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Tariff Price Increases: Sales Impediment or Opportunity?

Was your plate overflowing with price increases in 2018? Well, prepare for a second helping again this year, as President Trump intensifies his international trade war and firmly in his crosshairs are steel and aluminum tariffs. Why steel and aluminum? And why, as a contractor, am I dealing with so many price increases on the equipment, parts and supplies I sell?

Good questions. We have some answers.

TARIFF INTERPRETATION

In March 2018, President Donald Trump levied a 25 percent steel and 10 percent aluminum tariff on multiple countries, an effort he proclaims was done in the interest of establishing free and fair trade and national security.  
Regardless of the reasoning, Trump’s steel and aluminum import taxes have triggered price increases for downstream users of these elements and as a result, the price of HVAC equipment, parts and supplies prices has risen again and again.

CONTRACTORS REACT

Robert Giancroce, owner of Aiken, South Carolina-based Mr. Central, a contractor that offers heating, air conditioning, solar, geothermal, and plumbing services, said he approaches issues such as tariffs from two different perspectives.

“From a contractor’s boots-on-the-ground standpoint, I generally don’t care why prices are going up or if a manufacturer has moved its operations to Mexico; all I care about is selling these systems to the best of my ability,” said Giancroce, a 37-year industry veteran. “From a businessman’s perspective, I care about all of these factors as well as the impact it’s going to have on depreciation, the amount of inventory we have, how this will impact when we purchase new trucks, our profit margin, our training schedule, and if we can offer benefits.”

Regardless of the reason, when prices rise, Giancroce said he feels contractors have no choice but to pass price increases on to consumers.

“The businessman recognizes that prices are probably going to increase yet again, so, to overcome that, owners should aim to double their stock before the price goes up again. That’s what we’re doing; we’re deploying cash today for stock with the expectation that this investment will more than pay for itself in the near future.”

Yet another way to overcome price increases is to use them as a selling tool.

“We’re informing our customers that HVAC equipment prices are only set to go up as the president intensifies his stance,” Giancroce said. “So, if you’re considering purchasing equipment, there’s no better time than now.”

In April 2018, Dustin Denison, principal of Minneapolis-based Applied Energy Innovations (AEI), began receiving letters from vendors and distributors announcing 8 to 10 percent increases on HVACR equipment, parts, and supplies utilizing steel and/or aluminum.

While Denison felt these increases were a bit steep, AEI adjusted its prices and continued forward. Three months later, another round of letters filled his inbox announcing yet another 8 to 10 percent increase. A few weeks later, yet another round of increases were announced.

By mid-summer, nearly every piece of AEI’s HVAC inventory had increased 25 percent.

“Grilles, registers, air conditioners, furnaces, really anything with aluminum or steel in it skyrocketed in price,” Denison said. “When the tariffs were first introduced, the media talked a lot about the potential impact of these tariffs and how they may impact businesses, well, in my company and in this industry, they came, and they stuck. We’ve been battling with them ever since, and, like most markets, when prices increase, they rarely come back down.”

In an effort to be as transparent as possible, Denison began emailing and sending his customers letters explaining the situation as soon as he received the first notice back in April. It seems like he’s been pounding the send button ever since.

“Through our initial communications, we were able to motivate a dozen or so clients and customers who were thinking of buying to go ahead and purchase equipment immediately to avoid those price increases. In hindsight, I’m sure many others wish they’d done the same.”

While AEI immediately began passing the prices down to the consumers to maintain its margins, several other contractors in Minnesota elected to simply absorb the costs.

“Sure, these contractors may be winning jobs today, but they’re only going to be able to go through this exercise five or six times before they realize that they can’t continue doing business that way,” Denison said. “There is really one option — they either adjust their costs, or they’re going to have to find a new line of work.”

ASSOCIATIONS STAND IN OPPOSITION

Todd Washam, director of industry and external relations, ACCA, a national organization representing 60,000-plus HVAC contracting professionals, said the tariffs have not impacted HVACR contractors as severely as the organization had anticipated.

“We thought it was going to be much worse than it has been,” he said. “Across the board, I don’t think tariffs have had a massive impact at this time. The economy is good enough that people have enough money to overcome these incremental price increases.”

Despite the weakened impact, ACCA remains in opposition of the tariffs and believes such price increases could still drive people away from system replacements and toward Band-Aid fixes.

While representatives with Air-Conditioning, Heating & Refrigeration Institute (AHRI), have been pleased with the Trump administration’s enthusiastic support for manufacturing, the institute believes the existing steel and aluminum tariffs to be injurious rather than helpful to American manufacturing.

“As major users of steel and aluminum, we have been proactive in explaining to the administration that the HVACR and water heating industry has been negatively impacted by an increase in tariffs, as would the consumers who rely on the products we manufacture,” said Stephen Yurek, president and CEO, AHRI.

Based on a survey conducted by Heating, Air-conditioning, and Refrigeration Distributors International’s (HARDI’s) Sheet Metal & Air Handling committee, the current overall domestic production capacity of steel and aluminum HVACR products cannot alone meet the current demand of the domestic market. In its report, the committee stated that the American steel and aluminum industries cannot currently make certain materials, such as the low-gauge foil required to make Foil-Scrim-Kraft (FSK) facings that are used on duct board and duct wrap. Therefore, HARDI’s concern is that an increase in aggregate costs brought by the new tariffs may also result in a decrease in demand for HVACR products further along the supply chain.

Alan Beaulieu, president, ITR Economics, told attendees of HARDI’s 2018 Annual Conference that when all is said and done, the tariffs will not have a dramatic impact on the U.S. economy.

“The U.S. is the world’s customer,” Beaulieu said. “We can’t make all the steel and aluminum we need. It’s physically not possible. That said, these tariffs have been painful for a lot of companies, and, on the flipside, they’ve helped a lot of companies. There are winners and losers in this.”

Beaulieu predicts the tariffs will come to an end in the very near future.

“We’ll always have tariffs and barriers, as I believe we may never have relative free global trade again, but the tariffs, at least in this form, are about to come to an end. The trick will be to convince China that it’s earned a few wins and the same for Trump. When that occurs, I expect the tariffs will get rolled back a bit, but prices will likely never come back to where they once were. This has been an interesting exercise, as no president has ever put tariffs at the top of his agenda before, so we set a bit of history with this.”

The bottom line is tariffs are likely here for the foreseeable future, and things might get worse before they get better. Contractors need to accept them, leverage them, and pass them along to their customers. News on these tariffs is constantly changing, so stay tuned to future newsletters for more information.