This is the Mackenzie Podcast where we help you make sense out of our world's toughest business challenges.
Welcome to the show.
I'm Lucia Rahele and I'm Roberta Fissara.
We often hear and see that a lot of companies are frozen.
Yes, in you know the age of strategies back.
There's so much uncertainty.
There's so much that is shifting on advantage and demand patterns.
So, when we look at the leaders in the industry, there are three kinds of things that they're doing.
I simplify down sometimes to just simply say, protect, prepare, and propel.
That's McKinsey Senior Partner, Shubam Singhal.
He and senior partner, Cindy Levy, lead our geopolitics work here, and in late May's spoke with them about tariffs and trade for our McKinsey Live series.
You're about to hear a discussion about how leaders might best respond to ongoing volatility as the world waits for the outcome of the current tariff negotiations.
But first, Lucia, a quick note about what's new on McKinsey .com.
Check out our latest article about consumer attention, what drives it, and how to capture it.
If you pair that article with our recently published report on the state of consumers, I guarantee that you will have a much better understanding of what's motivating people's purchasing decisions.
Cindy and Shubong, welcome back to McKinsey Live.
Thank you, Lucia. Great to be back.
Thanks, Lucia. So, as always, let's start with some context, a situation with terrorists remains uncertain, at least somewhat dynamic.
Cindy, if you would, help us understand what we need to know about where we are now And what is likely to happen in coming weeks acknowledging uncertainties?
Let me try to do that, Lucia, and it has been an eventful number of months and we're doing our best to try to keep track of developments.
But as we see it, when we look at the weighted average tariff rate of goods, the announcements in mid -April took us from a 2 % weighted average tariff rate of goods into the U .S., to 20 to 25 % assuming any reversal of the reciprocal tariffs.
And the consequence of that is that if you look at all manufactured goods purchased in the U .S., about 37 % of those are imported, and this creates a very, very big knock on effect on US manufacturing purchases.
So that was the announcement back in April, and there are developments since that are very, very important to understand, somewhere in the industrial space and somewhere still in the policy space.
The first is you do see this soul searching amongst many global companies and some visible actions on where they are going to base they're manufacturing.
So there've been some very visible announcements of bringing manufacturing, scale, more so into the US, look at Apple, look at Hyundai.
We know of many, many other global companies doing very serious evaluations about increasing their manufacturing in the U .S. We also know about many companies saying I need to pause and I can't take major capital decisions right now because the environment is too uncertain.
The other thing that happened is that China and the U .S. agreed a 90 day pause.
It's unclear what will happen after this pause, this pause lowered.
The tariff rate on Chinese goods into the U .S. from 145 % to 40%.
And then we saw the shipping patterns change as a consequence quite quickly.
So if you look at shipping rates on containers, they essentially tripled right after that pause it was announced.
So that as many experts have quoted, people could restock their shelves.
So the pause is significant.
We'll see what happens on the aftermath of the pause.
The other thing that is happening is you know, the deadline on the reciprocal tariffs this period of moratorium is early July and people are queuing up to to do bilateral trade agreements.
So a lot of surveying worked on and discussed saw the UK trade agreement.
It's important to watch in those trade agreements what is happening with different categories of goods because not all goods are the same.
And one thing that we would encourage people to really keep an eye on are those categories of goods that are deemed national security things like steel, copper, pharmaceuticals, and you likely will see very different treatments on those goods versus all other goods.
So those are a few points on where we are and what developments to watch. Thanks Cindy.
Super helpful. I'm super.
What about looking a bit farther out?
How do you see the tariff situation evolving over say the next 12 months again, acknowledging uncertainties?
I think to cut through the uncertainty, first of all, let's just start with the impact of the tariffs is fairly meaningful to business cost structures.
But also the demand patterns, and then importantly it's not just about your own cost structure for a company that moves.
It's the combination of where yours moves and where you're competitive, so what happens to the relative competitive advantage that becomes important.
And I think to understand that it's just important to look at a few set of scenarios that would actually bound how you might kind of think about what these kind of tariff scenarios could look like.
I think the thing that we should think about is in three buckets.
There's one that says it's closer to 8%.
This is one where we do have the national security sensitive tariffs.
There is some de -escalation that further continues with US and China does not go down to zero but you know as more at the 10 % level going forward so you get to like an 8 % view on that.
At the other end is a 29 % which is that the after these pauses we escalate again and it kind of moves there.
And then the 15 is sort of where some of the deals by lateral trade deals happen, some don't happen, and so you kind of end up.
And that's a reasonable in our minds range to if you look at within that.
