Full transcript
Conor Doherty: This is Supply Chain Breakdown, and for the next 30 minutes we’ll be breaking down the most important topic in all of supply chain: tariffs. My name is Conor Doherty. I’m the Communications Director here at Lokad, and joining me in studio, Lokad’s founder and CEO, Joannes Vermorel.
Now, before we get started, take a moment—comment below: what is the industry you are most concerned about? And while you’re doing that, get your questions in as soon as possible. It’s very much like I said on LinkedIn yesterday and earlier today: we’re here to answer your questions. The purpose of this exercise is to discuss the pain points that you are dealing with and that you want concrete answers to.
And with that out of the way, Joannes, first of all, thank you very much for joining me. Now, you’ve run Lokad, a supply chain optimization company, for 17 years. I think it’s safe to say that you are the most qualified person in this room to ask this very specific question to. So take away the pain, take away the uncertainty, take away the frustration. From a purely supply chain perspective, in your opinion, what are tariffs? How do you think about them? And what are the unique problems that tariffs pose?
Joannes Vermorel: Tariffs are just taxation. The main thing is the unpredictability and unevenness of this taxation. It targets specific products with rates that are extremely uneven, depending on the origin and the type of goods.
Bottom line: in the short term it is just surprise overheads; that’s it—surprise massive overheads. The only reasonable short-term response that companies can have is to raise their prices. That’s it. In the short term this is the only option that is truly available to all companies, and that’s exactly what companies are doing, I would say dominantly, facing those situations.
Conor Doherty: Well, again, you can say that they’re taxes, but there are lots of different types of taxes. Would you categorize this as just a normal, run-of-the-mill tax, or is this in the more existential area?
Joannes Vermorel: No. The general theory on taxes—that’s a completely separate topic from supply chain—but the general theory on taxes is that a good tax, if there is one, has a very low rate and is spread very evenly across the economy so that you minimize distortions.
Here, as a mechanism, we’re looking at something that is the exact opposite: the rates are very high and they are extremely uneven. Essentially what economic theory predicts—and that’s what will unfold—is that it will generate massive market distortions, with all sorts of super weird things where goods are going to be shipped back and forth across the world to do some kind of fiscal optimization, and that is entirely predictable.
Those things will happen. Right now companies just react by raising prices; the next stage will be fiscal optimization, and then we will start to see things that are fairly strange and would not really make sense except in order to optimize those taxes.
Conor Doherty: Well, thank you. And one of the reasons why we waited as long as we did to have this discussion was because we wanted to have some kind of data to refer to, to frame what we were discussing. I have open in front of me an article from Reuters from the end of May saying that 72% of S&P 500 companies have mentioned tariffs as their number one concern going forward for the rest of the year, and those were at earnings calls—72%, that’s the highest in 10 years. So not trivial, certainly.
My question before we get into the more specifics is: at a high level, now that we’ve had some time and there’s data to talk about, how have these tariffs actually reshaped global supply chains at a high level, or has the impact been negligible?
Joannes Vermorel: No, the impact is not negligible. The impact is already a very sizable inflation in the first-world economy that is the United States; that has already happened. There is also—again we have some privileged information at Lokad—but there are quite a few small American companies that were relying on imports that are just going to go bankrupt. Remember that when there is a taxation on the milk, it’s not the cow who pays the tax.
Bottom line: we have seen companies that had literally already ordered things from China, and the goods were already in a container moving toward the United States, and now those companies just discovered that when the container lands they have to pay three million, five million dollars in extra surprise taxes. That’s why those companies are hit very badly.
But again, the answer for all the companies who have enough backbone to support that in the short term—their response is just raise prices. That is where we are at.
Conor Doherty: Well, actually, on that note, we ran a poll on LinkedIn a few weeks ago, and the volatility—the uncertainty—was the thing we heard the most. And again, to cite Reuters, just this year, this is from just a few days ago, Chinese exports to the US were down 34.5% year on year.
Obviously, that has knock-on effects on your ability to meet demand and your ability to forecast demand. So my question to you, as somebody in the industry dealing with clients, what are you hearing from practitioners about coping with this incredibly fluid and spiking uncertainty?
Joannes Vermorel: Reduce volume; lower prices. There are no real alternatives. Also, because this uncertainty—the magnitude is very important—it’s extremely difficult to envision right now real alternatives. People would say, “Okay, so we have tariffs, so now we are going to reshore all those industries in the United States,” but the reality is that tariffs have been going up and down a lot.
