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Intended to protect domestic industries and jobs, and to provide a more equitable international market for U.S.-made products, tariffs have long been used as a tool of trade policy. However, they can also have far-reaching and unintended consequences.
This is especially true for the crane and heavy lifting industry where tariffs affect the import of new and used equipment and parts, increase material costs and cause supply chain disruptions. At the same time, they are causing concern in the banking and lending industry that supports and finances the acquisition of high value commercial assets.
Currently, there is a minimum baseline tariff of 10% on many products imported to the U.S., which took effect on April 5th. The average effective tariff is 17.8%, the highest in almost 90 years. China is being hit with a 30% tariff while tariffs on imported aluminum and steel from various countries are ranging from 25% to 50%. It should be made clear that the USMCA (United States Mexico Canada Agreement) trade agreement remains duty free.
The administration’s stated goal when enacting new tariffs is to protect and enhance our domestic economy and bring nations to the negotiating table regarding international trade. The situation remains lucid as agreements could be reached any day between the U.S and other countries. As a result, it is causing much apprehension among customers, dealers and banks alike.
Dealers and customers are hesitant to make purchases that have tariffs because at the end of the 90-day period, the tariff has the potential to be lifted. As there is no way to be reimbursed for a tariff once it has been paid, dealers are holding off on importing equipment, and customers are holding off buying because they do not know whether the equipment will arrive before the expiration of the 90-day extension. Therefore, there is a great deal of “wait and see” in the market.
Finance Market Impacts
If tariffs are enacted at the end of the 90-day period and made permanent, that is a scenario that can be dealt with in the finance world. It is not easy, but it is workable.
Banks and finance companies typically prefer not to over advance on equipment with soft costs, such as taxes and shipping. Customers that are financially stout can typically seek financing and leasing options that will include the soft costs into the finance amount.
However, companies with a moderate or mid to lower tier financial ratings may be affected and required to mitigate the credit risk with larger down payments or additional collateral. These companies may be seen as a greater risk, and therefore, banks and other lenders may not be inclined to over advance on the equipment loan.
Their concern is that should the finance source get this asset back they could be underwater with an undervalued asset due to the tariff on the initial purchase. As a solution, banks may require the customer to pay the tariff out of pocket, which could greatly impact their business cashflow, or they may decide they cannot afford to buy the equipment at all.
If a tariff is enacted after the 90-day pause, then rescinded later in the year or next year, it will cause a major issue for the banking and financing industry because some portfolios may become over advanced or exceed credit risk Loan to Value (LTV) margins. For banks, this could create regulation and compliance issues that may factor into their Financial Stress Test formula. There is also the potential for a portfolio credit risk scenario resulting in a tighter credit policy and higher pricing, which may be required to satisfy Federal Regulators portfolio risk concerns.
Equipment Market Impacts
The uncertainty about the tariffs is causing issues in the equipment market as well. Dealers and customers alike are concerned about overpaying. Should a piece of equipment be imported and purchased while the tariffs are in place, the customer or dealer will need to pay that tariff. As a result, many customers and dealers are delaying or cancelling orders until there is a resolution regarding tariffs.
Adding even 10% to the cost of any crane or heavy haul equipment can range from $100,000 to $500,000 or more. This will have a major cash-flow effect because customers may need to pay the tariff out of pocket, or if the bank or lender agrees to finance the tariff it could significantly increase their monthly loan payments. In some cases, the tariff cost is like adding a piece of equipment to your fleet without gaining any revenue or income advantage.
One may think initially that domestic crane and equipment manufacturers may benefit from tariffs because they may be able to keep their prices lower while foreign rivals need to add tariffs to the cost of their goods. However, domestic manufacturers may need to import components or import materials for components, which initially will be cumbersome to price.
For example, what percentage of the components have tariffs, and can they be absorbed by the manufacturer or by the customer? In the end, this could reduce the cost savings of purchasing a unit from a domestic manufacturer.
The cost of domestically sourced used equipment may initially get a value boost from tariffs. This, in turn, may enable funding sources to accept higher values to be financed and/or advanced at 100% of the new value over time.
However, while customers may try to purchase equipment that is already located in the U.S. to avoid tariff costs, we also may see a surge in pricing due to supply and demand. If minimal equipment is being imported it will create high demand for equipment that is here, and as a result will increase prices due to limited supply.
The uncertainty with tariffs is also causing project delays and reduced capital investment until there is more clarity. Small to mid-sized contractors may not have as much financial flexibility as large firms and are particularly vulnerable. As a result, it may prohibit some companies from adding equipment to their fleet.
As an alternative, they may extend the lifespan of older machinery, which is generally known to raise maintenance and repair costs or decide to rent. While renting can be a great option, if there is minimal capital investment by crane and heavy equipment rental companies, there may be a lack of equipment in the market. Under this scenario, bare rentals can become more expensive, which can affect cash flow and job profitability.
For now, the best approach for manufacturers and lending institutions, and especially buyers, is to prepare a plan to move forward with their acquisitions, because once there is clarity about tariffs the equipment market may become extremely active through next year.
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Harry Fry is the president of Harry Fry & Associates, a heavy equipment financing provider dedicated to the crane and lift industry. Founded in 1995, the company has provided crane manufacturers, distributors, and end-users with finance and lease programs from $50,000 to several million dollars.
