While US went through high inflation recently, the companies raised prices to deal with supply chain issues to labour costs, but never cut their margin. Most companies are at historically high margin. How long is this sustainable?
This is one of the biggest long-term threats to market valuation.
In highly competitive markets–especially commodities like steel or grain–margins must constantly be under pressure. For most manufactured products price cuts are rare.
In a recession wage demands may be less severe but ability to reduce wages is rare. Wage cuts were the cause of the big railroad strikes (or riots) in the 1880s. Did that during the Great Depression. For Century Electric in St Louis in 1931.
More commonly that 2% optimum inflation rate allows employers to catch up by delaying wage increases.
Maintaining margins probably means raising prices. We do read of consumers resisting price increases by switching to generics or reducing restaurant spending etc.
Do not confuse price with margins. Margins have been especially high and never mean reverted. I thought SPY margins were skewed by tech margin’s, but even non-tech names like HD & LOW maintain their high margins. At some point they have to come down. Even Lina Kahn’s of the world were so focused on tech monopoly abuses, they were not really attacking the other industries. But, it may end up happening, if the inflation ends up sticky, i.e., above 2%, in the range of 3% to 4%.
So how does this square with the statement that “manufacturers will reduce their margins to absorb the tariff impacts”???
Seems like it gets argued one way on Tuesday and exactly the opposite on Wednesday. Weird.
Accountants tell us that manufacturing businesses need 15% return on invested capital to survive. (I’m not sure how that number changes with interest rates and inflation.)
If costs or competition prevent that the business slowly deteriorates and either shuts down or gets sold. Getting there usually means cutting costs or raising prices.
Yes, that does mean maintaining margins.
Yet Ford and GM’s Roic is around 3%, BA is negative.
At Westinghouse, depending on which division was running the calculation, the hurdle rate was either 5%, 8%, or 12%. And that changed over time, depending on interest rates, and whether the CEO really wanted to do it or not 
I think if you could find a manufacturing company that has a Roic of 15% you would have a very good investment. AAPL is at 55% right now but I suspect that is going to come way down.
It’s a new world, where you produce something once then sell it with only minor costs (pressing a CD maybe, or even now just streaming it) a million bazillion times.
That’s why Westinghouse was so entranced with broadcasting. Their shipyards and turbine manufacturing divisions were material, energy, and labor intensive; if they could grind out 3% they were happy, at 5% delighted. The nuke division was a nightmare, but I never saw any numbers from it. At one point it threaten to take down the whole thing, so it wasn’t good.
Meanwhile over in broadcasting we were running stations with 50% gross margins and 25% nets. I remember one year when the one Boston TV station alone contributed more than 25% of the entire conglomerate’s profit - and the entire broadcast division (10 radio, 5 TV, satellite, syndication) was only 3% of Westinghouse revenues, but the margins were HUGE. Make the product once, distribute to millions of people with no additional cost. Ultra high leverage.
Maybe that’s why they morphed into CBS when the rest of the industrial powerhouse came crashing down in the 90’s.
Yes, and they have PEs of 8. (GM 7.52) (Ford 6.57). Vs S&P avg of 16.
Clearly investors think their earnings are in decline. And reasonable people can ask if they will survive this time. Huge investment in EVs still required to defend market share.
I recall sitting in a meeting at a manufacturing plant. The suits showed up to tell us we had an 8% ROIC. That breezed over the head of most attendees. But they are telling us in code language big changes are coming. And that is what happened.
The business guys say at 8% return they would rather put their capital in bonds and get comfortable returns with little or no risk. Ie your plant might be more valuable leveled and sold to a housing developer. Bottom line either raise ROIC or your days are numbered. Don’t count on job security. If you are lucky you might get severance pay.
Re: price cuts are rare
Refers to situation where tariffs are imposed causing sellers to raise domestic prices. Then tariffs are removed. When customers are used to the new price reducing the selling price is rare. Holding special sale is more likely especially after Nixons price freeze. Competitive pressures might force price reduction but sellers will be reluctant.
Manufacturer reducing price to be competitive after tariffs are applied refers to exporting manufacturer. Yes, that is an option. But probably requires high margin product. Not much point in selling at a loss. Selling below domestic price is called dumping and is often illegal.