Conor Doherty: Yes, that is true.
Joannes Vermorel: What I am seeing is more like a paralysis rather than an immediate reshoring, because bringing an industry to another country for a given company is a decade-long undertaking. It’s a very long-term horizon thing. It takes about a decade. You will need to train the workforce; potentially negotiate with local universities and local technical colleges so that they will train the people that you need.
This process will take multiple years, especially in a country like the United States that is already very starved in terms of manpower for its own industries. I think there are something like seven million jobs that are open for the manufacturing sector. It is already a sector where there is a massive deficit.
And again, if you are trying to make a plan for a global company and you’re looking at this country where there is so much uncertainty, the reality is that it is certainly a negative impact. Obviously the United States remains the number one economy in the world; the United States has tons of advantages: an incredibly educated workforce, relatively cheap energy—there are tons of things going the way of the States.
But this thing, comparatively, is not doing any good to the United States, at least that’s my perspective—especially the uncertainty part where from one week it is this and then the next week it’s something completely different. That is extremely difficult for large companies to have a plan that accommodates such variations. They can accommodate modest, normal market variations, but it’s like having an asteroid hitting you every single week; it’s very difficult.
Conor Doherty: Well, again, that’s a key point, and there was a period at the start of April, I believe—I don’t have the numbers right in front of me—but there were four or five days in a row where the reciprocal tariffs between the US and China just ramped up. On Monday it was—I’m going to pull a number; this is not exact—50%; the next day it was 75; the next day it was 100; the next day it was 155. Planning around that is borderline impossible.
Joannes Vermorel: Yes. I mean, if the tariff was to go only up, that would be relatively straightforward. Fine—okay, you’re at a million percent both ways—fine. This is not where planning is difficult. Planning is difficult when you are at 100% and both parties say, “You know what, we do that because we want to negotiate a better deal where ultimately it’s going to be super low, even lower than it was before.”
Conor Doherty: Okay, so you mean it’s going up with the intent of going down.
Joannes Vermorel: That’s the thing. If you just say, “The tariff is 100%, and it’s not going to move in the next decade; it’s just going to stay what it is,” fine—new reality—you can accommodate that in your plans. But here it is something that is much stranger and much more difficult: yes, it’s going up, but the plan is to have it going down, and even lower than it was before. How are you going to plan on something that is extremely schizophrenic?
Conor Doherty: Well, just to ground this again: according to Reuters, the current estimate for tariff-related costs at the conservative end is 34 billion. In fact, other surveys found that if you were to ask US companies, “How much would it cost for you to avoid all of this—just reshore absolutely everything?” it would double your operational costs. And as you pointed out, that is a long-term project because even if you committed to it, it might be invalidated tomorrow.
So my question, just to push forward a little bit, is: you’ve commented on the longer term—the infeasibility right now of the longer-term plans. In terms of shorter-term plans—short-term horizons—what have you seen companies doing that have maybe moved the needle positively?
Joannes Vermorel: Companies are currently doing all sorts of strange things. You repackage your products into this country or that other country. There will be plenty of shenanigans. What I also observe is that when you have very shifting bureaucratic rules, you pave the way for corruption.
Generally speaking, one of the biggest strengths of the US is that it’s one of those countries where the level of corruption is generally very low; that has been a massive advantage of the US over many other economies. But here you end up with a situation where you will have bureaucrats at the borders who, depending on their appreciation—because, again, when you say, for example, you import steel—do blades that are sold at $1,000 per gram because they are intended for surgery count as steel imports? I’m just making things up; it’s an example.
There are plenty of things where it’s very unclear exactly in which category you fall, and depending on whether you tick a box or not, it’s going to be millions of dollars of import duties or not. That will be left to the appreciation of a person who is most likely going to be paid less than $100,000 per year. This is exactly the recipe for corruption.
One of the problems I see, and that I think is going to happen, is that it is difficult in the long run to really resist these super adverse incentives. Countries that tried these sorts of things in the past did end up with worse outcomes in terms of corruption compared to where they started from. The US is starting from a very good position, where the amount of corruption is, compared to many other countries—even developed countries—very low. This is not Denmark, but still very low. This is not going to improve this specific aspect.
Conor Doherty: Okay. In terms of actually trying to reconfigure your supply chain in response to these—again, just some more concrete information to bounce off of—the Financial Times reported on a big US company building a factory in Mexico ahead of the rollout of tariffs, and then the very next week Mexico gets hit with tariffs and that plan was totally invalidated. What should supply chain leaders consider when trying to adapt their networks?
