When South Korea’s Samsung Electronics and LG Electronics last year announced plans to build home appliance factories in the United States, they hoped to sidestep any fallout from President Donald Trump’s “America First” manufacturing and jobs mantra.
Last week’s decision by the U.S. government to impose tariffs of up to 50 percent on imports of washing machines and key components showed that wasn’t to be.
The inclusion of hefty tariffs on components in particular had moved the goal posts in a long-running trade dispute, upending supply chains and threatening investment across other industries, officials from the companies and the South Korean government said.
“It’s unprecedented and excessive, and will set alarm bells ringing for other companies doing businesses in the United States,” said one Samsung official, declined to be named as he was not authorized to speak to media.
After committing hundreds of millions of dollars to build the plants and bring jobs to South Carolina and Tennessee, the ruling caught the companies by surprise and was a “worst case” scenario, according to one executive.
Samsung says it will use imported parts until its factory runs at full capacity and becomes ready to produce key parts, expected to be by the end of the year.
Samsung, which relies on a sprawling manufacturing base in low-cost countries such as Vietnam has argued that a tight quota on overseas-made parts could deny it the supply chain flexibility it may need as its new U.S. production lines set up.
The ruling on a quota for foreign components is also making other manufacturers and suppliers jittery.
“You’ve got to find a way to adapt or circumvent somehow.”
An executive at South Korean battery-to-chemicals conglomerate SK Group said the news was also bad news for producers of intermediary goods such as SK, which supplies big manufacturers with thousands of components that will now be caught up in the spat.
Privately owned Dongjin Techwin, which supplies LG Electronics Inc, is already bracing for contract losses, as LG moves to produce components in-house.
“There’d be little point on trying to figure out how to export components from Korea to the United States, and then build a washing machine there,” Jung Hyun-mo, a senior executive at Dongjin, told Reuters. “There just isn’t the export-import supply chain in place for that.”
CUT OFF AT THE KNEES
The decision by Trump in the “Section 201” safeguard case came after the U.S. International Trade Commission found last year imports were “a substantial cause of serious injury to domestic manufacturers” including Whirlpool Corp.
The tariffs exceeded the harshest recommendations from ITC members, with a 20 percent tariff set on the first 1.2 million imported large residential washers in the first year, and a 50 percent tariff on additional imports.
Washington also imposed a 50 percent tariff on imported key parts in excess of 50,000 units in the first year, a move Samsung’s South Carolina plant manager fears could “cut us off at the knees”.
“Although we are installing production equipment and we are committed to producing the major parts in-house, there will be a transition period during which importing parts will be necessary to successfully launch this facility,” Tony Fraley, Samsung’s plant manager, told the commission in October.
When asked if there were any plan for price hikes to counter the tariffs, Samsung said it would discuss any changes with its business partners.
Consultancy firm Euromonitor estimates South Korean washing machine makers would need to raise prices by $50 to $400 to cushion the impact of tariffs.
“We had several scenarios… this safeguard measure turned out to be the worst case one,” Kim Gun-tai, head of LG’s home appliance division told a conference call last week.
LG, which announced a plan to raise prices on its washing machines sold in the United States last week, said in a separate statement to Reuters it was absorbing a significant portion of the tariff on parts. Once its U.S. plant’s operation began it would produce key parts on site, it added.
The safeguard issue is set to top the agenda when government officials from the two countries meet later this week to discuss trade issues.
South Korea has already filed challenges and demands for compensation at the World Trade Organisation under the Safeguard Agreement.
