The escalating trade situation between the United States and China are increasing production costs for fitness equipment vendors who manufacture equipment within the United States but, at least temporarily, has spared those who manufacture overseas, according to some equipment manufacturers.
To level what President Trump has deemed an “unfair imbalance” in trade between the United States and China, the administration has imposed tariffs on 50 percent of imported Chinese goods. China has retaliated with its own set of tariffs on U.S. imports.
Neither side has shown signs of backing down. If the trade war continues, health club operators should be prepared for the increased costs of fitness equipment and other ancillary goods to trickle down to their businesses and customers during the next year, according to several fitness equipment manufacturers.
In early 2018 the Trump Administration hit China with $4.4 billion of duties on steel, aluminum and consumer goods. A 25 percent tariff on an additional $50 billion worth of imports from China soon followed and a 10 percent tariff another $200 billion worth of goods was imposed Sept. 24, 2018. Trump has threatened to increase the tariff to 25 percent in early 2019 and extend it to an additional $260 billion of imported goods if a trade agreement cannot be reached.
As of Sept. 17, 2018, the list of tariff line items is 194 pages long, and ancillary items used by health clubs are all over it. Everything from terry cloth towels to retail displays, LED lighting, speaker components, weight lifting gloves, footwear, furniture and food items made the list, and many more items that are components of computers and machinery used to make, box and ship consumer goods. If the trade war continues, business owners should anticipate rising product costs across the board even on goods manufactured in the United States. Rising costs on consumer goods also mean less discretionary income for health club memberships.
Even though more than 50 percent of all Chinese goods are now subject to increased duties, most finished fitness equipment, including boxed cardio and strength equipment, is not affected by the tariffs. Still, fitness equipment manufacturers that import finished equipment from China told Club Industry that they could be included in the next round, which threatens to expand the tariffs to include 90 percent of all Chinese imports.
The ripple effect from these duties will be felt across the U.S. economy, but right now, it is hitting some U.S. manufacturers harder than those who manufacture overseas. U.S.-based fitness equipment manufacturer Precor reports the company is expecting higher production costs due to the trade war, even though 90 percent of its equipment is manufactured in the United States with American-made materials.
Domestic manufacturers are some of the first to feel the effects of the tariffs because American steel and aluminum prices are rising due to less competition from cheaper Chinese materials, according to Doug Johns, vice president of global commercial and marketing for Precor.
“We are experiencing higher material costs, just as are U.S. manufacturers from all industries that use steel and aluminum in their products,” Johns said.
American-made products also often include specialty components that are imported from China, some which are now on the duty list.
An American manufacturer who sells products into China also will be hit with increased duties on the sales end of the business. Exports to China will see higher duties because of the retaliation tariffs imposed by China on U.S. goods. Chinese manufacturers will not have to pay the duties because their products are already in the country.
“The tariff situation is generating a lot of conversations, and there are real impacts on costs for both U.S. and Chinese customers,” Johns said. “China has a booming gym scene and a strong hospitality market. There has always been a duty on the equipment we export to China, though now it has increased, and it is set to go up again January 1st.”
Major fitness equipment brands that manufacture in the United States include Precor, Cybex and Life Fitness. Other manufacturers, including Nautilus, Star Trac, Schwinn, Stairmaster, Octane, SportsArt, Johnson Health Tech (Matrix, Horizon, Vision) and Body Solid, import some or all of their products from China.
Although they have not been directly affected by the tariffs so far, companies that manufacture in China are watching the trade war closely. Speculation about increased duties in 2019 has some of them working on contingency plans to help cushion the cost increase if the threatened tariffs are imposed next year.
“Ideally, we would not want to be in a position where we have to pass these kinds of tariffs on to our customers, so somewhere in between the factories and our end customers that has to be absorbed,” said Bruce M. Cazenave, CEO of Nautilus. “Hopefully, we can find some way to do that. It’s not easy to move production around he world, particularly into factories and countries you are not as familiar with. There is a risk associated with the energy and cost associated with positioning to move, and then what if you don’t need to move? You’ve expended all that energy and angst and then you don’t need to.”
Nautilus is working proactively to explore options such as moving production to other countries with the help of their current manufacturing business partners in China. Cazenave speculated that the Chinese government may help factories with some of the costs. However, it would be unlikely that any manufacturer could escape some sort of cost increase if the trade war continues, he said.
Mark Zabel, president of Johnson Health Tech’s U.S. commercial division, said that his company also is exploring contingency plans and may consider moving production around the world if the tariffs are imposed on the company’s goods. He also is keeping a close eye on other industries for an indication of what business challenges they could face in the short term, one of which is increased shipping container pricing. As U.S. businesses scramble to purchase the goods they need from China before the trade war escalates further, the increased demand could cause container pricing to spike and overcrowd the shipping market, making it more difficult for overseas manufacturers to get products into the United States, Zabel said.
Consumers and businesses won’t see prices spike immediately, though. Products can take months to go from raw material to market ready. Some companies may have contractual obligations that don’t allow them to increase prices for a set period. If a trade deal is not reached, consumers can expect to see those cost increases rolling out over the next year. If a deal is reached soon, the price increase could be no more than a blip on the radar, and prices could normalize quickly.
The Sports & Fitness Industry Association (SFIA) opposes the tariffs, and representatives from SFIA lobbied against the tariffs, arguing its case before Congress over the summer and filing 71 petitions requesting exemption for more than 300 products under 38 product lines. Eight of the petitions were successful, exempting about 30 of the 300 products SFIA had petitioned for.
“We worked for months to petition the government to not impose these tariffs on sports and fitness products, and we remain convinced this is bad policy,” said Tom Cove, president and CEO of SFIA. “It makes no sense to increase prices on products that keep Americans healthy and drive down health care costs.”
SFIA will continue advocating in Congress for reduced tariffs on sporting and fitness goods, Cove said.
American manufacturers are holding onto the hope that customers will continue to value high-quality products made in America regardless of the price increase.
“Precor and the other fitness equipment manufacturers are not in a commodity industry,” Johns said. “Fitness operators have always made their purchase decisions based on factors beyond just price, especially equipment reliability and the quality of after-sale service.”