Podcast: How U.S. manufacturers are navigating tariffs and USMCA uncertainty

LP: So with the section 232 tariffs, are they getting a refund because they're using it in a finished product in the United States that's sold in the United States?

RD: Correct. So what happens is they get, so for the value they're creating in the U.S., they get that MSRP value of the vehicle. So take PACCAR, for instance, that builds Kenworth and Peterbilt trucks. They're building the substantial amount of that truck here in the U.S., either in Seattle or down in Texas. And so what the USMCA, so it just got expanded, the 232 was an automotive tariff that just got expanded to medium-heavy-duty trucks. 

So they take the value percentage of their MSRP that they're producing in these trucks in the US and then they get a percentage of that in tariff abatement. So we supply them a component, we supply PACCAR a component. And so now they can register those components that we're bringing in from our overseas operations and paying a 232 tariff on. They could register that with [Customs and Border Protection] and then they'll assign X amount of dollars in tariff relief to us and we bring that in. So all of a sudden we don't have to pay the tariff on that finished compressor that we're bringing in. But for us if we're bringing a component in that goes into a finished compressor, then we are selling that finished compressor out of our U.S. operation to PACCAR. 

We don't get that 232 rebate because it's not a part number that PACCAR can register. PACCAR can't register, say, a motor that we're bringing in for our compressor and an electric motor. So it makes more sense to bring the finished compressor in directly from our facility that can be registered with PACCAR, and we then take the time to localize all those components to North America. But we need to understand you know what where the tariff is going in North America before we can make supplier selection for that.

LP: But what's involved in localizing?

RD: So localizing is, so we've got to find a supplier in the U.S. or in North America, if the USMCA current process is, we have to look at the price of that product, compare it to the price of that component coming in from overseas. We've got to make sure that that once we have it, it takes about a year to do the validation, nine months to a year to validate that component through our validation process with our customers. 

So if I pick a component from Mexico, let's say a die casting from Mexico, and I source a die casting from Mexico, and all of a sudden I'm going through the validation process of tooling that up and validating it, and come June or July, the USMCA agreement changes and there's a tariff on that product that isn't there today, and that all of a sudden makes that component uncompetitive, I've just wasted all my tooling and my validation associated with that. 

If it's in the U.S., the trouble is in the U.S., it's been very difficult to find competitive product in the U.S. that's readily available. You know, a lot of the supply chain in the U.S. doesn't have the capacity or can't produce it at a cost competitive rate. It still may be less expensive for us to bring the motor in from overseas and pay the tariff on it, then localize it here with a true U.S. manufacturer. Just because over the last 20 years, there's been so much offshoring of product, suppliers in the U.S. don't have the capability and aren't as cost effective as some of these overseas. 

So it still may be cheaper for our customer in the end to bring the product in from our [overseas operation], but we are working hard to get a localized product and this operation up and going. Our goal is to be operational with this production by the end of this year. So to have localized product to make it more cost effective for our customers to buy it from this location than buy it from overseas even with the 232 tax credit.

LP: Do you have any idea how much the changes in tariff policy has cost your company?

RD: Well, it's hard to put an exact number on it. I mean, we've worked well with our customers and we've absorbed some of the tariff. We've passed some of the tariff along, we've had our supply base absorb some of the tariffs. So I think at the end of the day, you know, it has cost us, I would say in the neighborhood of 5% of our product that we've absorbed the tariff on. 

Ultimately, some portion of the tariff is getting passed on down to the consumer because they're just, I mean, there's just not the margin at any level to absorb 100^ of it. But I would say somewhere between, you know, in the 5% range it's cost us in tariff absorption.

LP: Okay. The renegotiation of the USMCA, what are you going to be looking for in that?

RD: Yeah, I think the big thing is, you know, what are any tariffs or duties associated with bringing in made in Canada or made in Mexican product as a source? Ideally, we want to see still what we have today, which is free trade with our biggest trading partners in Canada and the U.S.

LP: The Clean Energy Innovation Center, have you guys had to change your mix at all or been affected by  policy around EVs in the United States?

