shift tariff costs onto their suppliers.

Smaller and one-person sellers who aren’t diversified in terms of the products they offer and the countries from which they obtain them, are at a serious disadvantage, because they don’t have the flexibility to quickly roll out new strategies to contend with sharp increases in their costs the way larger businesses can. 

This dilemma is particularly acute now as the administration weighs another $300 billion worth of tariffs, many on consumer goods. 

 

Amazon has said little publicly about the trade war. 

It wasn’t among 600 businesses including Walmart and Target that wrote the Trump administration recently seeking an end to the trade war because it’s bad for US shoppers. However, Amazon is a member of the Internet Association trade group, which signed the letter.

 

Amazon as a company will be impacted since some of their products come from China. 

While Amazon is more insulated than most merchants in the near term, it too could take a hit if merchant sales slow, cutting into the commissions and fees that Amazon charges merchants to use its online marketplace platform. A decline in sales could also limit the amount of work available through Amazon distribution centers.

While the company hasn’t said much about the trade wars, they are aware that companies of all sizes are having to adjust to the increased costs. They are willing to work with vendors to help make the adjustments as smooth as possible. Amazon has agreed to pay some vendors up to 10% more for products affected by tariffs.

However, this help will only apply to products that Amazon purchases wholesale and resells itself. Third party sellers that sell directly to consumers on Amazon’s marketplace will still have to take on the tariffs on their own. 

 

What US Amazon Sellers who rely on imported Chinese goods can do to offset the increased costs incurred from the current tariffs…

Trade War 2

In order to continue importing goods from China to resell, sellers will either have to take on the taxes themselves and watch their profit margins shrink, or raise the prices of their products, which will cause consumers to have to pay more.  

Many Amazon sellers are currently opting to raise their prices.*

Raising product prices seems both a logical and counter-intuitive response at the same time.

By selling their products at  higher prices, sellers are able to earn back a portion of the costs to import those items.  However, consumers now have to pay more for products that were previously available to them at a lower cost. It seems likely that sellers will experience declines in sales as some consumers struggle to afford the new price points.

Some Amazon sellers have been considering other options, such as simply buying and importing as much stock as they can ahead of the higher tariffs due to take effect in October and later in December. 

This would allow those sellers to keep their prices the same, trading off cash flow and storage costs, while locking in a lower tariff component of Cost of Goods Sold. However, this could backfire on them if those products don’t sell and they end up with a storeroom full of purchased merchandise that nobody wants. 

*(Sellers should look to protect their Buy Box percentages. Be careful not to increase your product prices above list prices, as doing so can keep you out of the Buy Box altogether.)

 

Another alternative is to source products from other countries to avoid the new tariffs.

There are a number of firms that specialize in global manufacturing and supply chain management, sourcing away from China to Mexico, Vietnam, and India, but is this an effective strategy for Sellers to sidestep the current tariffs? Unfortunately, these countries and others will take time to get up to speed and become real contenders. 

For sellers with little product differentiation who are sourcing from any factory without regard to quality control, this might be an option, but it can be a major undertaking for a quality brand to move between factories and countries. 

It’s not always easy to simply begin importing from another country. New personnel, procedures and shipping arrangements would have to be set up. Besides, not all countries have the same factories or raw goods that China has. 

While they may have the manpower, they haven’t had the benefit of decades of government subsidies for manufacturing that the Chinese have enjoyed. The task that lies ahead for countries like Vietnam and India include building out infrastructure and ramping up their production abilities.

Truck 1030846 640Even if sellers find a factory in another country that is willing to produce their goods, there’s still a chance the raw material might need to be imported from China.

Sourcing suppliers in other Asian countries can work for certain categories, such as textiles and furniture, but not for all. For many product categories, it’s not possible to easily shift orders to suppliers in other Asian countries, because for those product categories there simply are no factories outside of China.

 

Some Amazon sellers are starting to implement what they hope will be an under-the-radar strategy, where they redesign the product itself in order to lower its manufacturing cost in a way that the consumer will not react negatively to. For example, they may remove an ornamental piece from a garment or change a feature on a product, thus eliminating the need to source those items from China.

 

Sellers must take a hard look at their reasoning behind their product sourcing and engage in a much closer scrutiny of their P&L and profits margins by SKU, to help reduce the impact of tariffs.

When sellers decide to change their pricing structure, it can be deceptively easy to work up a cost figure without reconciling that number to actual costs in the P&L, which risks missing some significant costs, or not attributing these properly in the pricing calculation.

For example, many Amazon business owners will account for international freight and customs clearance as part of the cost of inventory and apportion those costs to each product SKU by weight, volume, or by value.  However, they do not take into account another freight component, the cost of transportation from the port of entry to warehouses or FBA warehouse.

If FBA inbound transportation services are used for that part of the supply chain, those costs will be buried in the Amazon merchant account.  A typical margin calculation risks missing this cost component, whereas a savvy merchant reconciling their Amazon fees using a software like Entourage Margins would pick it up and apportion it appropriately in their costs and pricing calculations.

For low margin sellers without the ability to adjust prices, where a 10% or 15% increase in cost of goods from tariffs could wipe out their entire profit margin, having clarity about their costs on a SKU by SKU basis is absolutely imperative.

 

In Conclusion

Trade War 3

Amazon sellers will continue to be affected by the US-China trade war because tariffs continue to be applied to Chinese imports, which include many of the everyday products sold on Amazon. 

With little way to predict the future of trade relations with China currently, it’s time for every Amazon seller to develop plan B strategies for developing new product lines and sourcing alternate suppliers, that take into consideration the complexities of maintaining a successful business within the Amazon marketplace.

Mike Zagare

Founder, PPC Entourage

Michael Zagare is a serial entrepreneur, a recovering physical therapist, and the founder of PPC Entourage. Using the same tactics and strategies he shares through Entourage, he scaled his business from $50K per/m to $250K per/m in less than seven months.

Mike has an unquenchable thirst for knowledge in all things Amazon, and loves sharing that knowledge with other sellers to help them take steps towards personal and financial freedom.
Mike Zagare