Of course, there are other factors playing into the economy around productivity acceleration.
We're all talking about AI and the like.
There's a discussion around fiscal reset in the United States with the deficit that might be needed, as well as central bank actions that happen.
And so what we look at is that companies should look at those scenarios and under those scenarios understand what happens to the demand for their products, what happens to their cost structure, and importantly, what happens to their relative competitive advantage, and then you kind of make your decisions on how you kind of move forward. I think we see over the next 12 months, you know, companies will be beginning to do that kind of planning and also have a sense of what actions to take and as the government negotiations continue.
Thanks, Wubum. So as you said, tariffs are obviously only one element in this broader macroeconomic picture and there are other factors that may be mutually investigating but also critical.
Cindy, talk to us a little more about how business leaders should be thinking about the overall macroeconomic context, giving these variables.
We find that you need to link your tariffs and rios to macro scenarios but to realize that the macro environment will be determined not only by tariffs to Shabom's point.
So the tariff scenarios, the eight, the 15, the 29th, are clearly material in what will happen to the economy.
But we also have a very big question about whether the US will move faster to take $1 trillion of spending per year out of the budget, and when that will happen, our economists see only 150 of that billion of that one trillion announced so far.
So looks like there could be more fiscal reset to come if that comes very soon.
There's an immediate recession but potentially a rebound three to five quarters later, but if that's delayed, then that could be a delayed recession, and so it's important to look not only at the tariffs, but also some of the fiscal policies.
Moreover, companies should be looking at patterns of consumer and business demand.
which linked to the tariffs but also just broadly linked to expectations.
And a lot of the discussions we're having with corporates is not only on the impact of their cost structures, but just what will be the demand erosion to whatever it is that they produce near term and to really understand that because that determines the extent to which companies need to start executing on a number of resilience measures and how deep those resilience measures might need to be, around cost burdens, investment prudence, et cetera.
And so really looking deeply at demand, which is not a clear and easy picture because it will need to look at some of the B2B sectors you might be actually selling into around the world and also consumer demand, which is very different depending on what product we're speaking about.
Thank Cindy, okay, so scenario planning if I'm hearing you correctly now, more vital than ever, let's go a little deeper into some of the additional market trends you're witnessing that are driven by tariffs and other geopolitical factors.
Yeah, let me just talk about trade patterns because I think this is one that we get asked often.
Companies will now need to understand trade patterns at a more profound level.
So if you think about what tariffs do for any good or any product, they actually change the relative cost advantage of who is importing into the U .S. And so one example that I talk about often is you take transportation equipment.
China has about 20 % import share historically on transportation equipment.
If you do have high China tariffs, they likely get priced quite out of that.
And other countries, European countries, Latin American countries, will in relative terms be in a better cost position on transport equipment.
And therefore, then people that are relying on that transport equipment need to understand whether those alternatives to China have enough capacity, are they gearing up that capacity?
if you are in transport equipment you might think about putting your investment bets behind some of those countries that will now have an advantaged export position into the us.
So the way that trade might shift is something we're speaking to many of our clients about.
Another conversation we're having is if a company needs to change its supply chain, quite quickly and strategically, how You do that.
How do you move a very meaningful portion of your supply chain?
Do you understand the maturity of other countries, whether they're in Southeast Asia or elsewhere, by microproduct, to pick that up?
How do you assess that?
What does it mean for the level of involvement and the resources on the ground that you need in those countries as you're standing up new supply chain?
So that is another action and insight that a number of companies are speaking with us about.
Okay, super interesting examples.
If we could just say on this a bit, any suggestions for leaders who are trying to convert these challenges into opportunities for their organization similar to these that you described, Cindy, Shubam, any thoughts there?
Yeah, I mean it's interesting, right?
We often hear and see that a lot of companies are frozen.
And that's not entirely true.
At least not for the most sophisticated ones.
In essence, the age of strategy is back.
There's so much uncertainty.
There's so much that is shifting on advantage and demand patterns.
And so when we look at the, you know, kind of leaders in the industry, there are three kinds of things that they're doing.
And you know, I simplify down sometimes to just simply say, protect, prepare, and propel, they are mitigating downside, right?
which is the immediate action they have to take.
Take for example, within the US, Canada and Mexico.
There are no tariffs if your USMCA compliant.
Before we started, there's no one spent time making things USMCA certified as compliant because it didn't matter.
And now, they've had to do that.
So, there's a lot of tactical actions like those that are being taken reviewing supply chains, using exemptions, optimizing the logistics, et cetera.
So there's that part of it that folks are acting on.
