Samsung, “America First” and the Washing Machine Wars
Can Whirlpool, a domestic manufacturer of washing machines, leverage the administration’s “America First” trade policies to reverse its deteriorating competitive position relative to Samsung? A recent dispute before the International Trade Commission holds extreme consequences for Samsung’s appliance business.
Recently, the U.S. washing machine industry has become the primary battleground upon which the administration’s “America First” protectionism war against offshore manufacturing is being fought. Samsung, a Korean electronics conglomerate with businesses spanning mobile phones to appliances, is facing accusations of import “dumping”, in which a low-cost provider imports product at well below a determined “market price”, harming domestic manufacturers[1]. Recent accusations brought before the International Trade Commission have been catalyzed by an inflection point in domestic versus international competition in the washing machine appliance industry. Whirlpool, Samsung’s accuser and primary American competitor, has faced several quarters of deteriorating financial performance on the back of raw material price increases coupled with increased competition from lower-cost Asian manufacturers Samsung and LG. In response, Whirlpool management has announced impending price increases to recover lost margin to raw material inflation− a move that is likely to significantly undermine the company’s ability to compete[2]. To illustrate, the price differential at Best Buy between equivalent Whirlpool and Samsung models is already $50-$100 per unit.
In early October, the ITC ruled in favor of Whirlpool, and is currently determining the degree of import relief. The stakes for Samsung are extremely high given the extent of its overseas manufacturing base− if Whirlpool were to succeed in driving up import duties to an overwhelming level, Samsung could lose its cost advantage and be forced to fully relocate manufacturing to the U.S. to maintain market share. In a previous case brought before the ITC focused on Samsung’s Chinese manufacturing operations, Whirlpool was successful in driving the ITC to lock in 52.5% final duties for five years. In response, Samsung was forced to disperse its Chinese manufacturing operations to Thailand and Vietnam to maintain its cost advantage. The current case is even more comprehensive; Whirlpool is seeking emergency, global safeguards in which Samsung would face import duties regardless of country of origin1.
In the short term, Samsung is focused on mitigating Whirlpool’s case. Management’s counterarguments consist of two major threads− first, that Samsung competes mainly on technical superiority instead of price superiority, and second, that the company maintains extensive U.S. operations, including more than $27 billion in factories across Samsung’s businesses. Furthermore, in June of this year, Samsung announced a $380 million home appliance factory in Newberry County, South Carolina, expected to create 954 jobs by 2020. The move brought political capital to Samsung’s side in the ITC debate− the company intends to gradually migrate washing machine manufacturing to this plant while relying on imports in the interim until the domestic factory is fully ramped[3]. The build-out of a U.S. manufacturing base represents a longer-term play by the Company as it grapples with increasing protectionism against its overseas manufacturing.
Samsung management should proceed under the assumption that import duties recommended by the Trump administration will be at least as severe as prior historical precedent, which would effectively block imported washers from the U.S. market. Other industries have already witnessed the extent to which the administration is willing to counteract the offshoring of domestic manufacturing− earlier this year, the White House took aim at Toyota after it announced plans to relocate manufacturing to Mexico with continued threats of a 35% tariff on vehicles produced in Mexico and shipped to the U.S.[4] As such, efforts to ramp the new South Carolina facility should be accelerated and additional capacity should be built out to ensure the factory’s ability to cover the American market.
As a longer-term strategy to increase penetration of the U.S. market, Samsung will need to shift its competitive advantage from cost to technical superiority, innovation and customer experience. As the broader industry moves towards “connected home” products, Samsung should be able to leverage the extensive R&D capabilities of its broader electronics organization to drive its competitive position despite losing its cost advantage.
As Samsung and other foreign competitors of U.S. manufacturers continue to face trade pressures, can they relocate to the U.S. while maintaining a cost advantage? Without the resources of a multinational technology company, would smaller, niche competitors in a market such as washing machines be at risk of exiting the U.S. market completely given the extensive capital costs required to relocate manufacturing operations in response to shifting trade protections?
[1] Lesley Wroughton, “Whirlpool’s washer battle with Samsung, LG heats up at trade hearing”, Reuters, September 7, 2017 accessed November 2017
[2] Michael Rehaut, “Post-Call Notes: Penalty Box Likely for 1-2 Qtrs, But Even a Fairly Conservative 2018 = Good Risk/Reward”, JP Morgan, October 25, 2017, via Thomson One, accessed November 2017
[3] Megan Cassela, “Battle of the washing machine giants”, Politico, September 7, 2017 accessed November 2017
[4] Micheline Maynard, “Trump’s Indirect Protectionism Moves On To Toyota After GM And Ford”, Forbes, January 5, 2017, accessed November 2017
Zack – really interesting perspective on a product-line that I haven’t thought much about. When I first read your piece, I agreed with Whirlpool; foreign corporations should not be allowed to “dump” their products on the American market, thereby threatening domestic firms. The airline industry (specifically Delta, American, and United) have made similar claims against Middle Eastern airlines who receive significant subsidies from their governments, and thus, can drastically undercut the prices they charge passengers. That kind of behavior is not fair, and the International Trade Commission should step in accordingly.
But after some independent thought, I need more information about how Samsung can get its products to the US so much more cheaply than Whirlpool. Do they receive government subsidies? Do they take advantage of monetary exchange rates? Are they somehow abusing the American trade system? In the words of a child on the playground, “are they playing fair and square?”
