ELUXY AB Electrolux (PK)

By Andrew Tangel and Josh Zumbrun 

CLYDE, Ohio -- After the Trump administration announced new tariffs on imported washing machines in January, Marc Bitzer, the chief executive of Whirlpool Corp., celebrated his win over South Korean competitors LG Electronics Inc. and Samsung Electronics Co.

"This is, without any doubt, a positive catalyst for Whirlpool," he said on an investor conference call.

Nearly six months later, the company's share price is down 15%. One factor is a separate set of tariffs on steel and aluminum, imposed by the U.S. in March and later expanded, that helped drive up Whirlpool's raw-materials costs. Net income, even with the added benefit of a lower tax bill, was down $64 million in the first quarter compared with a year earlier.

In his next call with investors, in April, Mr. Bitzer struck a cautious tone. "There continues to be uncertainty regarding potential future tariffs and trade actions," he said. "We'll continue to monitor, evaluate and take the right action for our business."

Put into practice, tariffs are a complex economic weapon that can ricochet through an economy in ways even proponents don't expect. That's what happened with washing machines, which were among the first consumer products targeted by the Trump administration.

In the months since washing-machine tariffs took effect in February, LG and Samsung have pressed on with investments in the U.S., given that they now face the higher cost of shipping goods in from abroad. The overseas companies and Whirlpool have also increased hiring in the U.S. But appliance prices have risen for consumers, and there are signs of waning demand.

Whirlpool had campaigned for protection from what it called unfair foreign competition. Things became more complicated as the trade conflict spread beyond its industry.

"Raw-material costs have risen substantially," Mr. Bitzer said on the April investor call, primarily blaming steel and aluminum tariffs. Most of the 200-pound weight of a washing machine is in its steel and aluminum parts.

A spokeswoman at the Benton Harbor, Mich., company declined to answer more detailed questions about the tariffs' effects, saying Whirlpool needed to remain silent before it announces second-quarter earnings in late July. She declined to make Mr. Bitzer or other executives available for comment.

The administration has imposed tariffs on $92 billion of imports including washers, solar panels, steel, aluminum and a range of goods imported from China. U.S. trading partners, including the European Union, Canada, Mexico and China, retaliated in like sums.

Mr. Trump has threatened to broaden tariffs to an additional $200 billion in goods sold to the U.S. from China, including thousands of product categories that would hit consumers directly, such as bicycles, vacuum cleaners and baseball gloves. He has also said he might pursue tariffs on imported cars.

President Donald Trump says he is tackling rivals' unfair practices, and some advisers say tariffs are leverage to push U.S. trading partners lower their own barriers. Most economists, meanwhile, say they do more harm than good.

The White House didn't respond to requests for comment. An official with the U.S. Trade Representative, the lead agency for the tariffs, said doing nothing about washing machine imports could have driven American manufacturers out of business, leaving thousands unemployed.

Last year, Whirlpool sought protection from South Korean competition under a provision known as the safeguard law, which required the company to establish it suffered serious injury from surging imports. The law, or section 201 of the 1974 trade act, was previously invoked in 2002 when then-President George W. Bush moved to protect steelmakers.

The resulting tariffs apply a 20% duty on the first 1.2 million washing machines brought into the country each year, and a 50% duty on quantities above that threshold. The barriers are expected to remain in place for at least three years.

The U.S. imported 4.2 million large residential washers in 2017, for a monthly average of 350,000, according to Christopher Rogers, an analyst at Panjiva, a firm that tracks global trade data. This year, imports have fallen to an average of 161,000 each month through April.

Washer and dryer prices climbed 20% in the three months through June, the steepest rise in at least 12 years, according to Labor Department estimates.

LG cited washer tariffs when it announced it was raising prices in January. Electrolux cited tariffs on steel, aluminum and Chinese imports but not those on washers. Whirlpool called its price increase "cost-based" due to raw-material, labor and innovation expenses.

"We have repeatedly stated that this tariff is a tax on every washing machine buyer in the U.S.," a Samsung spokesman said. "Since the tariff was implemented, U.S. consumers have paid more for their washing machines across all brands."

Only about 3.7% of the average appliance sale is profit, according to market research firm IBISWorld, leaving little room to absorb new tariffs or increased costs without raising prices. Components, such as steel, make up over half the cost of an average appliance. Labor covers an additional 10%.

Further U.S. tariffs on Chinese imports could put even more upward pressure on prices than the steel and aluminum tariffs, said Dylan Miller, an appliance industry analyst for IBISWorld. Home appliances are increasingly technologically sophisticated, making them dependent on chips and electronic components, often imported from China.

"It's already a highly globalized industry," said Mr. Miller. "Operators are going to have to worry about, 'Oh, where do we get semiconductors, circuit boards?' "

Prices have risen for the least-expensive washing machines, according to research by financial-data-analysis firm Thinknum for The Wall Street Journal. Whirlpool's least-expensive model jumped from an average price of $329 in January to $429 in June. Samsung's rose from $494 to $582, while LG's rose from $629 to $703. Price increases at the lower end are most likely to be felt by consumers.