The second one is preparing.
They are looking at what are no regret moves.
There are action plans in place to say, where can we optimize our GNA?
Where can we get some operational efficiency?
How can we shore up our balance sheets?
I mean, those are all actions in the face of uncertainty that leaders are taking so that they can position their organization both to withstand.
But really be in a position to actually move when the time comes and the moves being around their supply chain around their manufacturing, around new markets, around, you know, commercial activity.
And being able to then act upon those to be able to really win.
And we've seen this in past moments of uncertainty, that those that both are aggressive in getting more efficient and improving the balance sheet in capital position, but also early in knowing where they are going to lean into growth, really are then able to win, and that's where the longer term kind of comes in as the uncertainty resolved itself having those actions in place is something that we are beginning to see folks really kind of think about.
So it's really on multiple levels that there is planning going on, and frankly, in the near term, some actions, and then really preparing for those longer -term pets that leaders are putting in place today?
Okay, so just reflecting on what you just said in the need for organizations to prepare for action plan, how can leaders take the potential impact of tariffs into a comp, specifically in ways that inform the CEO agenda or their decision making overall.
So one of the things and I briefly mentioned earlier, but we like to kind of take is to really think about this along a very sharp sense of relative advantage and a very sharp sense of what the change in demand looks like.
So let me kind of describe a little bit.
So relative advantage, the one that is straightforward to understand is tariff cost impact.
And what is it for you, what is it for your competitors and everyone has a different mix of products, a different set of geographies, a different set of places where the products are sourced from, or manufactured, and that leads to different outcomes, and understanding that is pretty important.
There are also other differences that are related to access to certain markets that people can have and not have given some of the other factors that are moving that are national security related for instance.
They can be ability to source certain supplies.
Those are all aspects of advantage that are getting magnified quite significantly.
And, you know, organizations need to kind of really understand that and we find most understanding for themselves many don't seem to understand it relative to competitors and that's pretty important, first of all.
The second part of it is on the demand side, understanding, for example, in consumer markets how consumers will react to, as pricing actions are taking, to adjust for the cost increases for instance.
Are they going to move to substitutes?
Well, in that case, the demand may go down for one product but go up for another one.
We're seeing, for example, consumers moving in the U .S. in particular towards more value in our surveys.
Well, if they move to more value, those value brands, they will see growth and should lean into that even if overall demand gets dampened.
So, you know, the word that we typically use around granularity of growth becomes important here.
Where is there going to be growth?
Where is there going to be pullback?
The conversation we just had on trade corridors is another one which is certain corridors will grow while others will retract and are you positioned in those drawing corridors?
Once you understand that, you can begin to say, okay, all the businesses that I have in my portfolio, where can I lean in?
Where does M &A happen, where does growth happen, investments and commercial capabilities, investment and production capacity?
Those become the top right corner and understanding that.
If you are more on the top left side, you're probably going to take price action to shore margin because the demand pattern is less clear and probably not make the investments that you want to, the bottom left is where I think a lot of folks need to kind of reconsider whether they want to be in those businesses or geographies or products at all or not.
And then on the right bottom is where they have to make a hard -nosed decision on whether they think the ROI exists to make investments to remediate this advantage, or take a different kind of action.
Now even on these actions it's important to understand where your competitors are going to be taking and then what you would do and we were looking in one industry and which has some large players and some boutique players, smaller ones and that industry, some of the smaller ones wouldn't be able to make the moves.
So one of the parties, hey, if they are not going to, they become candidates for acquisition.
So how do we understand that, if others are going to either exit markets or going to shed certain businesses, how do we position ourselves to kind of lean into that?
And I think those are the kind of actions that are much more strategic that companies are planning for but need to begin to be prepared to be able to take.
Thank you, Al, super helpful framework.
So as both of you know as veterans of McKinsey Lab, we get a lot of questions in this series on the how, how to go about translating these insights into impact.
Cindy, can I get your thoughts here on how leaders can organize practically speaking to make these kinds of decisions given the flux we've been describing?
Absolutely. And one construct.
And I'll talk about the new term constructs, and that I'll talk about what might be more enduring constructs as we lean into a world that will have more geopolitical volatility, but near term, as we discussed before, it's essential that institutions, global organizations, any organization, is able to make fast decision -making, and is able to bring insights to a whole bunch of decisions in quite a structured way.
And as a consequence, we see many of them setting up nerve centers, some call them more room, some call them nerve centers.
And these nerve centers can take on very operational tasks, but also be a source of insight to the rest of the organization on scenarios.