RD: Absolutely, and I would say, you know, we're a global supplier, so, and this innovation hub supports our global customers and global development. So things in Europe and Asia, you know, have not changed that much with the direction of their EV sources. The U.S. has made a big shift. A lot of our customers have shifted, either eliminated a lot of their BEV programs, battery electric vehicle programs, or substantially reduced them in volume and scope.

The ICE, internal combustion engine, is still a very strong percentage, I would say 90+% of vehicles in North America in the medium and heavy-duty truck commercial vehicles and buses still a 90% plus for the, you know, foreseeable future. So, and foreseeable future, I'm saying somewhere into the 5-7 year mark, I think as we get into the mid-‘30s, it very well could then be shifting as costs come down. 

Again, part of the problem is BEVs are so expensive, they're two to three plus times the cost of an ICE vehicle, and there isn't the infrastructure in place, so, even though the current administration has changed their incentives and philosophies on BEV vehicles, really you have to go back before this administration and even with the administration before that that was pushing it. They weren't putting the infrastructure in place to support the push that they wanted or were doing, so you know if all of a sudden we had 20% electric vehicles, commercial vehicles running around the road, there's no infrastructure to charge them and that hasn't changed with the current administration. So, you know, that is a big problem that a lot of customers talk about.

That being said, what we're seeing is a resurgence in the hybrid vehicle. So, whereas it was either ICE or BEV, now we're seeing a hybrid vehicle start to pop up and gain some momentum and some strength because it doesn't cost that much to—especially in our product for the air conditioning, which is an engine-driven compressor—to pull that compressor off of the engine because there are engine fuel efficiency and emissions targets that are significantly changing in '27 or '28. And I don't think the current administration is really going to change that that much.

So the engine manufacturers have to find ways of making these engines less pollutant, and part of that is allowing them to shut off longer at stoplights and just like cars do. And a big piece of that is pulling the HVAC system off of being an engine-driven product and put it as an electric compressor, even a low-voltage electric compressor cooling. So those are some of the programs that have actually accelerated out there now that we're looking at those type of products for hybrid-type vehicles.

LP: So as we're wrapping up here, is there anything, what else are you looking ahead to in 2026 as you're strategizing?

RD: I think the big thing is really getting here in North America, as you've talked about, getting our head around what's happening with electric vehicles and ICE vehicles and hybrid vehicles, and what the right product is for not only over the road, but ag and construction. 

Ag and construction for us has a big change in refrigerant for HVAC, so everything is moving from 134a to 1234yf in those markets, so we're working hard with our customers to make that conversion of the product. Overseas, it's similar, different refrigerants. We're really looking at what the new refrigerants are, the natural refrigerants we're adding here in the U.S., a lot of natural refrigerant testing as well, even though the U.S. may not be looking at 290, which is propane, but Europe is. We're already seeing customers starting to move to natural refrigerants in Europe. 

So, we're really still investing a lot in our climate center here for innovation and research. You know, originally refrigerants with fluorocarbons were banned, so you had to start moving to your natural refrigerants like propane, like CO2, are very low in ozone-depleting type environmental issues. So, but 134a is moving over to 1234yf, which does have fluorocarbons in it, but a very low percentage that meet that. 

As these regulations move, ultimately you want to move to a natural refrigerant, which means it is naturally occurring in our atmosphere and isn't damaging to the atmosphere. So the two main ones that are being looked at are CO2, and which is what we refer to as R744 and R290, which is propane. So there's pluses and minuses to most of those. Most of our industry is really looking at the R290 or the propane-type product. It has a lot of characteristics that the current refrigerants have. It's better in some cases, but there isn't a ton of changes except for you have to be worried about. Obviously it it's more it has a higher flammability than current refrigerants. So those are all things that you have to be conscious of when you're using it.

LP: Okay. And I just wanted to ask you about the workforce programs at the new center. Are these up and running yet?

RD: The curriculums are lined up and the community, Richland Community College is set, they're still putting a lot of their audio-visual stuff in those classrooms. The fall of ‘26 is slated for their first semester of curriculum.

About the Podcast
Great Question: A Manufacturing Podcast offers news and information for the people who make, store and move things and those who manage and maintain the facilities where that work gets done. Manufacturers from chemical producers to automakers to machine shops can listen for critical insights into the technologies, economic conditions and best practices that can influence how to best run facilities to reach operational excellence.

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