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How Amazon could combat ongoing trade war with China

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How Amazon could combat ongoing trade war with China

Despite a tariffs delay on some major Chinese imports to the U.S., Amazon.com Inc. is likely considering various strategies to help shield its third-party merchants and global supply chain from the ongoing trade war between the two countries, experts say.

The Office of the U.S. Trade Representative said Aug. 13 that tariffs on imports from China like cell phones, laptops and video game consoles will be delayed until Dec. 15. Other products will be removed from the Trump administration's plans to impose a 10% tariff on $300 billion of Chinese goods going into effect Sept. 1. But analysts say the delay will not entirely ease the pressure on retailers and e-commerce companies like Amazon.

"While it signals some financial relief for retailers and other consumer-facing industries, holding tariffs off until year-end does little to remove the uncertainty," Josh Holmes, Fitch Solutions Macro Research's senior consumer analyst, said in an emailed statement to media.

Analysts say Amazon is likely working behind the scenes to assist vendors, suppliers and manufacturing partners around the world and lessening its overall dependence in China as trade tensions continue. More than 50% of Amazon's unit sales come from third-party merchants highly susceptible to price changes, say observers.

Amazon, which has refrained from making any public statements about the trade war, declined to comment to S&P Global Market Intelligence on the matter.

SNL Image

Amazon's New York office.

Source: AP

Brandon Fletcher, an analyst with Sanford C. Bernstein & Co., said the delayed tariffs "helps consumers go a bit longer before any impact that might change consumption." But he still expects U.S. retailers will want to "de-China" their supply chains.

"They are going to ask their merchandising teams to emphasize the mix of products to come less from China in the assortment of their offerings, and they're going to raise a couple of prices on a couple of items," Fletcher said.

Cost control will also be front and center at retailers, including Amazon, he said. "They're asking their sourcing teams to think of clever ways — timing of the shipments, how they bundle the packaging, how they coordinate the shipping — to reduce cost."

President Donald Trump announced in August a plan to impose the 10% tariffs Sept. 1, which is in addition to the 25% tariff on $250 billion worth of goods

The latest round was expected to impact categories such as toys and apparel, making the situation more acute for companies like Amazon and BestBuy.com, LLC, which partners with factories in China to produce private label products, as well as Walmart Inc.

The tariffs delay will provide some financial relief for retailers in the runup to the holiday season but it may be only temporary.

"Longer term, there are still concerns that a trade conflict will continue," said David Silverman, senior director in Fitch Ratings' corporates group. "Right now it looks as though we are entering a period where it could structurally be more expensive to source goods from China," he added.

Vested interest

According to Amazon, the percentage of physical gross merchandise sold by independent third-party merchants on its site grew to 58% in 2018 from 3% in 1999. The e-commerce company helps merchants by, for example, taking care of packing and shipments, customer inquiries and returns.

The company does not provide specific data on third-party merchant sales but did say customers bought $2 billion of goods from its third-party sellers during its Prime Day sales events in July.

Justin Smith, founder of TJI Research, which tracks Amazon, said small and medium-sized third-party merchants might bear the brunt of the tariffs, feeling the most strain of having to swallow any additional costs or pass them on to consumers, something Amazon will likely want to address, he said.

"Smaller sellers who might be a little bit less diversified are potentially going to be more impacted than larger companies," he said. "If you have 200 different products coming from all over the place, you might be able to make strategy changes on how you are running a business. Those options might not be available to companies that are smaller."

Mitigating against tariffs

To prepare for the potential long-term impact of the tariffs, Amazon may already be encouraging suppliers and manufacturers to control product costs by changing a design pattern or taking out an ornamental piece within a garment, said Silverman of Fitch.

"A classic example is you remove a button," he said. "That's another strategy where you rework the product itself to make it lower cost in a way that the consumer won't negatively react to."

In addition, the company could work with manufacturing partners and vendors to shift production from of China to other countries such as Vietnam, Cambodia and India, said Joel Sutherland, managing director of the Supply Chain Management Institute and professor of practice at the University of San Diego School of Business.

Mexico is another potential destination. "A lot of companies are saying, 'It still makes sense for us to move to Mexico — they've got a stable currency, they've got great workers, they've got great engineers, and we're reducing our supply chain risk because we are coming closer to the home market,'" Sutherland said. "The fees, tariffs and duties are mitigated to some extent in the order-to-delivery cycle time."

Sutherland said that while the tariff delay is an opportunity to hit the pause button, they also increase uncertainty. "People like consistency," he added, underscoring how the stop-start scenarios are already taking their toll and postponing changes to December is actually a "plan B" while "retailers also have to be thinking about plan C or plan D."

Amazon, whose second headquarters near Washington, D.C. is under development, also will likely focus lobbying efforts on trade for the remainder of 2019 and into 2020.

According to the Center for Responsive Politics' OpenSecrets website, Amazon spent $4.2 million on lobbying efforts in the second quarter alone, advocating on issues including tariffs, U.S. trade policy, China, U.S. customs policy and procedures, foreign direct investment and other trade practices.

The National Retail Federation, whose members include Amazon, is also increasing its education of lawmakers on the impact of tariffs and how they could affect retailers' investment and potential hiring plans, said Jonathan Gold, the association's vice president of supply chain and customs policy.

Gold said companies like Amazon may seek exclusions from tariffs for certain items.

But exclusions are a short-term solution, Gold said. "It takes time and if you get an exclusion, it is only good for a year."