So as an example, some of the private equity firms will have a nerve center to support tariffs and Arios and economic modeling and provide that to all of their portfolio companies.
Because it makes more sense to do it that way versus letting each portfolio company having an idiosyncratic view or a bespoke view on what might play out.
And within the nerve center, it's important to really think carefully about the full perimeter of activities that might be valuable to respond operationally to shabams point but also to think about near term resilience actions.
And again, there is a lot of cash at stake in just some of the near -term operational management.
That's not to be underestimated.
Some organizations are bleeding millions a day because the products that they're importing have not been classified accurately.
Shabam mentioned the lack of documentation on USMCA compliance so they can't get zero tariffs on items that should be zero tariff, they might also not have transfer pricing working in the right way.
There might be products substitutes that they need to consider to just lower cost. And if you set up a nerve center, you can really create a category of these decisions and try to execute them quickly.
There might also be near term decision making to take on pricing.
What do we want to do?
So again, in terms of this relative advantage, I spoke to one European industrial company, they have US manufacturing, their competitors do not, so their competitors are going to have much more of a cost experience issue vis -a -vis customers than they will.
So, they're starting to think about is this the time to really grab market share and lock in long -term contracts because we actually will have that opportunity during this So how do you actually analyse that and tee up that decision for fast decision making?
So those are some of the things that a nerve center can really provide.
And what's important is that geopolitical trends impact every aspect of an enterprise.
They impact your near -term compliance management around tariffs.
You don't want to be caught out not complying.
They impact operations.
What does the supply chain do?
What does manufacturing do?
And also there might be a number of strategy calls.
You might have been about to enter, put capital into a country that has a very unclear tariff scenario.
You might need to immediately rethink that decision.
And therefore the enterprise needs a bit of a nucleus and a center of gravity to help itemize and deliver against a whole diversity of decisions.
Thank you. Okay. I am mindful of time we've been kind of inundated with questions here.
I want to try to fit in at least one possibly to taking an investor lens any trends to highlight new, investable themes from policy tailwinds or value change shift. Shubam, will you take that one?
Some of the ones that we see emerging are.
This is a little bit broader than just the tariffs, but there is the whole industrial based around the increase in defense banding that is happening in around the world, frankly, Europe, Japan, including the United States.
And so that is a pretty significant, investable team that we're seeing kind of coming out of this.
The second one, which is not quite yet, but to the points I made earlier in the session, we're also seeing a gearing up for CAPAC spending, to capital spending as supply chains move where they move from to and that may not be just you know moved to the US that will be certain things at high and manufacturing.
Well you've seen for example more moved to India out of China for instance last time around eight years ago a lot of move happened to Vietnam and Mexico and so following those there's a bunch of capital and then to the extent more will move to places like back to the US as well.
It is more high -end manufacturing and a lot more automation.
And so again, back to the technology theme and AI and kind of being another round of capital spending that needs to happen to be able to do that on a cost -effective basis.
So just as this rewiring of the supply chain and everything that follows, And then of course the services firms that sort of follow after that is another major one.
Thank you. Okay, I'm going to try to squeeze one more, and this is a segue, Cindy, from your last point on nerve centers, we've got a question on how to get started staffing these nerve centers, where does the talent look like?
Are companies recruiting folks for these rules or did they simply upskill, existing workers?
Just very practically how to make nerve centers a kind of functional reality?
Yeah, I think we learned also a lot about nerve centers during the COVID years as well and now yet again.
We see it as a cross -functional team where you really bring expertise from around the enterprise to deliver on the different decisions that need to be taken.
We would have people from compliance and legal to just make sure that your legal and functioning, clearly operations and logistics.
Clearly an interface that knows the supply chain.
Well, should be there in the nerve center.
Some are bringing people from a central economics unit into a nerve center, just to kind of anchor scenarios into one version of the truth and then some commercial capability as well.
We do think that there's value in having the nerve center led by potentially full -time executive who could be taken out to really run a cadence of decision making, make sure things are elevated to the right levels of the governance for management, team for decision making.
We've also seen some good examples of trigger -based planning.
Though the nerve center could say, okay, what could happen?
We might have a development where Mexico does not go to, you know, a place of relief, and we have higher Mexican tariffs for a while, you know, we may get a re -escalation with China, and therefore what are you ready to do in some of those scenarios and having those mitigation plans ready to go, and there'll be a diversity of those as well.
This was a fantastic discussion, Chubom and Cindy.
Thank you again for being together with us today.
Thanks, Lucia. Thanks so much for listening to the McKinsey podcast. I'm Lucia Raley, and I'm Roberta Facaro.
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