Joannes Vermorel: If you have such volatility, then unless the United States is a place where you absolutely need to be inside, the reasonable response is to build just outside. As the rest of the world is maintaining relatively low tariffs—and because in supply chains the problem is that goods have to move through borders many times—very frequently, because it’s not as simplistic as things being manufactured in China and moved into the US.
If you look at complex products, you will have many subcomponents, and they will have to travel across countries in many stages. At this point you end up saying, “Okay, if I put in this circuit the US, it creates a massive complication.” I suspect that for many industries the response will be just the contrary: remove the dependency on the US and move it somewhere else.
Conor Doherty: Again, it will not be possible for all industries.
Joannes Vermorel: Sometimes you have an expertise that is incredibly difficult to replicate in the US. The converse is also true: you have plenty of industries where finding the expertise outside the US is extremely difficult. But for the sort of industries where it is feasible to do it outside the US, then the situation might be to completely extract the supply chain out of the US so that you don’t have to factor the massive uncertainty of having those things that just hit you at random.
Then you would just sell at a higher price point in the US and that would be the end of it.
Conor Doherty: I don’t want to put words in your mouth, but just the way that you frame those answers, it very much sounds—again, correct me if I’m wrong—like you have bad options and you are trying to choose the least bad option. There’s no “How can I thrive in the presence?” It’s “How can I survive?”
Joannes Vermorel: When you have protectionist measures, some local players will find themselves with an economic niche where suddenly all their competitors that were mostly abroad have raised their prices substantially. What are those local players going to do? They are going to raise their prices too, because they have no reason to be massively cheaper than their competitors abroad.
They will just be a little bit cheaper, but not massively cheaper, so they will raise their price and will suddenly have very comfortable margins. Good for them. But does that lead to a situation where those local players who benefit from a massive boost—does it turn into lasting strength? The good news is that we have 2,000 years of history to assess this statement. This is not a theoretical question; this is something that has played over and over.
In the 2,000 years’ worth of protectionist history—you can go back even to Roman times—they already tried these sorts of things. The short answer is: protected industries invariably become lazy and less competitive. Usually, when you introduce those protectionist measures, it’s because you have industries that are already struggling. You protect them, then you realize that protecting them is not enough; you need to subsidize them—this can be done in many ways, some more ancient and some more modern.
Fast forward a decade: you have industries that are even less competitive than they were initially. At some point the cost of all of that—the subsidies, the protections—is so large that the state—the emperor, the king, or the elected government—is forced to give up on that, and those industries just collapse. This story is not new; it played dozens of times in the 19th century, hundreds of times in the 20th century, and already dozens of times in the beginning of the 21st century.
Conor Doherty: To build on this, we’re talking about multiple industries. When we asked for feedback on LinkedIn about this, we ran polls, we asked for comments; we got people concerned about aerospace, automotive, retail—the entire gamut, obviously. From your perspective, is any one of those sectors particularly vulnerable to this just because of the orchestration of a typical supply chain in that industry?
Joannes Vermorel: Yes. Things like aviation, for example. If you look at the US, you have Boeing, who was the super dominant player—20 years ago they were completely dominating civil aviation. They have been struggling enormously, and now Airbus is in front of them. There are plenty of other companies, like Embraer in Brazil, who are eating market share every year.
This is a market where the technology is very distributed across the globe. The US is very important in this market, but they are not the only ones. Nobody can actually build competitive modern aircraft if they only try to do it locally. Russia has its own program and is producing a few jetliners locally, but they are absolutely not competitive with what the rest of the world operates. Same thing for China.
What will it mean for aviation? It may mean that manufacturing moves entirely out of the US, keeping only design, conception, and engineering—where again there is quite a lot of talent in the US—but for the manufacturing part, it would be completely outside the US.
For other sectors like automotive, the reality is that automotive is already dominantly sourced and built locally. There has been a move for more than two decades to build cars locally. That leaves the question of semiconductors, which represent a massive fraction of the price of modern cars. Semiconductors—like aviation—are a very global market.
My take would be: for cars, that will not change much. The amount of cars that were actually imported was already a small fraction, at least for very large markets like the US. I don’t have the numbers in head, but the amount of cars imported in the US compared to the ones being built locally was already dominated by local production.
As far as semiconductors are concerned, the price will increase, and so the price of US cars will increase accordingly to the overhead that you have for semiconductors. Other than that, it will not be an existential threat to those industries, because you already have tons of companies like Toyota manufacturing in the US. You can very well have an industry that is locally produced but still dominated by foreign companies.
