Tariffs Affecting Mechanical and Plant Engineering

Machine and plant engineering are particularly impacted

European machine and plant engineering are particularly impacted as this is an industry that traditionally focuses on the U.S. market as the most important sales channel. With an export volume of 13.9 billion euros in the first half of 2024, the U.S. market is the most important market for German mechanical engineering companies. While other markets, such as China, are seeing declining figures, the U.S. market remains largely stable, making the impact of the punitive tariffs all the more serious. International responses in the form of retaliatory tariffs on U.S. imports are adding to tension and creating a complex environment for export-oriented companies.

In a world of unknowns, it is important to plan for every conceivable scenario in order to recognize when certain thresholds are exceeded and new courses of action are required. There are three factors to consider: the duration of the tariffs, the level of the tariffs and the cost of the courses of action. The longer tariffs are in force, the more the resulting costs will accumulate. At the beginning, expensive courses of action do not seem appropriate as they will drive up the cost curve. However, if the tariffs remain in force for a longer time, these courses of action will begin to have a cost-reducing effect after a certain duration.

These “turning points” must be identified at an early stage by examining multiple scenarios, and the corresponding measures must be planned for and prepared. The response framework makes a distinction between measures without intervention in the value chain and measures with. While measures without intervention could be implemented quickly and also quickly dismantled if the tariffs were to be eliminated again, these offer only limited relief in the case of an enduring tariffs situation. Measures that influence the value chain are significantly more effective, but these are also expensive and difficult to reverse.

To intervene in the value chain or not?

Up to a certain point, tariffs can be absorbed without countermeasures. If an end to the trading burden is foreseeable in the near future, delivery delays are a viable option, in spite of contractual penalties. Price adjustments, cost reductions and a review of the tariffs’ classification are further short-term options. However, if longer-lasting or rising tariffs can be expected, these measures will not be sufficient. Adjusting the value chain then becomes inevitable; for example in procurement, production and logistics. The following figure shows examples of possible short-, medium- and long-term courses of action for production.

Example: A European mechanical engineering company has a production facility in Canada, where it produces machine tools, predominantly for the U.S. market but also for Canada and Latin America. This company purchases steel and other raw materials from countries including Canada, while some pre-assembled modules are procured from the U.S. If punitive and retaliatory tariffs of 25 percent apply, the import and export of parts and products across national borders is not sustainable. In the worst-case scenario, punitive tariffs will be imposed by the Canadian side when importing the pre-assembled modules, and further punitive tariffs will be imposed when exporting from Canada to the U.S. 

Examples of possible courses of action in this situation include regional sourcing, shifting of final assembly (for example in the form of semi-knocked-down [SKD] or completely-knocked-down [CKD] strategies), shifting of individual production steps or even shifting the entire production. In the short term, partnerships with contract manufacturers can also help. At the same time, logistical processes have to be optimized to increase efficiency and absorb additional costs. However, the overall picture must always be considered when weighing up the options. If production is relocated, qualified workers will be required in addition to significant investments in new production facilities. U.S. wage levels are up to 50 percent above Canadian levels. In addition, higher corporate taxes may apply, depending on the state. Even if a partial or complete relocation of production to the U.S. were possible, this may not always be the most economical option. 

Courses of action for affected companies

Porsche Consulting recommends a structured four-step approach to effectively tackle the challenges of punitive tariffs. This approach allows companies to identify risks in a targeted manner, develop strategies and clearly manage implementation:

1. Analysis: First, companies must analyze the relevant influencing factors and assess their individual impact. This includes a comprehensive inventory of current supply chains, production sites and the potential impact of customs duties.
2. Modeling: The second step is to develop a mathematical model that simulates different scenarios and analyzes their financial impact on the company. The aim is to gain transparency about possible cost developments and to create a sound basis for decision making.
3. Response framework: Strategic courses of action will be developed based on the insights gained. These will range from short-term measures without any direct impact on the existing value chain to long-term structural adjustments, such as the relocation of production capacities.
4. Implementation: Finally, a detailed action plan will be drawn up that defines clear milestones, investment requirements and decision times. This road map will serve as a guide for the step-by-step implementation of the chosen strategy.

A sound scenario analysis must form the basis of a successful strategy for dealing with punitive tariffs. Companies should model and evaluate various developments, such as the extension or elimination of punitive tariffs and possible adjustments to customs tariffs. This allows risks to be identified at an early stage and suitable measures to be extrapolated. In the medium term, it is crucial to check the entire value chain to examine its resilience to external influences and, if necessary, to adjust it. This includes strategic measures such as the use of free trade zones, investments in regional production sites and the relocation of assembly processes nearer to key sales markets. A clearly structured action plan ensures that adjustments are implemented in a targeted and efficient manner. It serves as a guideline for investment decisions, identifies necessary resources and defines schedules. This means that companies retain the ability to act even in a volatile environment.