As President Trump has long promised, we are now in for a long, protracted series of tariff actions, escalations, pauses, and rescissions. Until a stock market collapse, economic recession, or a mid-term election reversal occurs, manufacturers and distributors will have to navigate great uncertainty around tariffs impacting their businesses. With tariff rates being bandied of 10 to 300% or more, the impact can potentially be ruinous for distributors with high tariff exposure, weak strategy and/or poor execution.

For distributors, first-order tariff impact is a function of their manufacturer-suppliers’ product content, supply chain geolocation, and industry structure. Manufacturers that are saddled with disadvantaged product content or geolocation will bear significant impact from their sourcing positions, which often are difficult to reposition in the short to medium term. If they fail to negotiate compensating price concessions from their tariffed suppliers, they will have to calculate their own optimal strategies for pass-through price increases.

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Whether or how manufacturers will pass through their impact to their distributor partners is partly a function of manufacturers’ own competitive market structure. In markets with high degrees of consolidation — oligopolies, for example — the pass-through rates will likely be very high. Where no competitor has a scale or cost advantage and/or end-customer buying patterns exhibit stickiness, the pass-through rates will be very high, as the strategic play for price-based wallet share gains is minimal. In the opposite cases, game-theoretical choices — where companies’ choices depend on how their competitors choose to act under conditions of uncertainty — will predominate, as high-scale, low-cost manufacturers play to gain share through tariffs’ disparate impact on their relatively weak competitors.

Distributors should start by profiling their major line-card suppliers and assessing their relative tariff exposure, industry structure, and customer-stickiness characteristics. In each case, the crucial factors to be determined include the likely tariff impact on the manufacturer and how the pass-through fundamentals are likely to play out, in either a competitive or game-theoretical progression. In many product categories in Electrical, HVAC, Plumbing, Power Transmission, Motion and Control and allied industries, consolidation in recent years has created the conditions for game-theoretical outcomes. When these manufacturers are themselves, or similarly positioned to, publicly traded companies, recent and pending quarterly earnings calls can help distributors understand the basics of geolocational impact and supplier intent that drive first-order tariff impact.

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For distributors, second-order tariff impact starts with similar fundamentals of industry structure, scale economics, and the compounded advantages or disadvantages of their suppliers’ own pass-through positions. Those with strong scale and positioning and advantaged supplier pass-through regimes may adopt a game-theoretical strategy to gain share by negotiating aggressively with their manufacturers to “eat” the tariff impact (either broadly or in SPA/rebate scenarios with specific customers or projects). Particularly if end-customer stickiness is low, this strategy could tilt the tables of market share significantly. Distributors with strong rebate-optimization tools stand to gain from competitors lacking the same.

Thus, on the buy side, distributors will need to sharpen their strategy, tools, and disciplines around procurement and rebate execution. Distributors who outperform in AI-driven rebate optimization stand to have significant opportunities to win share using supplier cost support, “house money.” These dynamics can vary significantly within a given distributor’s own supply base, as differences in manufacturer pass-through strategies and rebate capabilities support varying distributor pass-through strategies within their supply base. Sloppy rebate management practices typically underclaim rebates by 30% or more.

On the sell side, for any given pass-through strategy, distributors will need to have a strong pricing strategy, architecture, analytics and training to ensure that the selected strategies will “stick” and accomplish their desired balance between pass-through and share gain. If sales teams are doing cost-plus daily, distributors seeking share gains from price plays will be stymied, or may even lose share to their dynamic-pricing competitors. For sales teams with pervasive pricing overrides, the opposite deleterious result will occur: a strategy of pass-through will be undermined and the vendor cost increases will be paid by their shareholders. Sloppy contract management practices will similarly prove to be a noxious threat. Particularly if economic turmoil and tariff-driven inflation produce a stagflation marketplace of heightened competition for revenue and heightened price sensitivity for customers, the results will be catastrophic for those lacking the pricing discipline of their competitors.

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To optimize pass-through strategy, distributors need a system that differentiates pass-through rates according to the price sensitivity of product-customer combinations. Using a scale of zero (most sensitive) to one (least sensitive), for example, each intersection of customer and product should be rated for price sensitivity. With thousands of products and thousands of customers, this complexity translates into millions of permutations, each with an optimal pass-through rate for a given strategy. Without a dynamic pricing engine, a “peanut butter” approach will yield revenue and profit leakage.

To have any meaningful agency in an unstable economic environment, distributors need to invest the capital and management focus to deploy effective rebate and pricing tools. They need to train and incent their sellers to adopt optimization tools, sell on value and negotiate more effectively with their suppliers and customers.

In politics, it’s often the case that the most interesting question is not whether a policy is good or bad, but rather who wins and who loses under such a policy. When politics increases in volatility and velocity, markets will shift in favor of those who anticipate the impact, select superior strategies, and harness the tools and disciplines of execution. Generally speaking, today only one in five distributors has a rigorous rebate or pricing optimization system in place, so there will be abundant gains available to those who lean into the strategic imperatives of the New Normal of Tariffs. Sloppy business practices that were viable in a stable economic environment will produce further impetus for certain distributors to head for the exits — creating a virtuous acquisition cycle for their more rigorous competitors, the Winners of the New Normal of Tariffs.