Conor Doherty: I just checked and I’ve received a few questions already to get to, and there are some that were sent to me privately. I will close with the following question, which is: obviously you called tariffs taxes. Fine. Are tariffs always a bad thing? They hurt—no one’s disputing that; it’s a pain—no one’s disputing that. Are they always a bad thing? Or, in other words, do they present any kinds of opportunities for companies who are living through them?
Joannes Vermorel: Again, are they bad things? If you ask the question in terms of the economy, we can look at history, and the history is very clear. We have 2,000 years of history, and the answer is a resounding yes: tariffs are a bad thing. They have been, and this is not a value judgment; this is something that was put to the crucible of experiments. It was done hundreds of times; it just works extremely poorly.
For me it is in the same category as rent control damaging cities. Even in Mesopotamia—3,000 years ago—they tried rent controls; it went very poorly. This is the sort of thing that has been tried many times—hundreds of times—and it went poorly every single time. Will it go differently this time? I would say no—no reason.
Now, like all economic distortions, there are some people who profit from it. That is true, but that is true for all economic distortions. If I decide, as president of France, that companies who do predictive supply chains need to have massive subsidies—massive, massive billions—then for me at Lokad: fantastic; for the French taxpayer: not so great. When you introduce economic distortions there are always some winners.
So yes, there will be some winners—no problem. But for companies, can you actually build a strategy to be among those winners? Considering the amount of erraticity of what is going on right now, I don’t think so. It will be more like winning the lottery. You’re lucky—good for you—but fundamentally it is not a strategy to position yourself.
The reason why I say it’s a lottery: I don’t think that anybody really predicted six months ago that some tariffs on some countries for some products would jump to 100%, and whether it will last or not, etc. If you can’t predict it, it’s very difficult to say that you can have a strategy built on something that is so erratic.
Conor Doherty: I would agree. Just as a final addendum to that, I read a report from PwC earlier today, if I recall correctly, and it said something like 57% of executives said that when it came to decision-making, they could not make decisions fast enough given the erraticity you’re describing there. That speaks, on one account, to the environment being very stochastic—very random, lots of uncertainty—but there’s also an inward perspective there which says, “How are you making decisions? Is it incredibly slow? Is it incredibly bureaucratic? And if so, what can be done about that?”
Joannes Vermorel: Yes. But we have to be realistic. You can change policies—like your prices—very swiftly; that’s possible. But it is not realistic to say, “I am going to take a factory that took two years to design, three years to build, and that taps into a pool of people who took five years to train, and overnight displace that to some other place in the world.”
Those processes are relatively slow. Yes, companies can be incredible and do that at a pace that is quite high, but even the fastest companies—it will take years. That’s why I said the stage right now is tax optimization, where it will be mostly shenanigans that are highly predictable, where people are going to find loopholes just to navigate that.
But the true in-depth reconfiguration will take years, and it will probably be delayed until people are confident that the rules of the game are set. Again, if the goal was, “There will be tariffs at 100% for everything from China, and this thing is immutable; it will stand half a century,” then many people would invest to rearrange the supply chain right now based on those new rules.
The problem is that both parties are announcing that actually they want to negotiate something that is extremely low and better in the end. That may or may not happen, and the time frame is completely up in the air.
Conor Doherty: All right. Thank you. I’m going to switch over to some of the questions that came from the live chat and that were sent privately. First question is from Konstantin Johannes: what would you recommend to companies with very thin margins who may not survive these tariffs if it continues for a long enough period of time?
Joannes Vermorel: That is very tough. I was saying that many companies will just not survive. That’s what I’ve been seeing among the ecosystem of companies that we serve in the US. Some US companies may not survive. Obviously, plenty of Chinese companies will also not survive—let’s be clear.
Again, in the short term I think the thing is that you will have to raise your prices, and do that even ahead of time compared to your competitors. You end up with a situation where, if your competitor doesn’t raise their price, they are just going to run out of stock. Usually you wait for your competitor to raise their price, but here we are in a situation where you raise your price, and don’t worry: competitors who are not raising their price are just going to run out of stock.
Once they have liquidated their stock, they are going to realize that replenishing this stock is more costly for them too. Then, just like with tariffs, some companies are lucky and some companies might be absolutely unlucky. In this case there is not really much that we can recommend except changing the business entirely.
Conor Doherty: Thank you. The next question is from Sunil—forgive me if I’ve mispronounced that. Speaking of industries at large, is reshoring and nearshoring a feasible strategy?