Bill Anders, 61 years old, a retired educator in Churubusco, Ind., decided in April to use his tax refund money to replace some appliances. The price for the washer and dryer combo he preferred, manufactured by LG and sold by Sears, was about $2,478 including installation. It was so much he decided to forgo buying other appliances.

"We looked at stoves and dishwashers, too, but with the money we had in hand, so to speak, we just decided to do the washer and dryer," he said.

Ryan Smith, of Smith's Appliances outside of Kansas City, an appliance repair business, said higher prices have helped his business of keeping old machines churning. In the past, when washing machine repairs cost more than $200 people skipped repairs and bought new machines. "Now we are doing more expensive repairs such as tub bearings, gear cases and control boards, pushing $300 to $500," he said.

Sales have been underperforming other product categories, following strong sales earlier this year before the tariffs kicked in, said Phil Hannon, vice president at retailer Abt Electronics in the Chicago suburb of Glenview. "They're not rushing out there to replace their laundry [appliances] at these pricing levels," he said.

Washer shipments, a proxy for sales, to U.S. dealers dropped 18% in May compared with the previous year, the steepest monthly decline since March 2012, according to data compiled by the Association of Home Appliance Manufacturers, a trade group. Analysts said shipments likely dropped because dealers had stocked up on washers before prices rose. LG blamed post-tariff price increases, too, a spokesman for the manufacturer said.

Home Depot Inc. said it hadn't seen any impact from the tariffs on sales of washing machines. Some members of the Retail Industry Leaders Association reported a sales decrease in April, a spokeswoman for the trade group said.

With import competition restrained, Whirlpool anticipated more business for its Clyde, Ohio, washer plant and added 200 positions to its payroll to gear up. Business there appears to have slowed in the past few months. Whirlpool paused operations at the Clyde facility for a few days each around the Memorial Day and Fourth of July holidays, according to workers, suppliers and Scott Black, the town's mayor.

Such periodic "down days" are typical when inventory builds, Mr. Black said. Workers typically take unpaid days off or vacation during such pauses.

Steve Cummins, vice president at Mansfield Engineered Components Inc. in Ohio, a Whirlpool supplier whose products include counterbalances for washer-door hinges, said he has seen an uptick in demand from Whirlpool. Green Bay Packaging Inc., which supplies corrugated boxes for finished Whirlpool washers, said an initial uptick in business has faded.

"Volume is down overall for the year driven by the last three months," said Bryan Hollenbach, executive vice president at Green Bay Packaging.

In January, Joe Liotine, Whirlpool's president for North America, told the U.S. Trade Representative's office the manufacturer could add a third shift at the Clyde factory and hire more than 1,300 workers. Whirlpool workers, contacted in Clyde in early July, said much of the factory's production wasn't running on all three shifts.

Whirlpool also told trade regulators that tariffs would help make way for capital investments in the Clyde factory. Mr. Black, who went on a recent tour of the facility, said much of the plant was under construction, including a new museum, labs and training facilities. Workers said Whirlpool has been adding equipment in preparation for a new line of washers.

Whirlpool in recent years had sought and won conventional tariffs aimed at what it called unfair dumping, or selling below cost in the U.S., by LG and Samsung. The South Korean companies, which denied they broke trade rules, avoided those trade barriers by shifting production, first to China, then to Thailand and Vietnam.

Amid the continuing tariff threats, both LG and Samsung decided to build washer plants in the U.S. LG's plant in Clarksville, Tenn., is slated to open in the fourth quarter and initially employ about 600 workers. "My mandate is to get it done as soon as possible," said Paul Bradford, who is overseeing construction.

An LG spokesman said the manufacturer began exploring a possible U.S. factory in 2010 and that the tariff threat spurred the company to speed up construction. A USTR official said the tariffs encouraged both firms to move ahead with their U.S. production plans.

Samsung started producing washers in January at a retrofitted plant formerly run by Caterpillar Inc. in South Carolina. With more than 600 workers, it was churning out more than 1,000 washers a day as of this spring, said Tony Fraley, who oversaw the factory's rapid renovation for Samsung before leaving the company. Samsung didn't respond to a request for comment about the production rate.

People familiar with the matter said Mr. Trump's election influenced Samsung's decision to produce in South Carolina.

Samsung said it hired many laid-off former Caterpillar workers. The unemployment rate in Newberry County, the site of the plant, dropped to 2.6% in May from 3.5% in the same month a year earlier. Foster Senn, mayor of the city of Newberry, said developers are contemplating building a new hotel and subdivision.

In Clyde, some employees at Whirlpool and one nearby supplier said the tariffs are working. "If not for that, Whirlpool wouldn't have been able to hire," said Matthew Morton, 42, who works for a supplier and has a son who works at the washer factory.

Some Whirlpool workers said recent production stoppages have fueled questions about the outlook. "Everything is now thrown back into a flux, " said Mr. Black, the mayor, himself a former Whirlpool employee. His wife, children and other relatives work at the plant. "People's anxiety level is higher because nobody knows what's going on."

Write to Andrew Tangel at Andrew.Tangel@wsj.com and Josh Zumbrun at Josh.Zumbrun@wsj.com

(END) Dow Jones Newswires

July 16, 2018 12:28 ET (16:28 GMT)

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