If the answer to these questions is “no,” and instead, Samsung is just more innovative, more efficient, and/or more focused on its supply chain, then I do not see a problem. As Americans, we should pride ourselves on free-markets capitalism, not burdensome restrictions so that inefficient American firms can compete with innovative international ones. Whirlpool needs to do some soul-searching and self-reflection. While it may be human tendency for losers to cry foul, those competitors that can identify strengths and weaknesses, and then subsequently, take advantage of them will ultimately prevail.
Instead of whining to the Internationl Trade Commission, Whirlpool needs to look inward, improve on its own processes, and look to compete without more regulatory oversight.
Let the debate begin…..
I agree with Chip on this. My stance on this is really driven on the reasoning behind Samsung’s lower prices.
My fear with isolationism and trade protectionism is that it will cause the US market to become stagnant. Competition is vital in order to keep prices manageable and increase innovation. Isolationism tends to favor these large, multinational companies that are able to relocate in order to maintain competitive in the US market. While I appreciate the job creation in the United States, I think this policy excludes smaller, niche firms and interferes too much in the market. I think in the long run America will be unhappy with the result of this action and will ultimately end up paying more for lesser products.
Zack, this is definitely a very interesting topic and it instantly reminded me of the impact of protectionist policies in Argentina in the last 15 years.
Based on this personal experience, when governments and companies align on building barriers to entry to foreign products, they are only affecting customer choices and hurting the companies’ ability to improve their own performance based on international standards.
We do not know exactly the reasons on Samsung price advantage or on Whirpool fearless fight to stop this situation from happening, but as described it sounds like Whirpool is trying to get an easy way out of these troubles instead of focusing on building competitive advantages – maybe the answer to this problem is for Whirpool to realize that it might not make sense to keep producing washing machines in the US in the long term.
Finally, I am particularly surprised by this situation since it goes against my belief that much of the success of United States as a powerful economy comes from its constant efforts towards free-markets capitalism – as Chip mentioned.
Great topic! I agree with many of the previous comments around the necessity of Whirlpool to innovate better and make their production more efficient to compete.
I would be very interested to see how the costs of the Samsung washers produced in the US will compare to the costs of those produced in Asia. A price differential of $50-$100 does not seem too significant for a high-priced item such as a washer. I wonder if Samsung’s move to US manufacturing will lead to a much higher price driven by more expensive labor, raw materials, etc. If they are able to maintain costs with the move to the US, Whirlpool will be forced to compete more viciously. Does this lead to the outcome WS mentioned in their comment – paying more for lesser products – or the opposite – increased competition leading to better products and a price war? The other outcome is Samsung’s superior innovation leads to market segmentation that keeps them focused on high-tech, high-price washers (and higher margins, I would guess) and Whirlpool focuses solely on lower priced, lower tech washers.
Ultimately I think the outcome will not benefit the consumer, and as other commenters have stated, competition should enable better manufacturing strategy (such as choosing to produce in Asia) to win in the market.
I agree that Samsung must accelerate their plans to open a plant in South Carolina. But I’m skeptical that a single plant with less than 1,000 employees will be sufficient to serve their US market. Samsung seems to think that they can limit the blow to their profitability through lobbying and that the final tariffs won’t hurt them that much. I think that is a mistake in the current US political environment. Samsung could further improve their position with the government by announcing plans for further US manufacturing. That way, even if tariffs do come through, management at least has plans to ramp manufacturing to a point where the majority could take place inside the US.
This is an interesting debate – I agree with the comments above that further analysis will be needed to judge whether Samsung is really “dumping” in the U.S. and hurting local manufacturers like Whirpool or if it is playing a “fair game” and adding value to drive innovation and efficiency through competition in the marketplace.
It is important to evaluate the consequences of the decision to impose sanctions on foreign corporations. While this may help domestic manufacturers in the short-term, there are high risks following the decision, thus should be carefully considered. One, if the U.S. starts to impose heavy sanctions on imports, it is likely that foreign governments will follow and issue tariffs on U.S. exports. This effect will be prevalent across different industries and not only limited to the the washing machines or the household appliance industry. Second, as you mentioned, Samsung has begun and will continue to increase its direct foreign investment in the U.S. but such trade barriers may discourage Samsung to continue with this investment.
Just this past Tuesday, the U.S. International Trade Commission formally sided with Whirlpool on this debate, issuing guidance that called for a 50% tariff on imported washing machines. [1] Interestingly, the tariff would take effect if imports were to exceed 1.2 million units within the next three years. It is worth noting that the ITC’s recommendation is subject to President Trump’s approval. However, given the current political environment and the upcoming mid-term elections, President Trump has little incentive to block the tariff. In light of these facts, Samsung seems to have the right strategy by localizing production within the United States. Samsung’s price $50-100 price advantage could easily be wiped out by unfavorable trade policies. Perhaps just in time, the company’s plant in South Carolina is expected to open next month and is currently expected to employ 1,000 Americans by the end of 2018. [2] While the plant is not expected to have sufficient production capacity to serve the entire U.S. market, it does create positive press headlines that will help mitigate any future unfavorable trade policies. By all appearances, President Trump seems to care more about press headlines than actual trade policy. A headline declaring the creation of 1,000 American jobs might be enough to appease the Trump Administration, at least for the time being.
[1] De Lea, Brittany. “Whirlpool vs. Samsung, LG: US trade court calls for 50% tariff on imported washers.” FOX Business. 21 Nov 2017. http://www.foxbusiness.com/markets/2017/11/21/whirlpool-vs-samsung-lg-us-trade-court-calls-for-50-tariff-on-imported-washers.html
[2] Ibid.