Joannes Vermorel: We talked about short term and long term before; it goes both directions. If you have a business where being in the US is a massive advantage, then the tariffs change is still a massive advantage. If you have a business where being in the US is just never going to happen—absolutely no—let’s say, for example: are the super low, ultra-cheap textile industries of Bangladesh going to move to the US? Hell no. Probably not. Even if you have a 200% tariff, Bangladesh is still going to be way cheaper than the US workforce. Case solved.
The question is for companies that were just at the edge, where US advantages versus other places left you on the fence. What I see is that many companies might decide to do the exact opposite: be completely outside the US, so that when we want to do this back and forth with other countries, we are not hit by tariffs again and again and again.
Yes, you will be hit—being outside the US guarantees that you will be hit by tariffs—but you will be hit by tariffs only once. If you have to go back and forth many times, then it is a better option to be outside, and then take the heat of the tariff only once as opposed to getting hit a dozen times because of those back and forth.
Conor Doherty: One question that was sent to me privately from Burton—this is related to aerospace. What do you recommend for MRO companies trying to maintain repair schedules this summer? A very short-term horizon there.
Joannes Vermorel: The beautiful thing about aviation is that you can send your aircraft abroad to have it repaired abroad. We have clients that are already doing tons of maintenance. In fact, a big portion of the jetliners used by US passengers are already maintained in the south of the US—this is already happening.
My take is that if it’s too complicated, then you just send your aircraft outside the US; maintenance will be done out of the US, and then the aircraft comes back into the US and problem solved. For those MROs, that’s exactly a situation where it’s not about reshoring your industry, but on the contrary just making the move of doing the maintenance out of the US, and you’re out of the nonsense of having super hectic tariffs.
Conor Doherty: All right. Joannes, thank you. There are no other questions to get to, so I’ll just ask you for a closing thought. Any parting advice for people trying to survive the tariff crisis? We’ll come back to it in other formats, but parting advice?
Joannes Vermorel: I believe that it’s part of a broader culture of being able to assess risk. That’s where having a probabilistic perspective—where you put percentages of risk—is very important. What does that mean in practice? Let’s assume that there is 2% chance that we have a war every year, or 2% chance that we have incredibly damaging fires like Palisades in Los Angeles.
You can have all sorts of random problems, and it goes completely against the mainstream view to just have one forecast that you project and you’re good. Here it’s about putting a probability on calamities, and yes, tariffs join the list of calamities. You would have war, lockdowns, fire, tsunami, and whatnot, and then try to start risk-adjusted decisions.
There is risk; it needs to be quantified; you need to quantify that in dollars and approach that as you would approach insurance. If there is a possibility of having a fire in your factory, then you need insurance. Do you approach that with wishful thinking—“The factory will never burn”—or do you start investing into something that would hedge your situation?
Investing in hedging the situation is like the fire insurance policy for your factory—it’s not cheap; it is quite expensive—but that’s part of the culture of managing risk frontally: to admit that there are tons of costs involved in that, and there is no magic. Those costs have to be addressed; otherwise, if you are unlucky—think fire in your factory—the factory can burn down, and then you don’t even have the funds to rebuild.
Conor Doherty: This is what I was talking about earlier: even within chaos, even within an emergency, there are possible avenues of opportunity—even if that’s just self-improvement from the perspective of companies: your perspective on decisions, your perspective on how you approach your own business. Or have I misunderstood what you just said?
Joannes Vermorel: Yes. Obviously there are opportunities to improve. But let’s be real: one of the main problems that supply chain teams have is lack of bandwidth. When you are having even more chaos, let’s be real—it’s not exactly the time where companies can just contemplate ways to make things better. It is firefighting. There won’t be much beyond firefighting for as long as those things continue.
The idea of being able to do wartime efforts where you manage to develop fantastic technologies while suffering the fire of the enemy—maybe a few companies will pull that off, but my suspicion is that it will be a very happy few segments of companies.
Conor Doherty: All right. Joannes, I don’t have any more questions for you. Thank you very much for your time, and to everyone who’s attended, thank you for your questions. Thank you for reaching out personally to both Joannes and me, participating in polls. We’re going to do more of these, and it’s nice to do topics where people connect, reach out, send their concerns and questions.
If you want to continue the conversation, feel free to connect with me or Joannes privately—you’re already on LinkedIn. With that I say, Joannes, thank you very much for all your patience and your great answers. And to everyone else, time to get back to work.