At RapidRatings, we work with thousands of Supply Chain and Third-Party Risk professionals who wrestle with impending tariffs.

The Trump administration has signaled significant tariffs on trading partners like Mexico, Canada and China and threatened potential tariffs on a wide range of others, including the EU. How does one make sense of these threats? What will actually come to pass? While these questions will only be answered with time, we expect some threatened tariffs will be averted, others enacted, and some may be more punitive than currently expected. Those against China for instance, were originally threatened at 60%, are now talked about at 10% and will likely rise from there.  

Businesses must prepare and that means assessing worst case scenarios and planning accordingly. Many suppliers up the chain, particularly private companies, will be profoundly impacted by the increased costs of tariffs, much of which they will have to absorb. The most practical way to understand the potential impact is to stress the financial health of these companies.

RapidRatings is conducting stress tests now to help guide our clients, and the following represents our early insight.  

‍Our Findings:

The first test we’ve conducted assumes tariffs on goods from Canada, Mexico, China, and Germany impacting US companies in manufacturing supply chains. Why these countries? China, Mexico and Canada are already in the new administrations’ crosshairs. Germany, while not singled out by Trump at this stage, represents the European country with some of the heaviest manufacturing supplier base to major US industries, such as auto and transportation. Additionally, the middle market and private companies in Germany have been under particular financial health pressure and thus need to be closely monitored for any additional exogenous shocks.  Here's what we found:

• Increased Supplier Risk: Both public and private companies faced heightened risk. 25.4% of public companies and 38.4% of private companies experienced an increased risk profile.
• Financial Health Decline: Public companies saw an average 5.1-point decline in their Financial Health Rating  (FHR), while private companies experienced a more significant 9.4-point drop.
• Hardest-Hit Industries: Automotive, retail, and food & beverage sectors were among the most significantly impacted.

The Impact on Suppliers:

Suppliers will experience increased costs from tariffs, many of which are already facing financial strain.

Tariffs will significantly impact cash conversion cycles, the time it takes for businesses to convert cash flow from sales. Middle-market companies have already experienced a notable and negative increase in cash conversion cycles from 54 to 77 days between 2019 and YE 2023, and this has deeply strained their working capital. This trend is likely to worsen with tariffs. Most private and middle market companies don’t have the power to pass on cost increases down to their customers. So just as they have had to absorb the costs of parts and wages, inflation, and higher interest rates, they will have to absorb the lion’s share of tariff costs.

This underscores the importance of digging down deep to better understand supplier financial health.

What Companies Can Do Today:

Companies that proactively manage risk by deeply understanding their suppliers' financial health are best equipped to weather the storm of tariffs. In contrast, organizations with limited visibility into their suppliers' financial situations will face significant challenges and may encounter unexpected disruptions.

To mitigate the risk of tariffs, companies should take the following steps:

• Collaborative Risk Assessment: Closely collaborate with key suppliers to assess risks and develop mitigation strategies.
• Deep Supplier Understanding: Conduct thorough financial health assessments of suppliers to understand their vulnerabilities and identify support opportunities.
• Innovative Support Mechanisms: Explore innovative financial support options to help suppliers navigate increased costs.

As we've seen over the past four years, risk is a certainty. Organizations that have successfully navigated past challenges, such as rising interest rates, supply chain disruptions, and geopolitical tensions, by fostering strong supplier relationships and proactive risk management will be better prepared to address the challenges of tariffs.

By implementing supplier financial health assessments and cultivating strong supplier relationships, businesses can build more resilient supply chains and navigate uncertainty with confidence.

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