By Bob Tita and Patrick McGroarty
Cummins Inc., which imports engines and other products from its factories in China, is among U.S. companies likely to be stung by an American tariff on Chinese-made goods that takes effect next month.
Based in Columbus, Ind., Cummins imports small diesel engines and components such as turbochargers from its own plants in China to sell in the U.S. or use at its domestic plants. Beginning July 6, those engines and some of those components will be subject to a 25% tariff at the U.S. border.
"This is a big headache," said Tony Satterthwaite, president of Cummins's distribution business. "Making changes in your supply chain is not a three-week process."
Cummins declined to disclose specifics about the volume of its imports from China that would be subject to the tariff, or the expected cost to the company. Cummins is still determining how much more it will have to pay because of the tariff and how long it is likely to remain in effect, Mr. Satterthwaite said, adding that the company may raise prices or sacrifice profit margin by absorbing the cost to protect sales.
The U.S. government plans to impose duties on items that accounted for $50 billion of imports from China last year. Manufacturers of everything from power switches to cars are due to pay more for some of the parts they import from China, research firm Panjiva Inc. said this week. To retaliate, China will impose its own 25% tariff on certain high-value products imported from the U.S., including farm products and cars.
Companies that in recent decades fanned out their operations globally, often dictated by free-trade agreements and cost efficiencies, are contending with unexpected barriers due to the tariffs planned by the world's two largest economies.
German auto maker Daimler AG issued a profit warning Wednesday, saying that Chinese duties on U.S. vehicle imports would hurt sales and profits of the Mercedes-Benz sport-utility vehicles it builds in Alabama. The U.S. semiconductor industry also expects to be caught in the trade scuffle because many American chip makers make some components in China and import them into the U.S.
Cummins said the U.S. tariff will drive up the cost of its engines and production at its domestic plants, which are already coping with rising steel prices fueled by U.S. steel tariffs. The company said tariffs will make its products less competitive with foreign rivals. Cummins, with a market capitalization of $22 billion, competes with Caterpillar Inc., Volkswagen AG's MAN engine unit and Japan's Mitsubishi Corp.
China accounted for one-tenth of Cummins's $20.4 billion in 2017 sales. But the full force of China's retaliatory tariffs won't hit the company's sales in the Asian country because Cummins locally produces most of the engines and components it sells in China.
Instead, the U.S. tariffs could expose Cummins to potential retaliatory tariffs from countries other than China where it sells its U.S.-made engines, such as Canada, Mexico and the European Union.
Trump administration trade representatives and some industry associations maintain that existing trade agreements allow other countries to take advantage of U.S. firms. They say U.S. tariffs provide relief to manufacturers struggling to compete against unfairly priced imports and provide incentives for companies to invest more in U.S. manufacturing.
In the aftermath of the 2008 recession, Cummins, like many of its industrial peers, turned to overseas markets in search of sales growth. Cummins found ready buyers in China, Brazil and elsewhere as vehicle makers snapped up its diesel engines rather than revamping their own engine technology to comply with stricter emissions standards in their home markets. Capitalizing on its experience complying with tightening regulations for engine exhaust in the U.S. and Europe, Cummins was able to quickly adapt its engines and components to developing countries' standards.
Sales nearly doubled between 2009 and 2017 driven by strong international sales growth.
With Cummins parts and service providers available around the world, the company's engines helped Chinese construction-equipment manufacturers LuiGong Machinery Co. and Sany Group Co. and truck makers Beiqi Foton Motor Co. and Dongfeng Motor Co. extend their sales to other countries.
As its business grew overseas, Cummins retooled plants like the one it operates in Seymour, Ind., to make more engines for export. Cummins has invested more than $300 million in the plant since 2011, including a new assembly line and a research and engineering center for large, high-horsepower engines that power ships and train locomotives, and generate electricity. Cummins's workforce in Seymour has grown to 900 from 250 seven years ago. Three-quarters of the engines built at the plant are exported.
The proliferation of tariffs and increasingly frosty relationships between the U.S. and its biggest trading partners undermines export-focused operations like the Seymour plant, Mr. Satterthwaite said.
"Tariffs and trade wars are very disruptive," said Mr. Satterthwaite. "The European and Japanese manufacturers are going to have an advantage."
Write to Bob Tita at [email protected] and Patrick McGroarty at [email protected]