Investment firm William Blair on Trump tariffs

The American investment bank William Blair & Company’s latest management survey, as reported by SGB, takes on the “current environment,” hoping to steal a “view into derivative impacts and demand trends ahead of an important, and likely volatile, first-quarter earnings season.”

Blair believes that certain management decisions since April 2 – US President Donald Trump’s “Liberation Day” – could affect the rest of the year. Some companies have pulled back on orders and spending, while others are forestalling changes to their full-year guidance until tariff negotiations play out. “By most accounts,” Blair writes, “consumer demand is healthy and stable from March,” which “suggests relatively quick capacity to rebound, though these coming weeks are critical to gain some clarity before more lasting disruption occurs.”

Companies in general, says Blair, are seeking to minimize Chinese production. Those dealing in softgoods have an advantage here, most of them having begun the shift during Trump’s first term and continued it during Joe Biden’s. At the time, moreover, although some of it moved to Vietnam, much softgoods manufacturing went beyond Southeast Asia – to India, Pakistan and Bangladesh. Hardgoods manufacturing, by contrast, went mostly to Vietnam, Cambodia, Indonesia and Thailand, with some going to Mexico.

China’s sphere of influence

In any case, the current shift away from factories in China is general, although there is more to it than meets the eye. “Most of the companies we spoke to,” writes Blair, “seem to have moved production from China into Vietnam in particular following a flow of Chinese-owned and staffed facilities that migrated to the country starting in the first Trump administration.”

In other words, the shift amounts in part to a Chinese circumvention of US tariffs, because China owns so many of the factories in Southeast Asia. As we at SGI Europe have noted in our timeline of the Trump tariffs, Chinese President Xi Jinping paid a visit to Vietnam, Cambodia and Malaysia not long after “Liberation Day.” The tour was scheduled before Trump’s announcement, but the tariffs undoubtedly moved up on the agenda.

So where to now?

“Given that all these countries face an uncertain future,” Blair continues, “there is not one obvious geography that feels more secure, particularly as the overwhelming consensus is that these tariffs will ultimately come down (consensus is uniformly 10 percent to 20 percent across all countries outside of China).” Latin America is a possibility, because the proposed US tariffs on its countries tend to be relatively low and because some of the region has near-shoring potential with respect to the US market. For now, though, Blair recommends flexibility through a diversification of supply chains.

Because lead times for many goods tend to last around six months, the tariffs shouldn’t affect the cost of goods sold until the third quarter. (The 90-day reprieve on Trump’s reciprocal tariffs is scheduled to end on July 9.) Blair cautions that lead times for non-vertical, non-fast-fashion footwear and apparel tend to be three times as long (18 months). As we have reported, some sportswear brands – On, for instance – are toying with methods to speed things up.

Prices or margins?

There have been a few order cancellations and a few order delays, because why pay duties now if things are going to change? But this strategy, Blair observes, will work only when the market is not in a selling period, like back-to-school.

Most companies are proceeding with plans for new and seasonal products this year, although uncertainty reigns over matters of inventory for the second half. On this front, Blair expects conservative management, with shortages to come in Q3 if consumers keep spending. Some companies are making their cuts in advertising and real estate.

Will companies raise prices or suffer reduced margins if the US tariffs go through? In Blair’s view, many companies will take the hit on margins, because prices are already up. Apparel prices, the firm notes, were relatively flat for 30 years before the lockdowns but increased by 10 percent from 2021 to 2023 – this on top of core inflation of 14 percent over the same period. So many companies are looking to “absorb costs through greater efficiencies, value engineering, or cost cutting.”

New US factories?

Apparently not, Blair says. Only New Balance, with its five factories in Maine and Massachusetts, and a few small brands make shoes in the US. It would be easier, says Blair, to move apparel manufacturing to the US, but in either case the shift would take about five years. The Caribbean and Mexico have a head start. At any rate, “the two most-cited issues are labor cost and availability,” with the pollution of large-scale textile manufacturing coming next. Although softgoods are already made in the US, most producers still import their fabric, even cut fabric, from abroad.

A shift to the US is therefore “unlikely,” says Blair. “Those that already produce in the U.S. could have some opportunity to expand. But by and large, the higher cost of production and lack of skilled laborers (84,000 workers in the U.S. that make clothing) make that a tough proposition without significant time and investment.”

“Several companies highlighted Mexico as a viable alternative to China and Southeast Asia, with a quick ramp possible in the near term, but many are waiting for visibility into a more defined agreement between Trump and Mexican President Claudia Sheinbaum Pardo.”

On Q1 2025

William Blair’s Leveraged Finance Newsletter for Q1 2025 also surveys companies on the Trump tariffs and their effect on new opportunities. Here are some results:

• Tariffs now key in deals, but uncertainty is clouding risk assessment and pricing
• New forecasts include downside scenarios
• New focus on supply chains, potential foreign exposure
• Margins being adjusted down 5 to 10 percent
• New demand for US businesses with North American supply chains – companies must be more aggressive on leverage and pricing to win these deals
• Caution on businesses with government contracts or spending
• More opportunities in opportunistic credit
• Modestly exposed opportunities getting structural cushions
• Materially exposed opportunities being avoided
• New focus on cost of labor and raw materials
• Reduced deal-flow volume

What will most affect the leveraged loan market?

• The Trump administration and its Department of Government Efficiency (DOGE – i.e., US government contracts)
• Tariffs, interest rates, inflation
• Performance of existing portfolios
• Upcoming debt maturity walls
• Consumer confidence, sentiment, and spend
• M&A activity and lack of results from dividend recaps
• Volatility from regulation
• Continued financial stress of interest expense and labor and input costs
• Labor and/or supply chain disruption
• PE fund exits
• Macroeconomic uncertainty (possible recession)
• Competition with lenders for few deals
• Appetite for refinancings
• Lack of deal flow against LP demands to return capital
• Artificial intelligence (AI)
• Foreign policy and geopolitical risks (Ukraine, Middle East, etc.)