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Ecommerce on Tap is a world where Supply Chain meets storytelling. Join Aaron Alpeter each week as they offer insights into the backend of successful businesses. Brought to you by Sourcify and Izba Consulting!
Aaron Alpeter (00:00)
this season we've been asking whether a company's advantage is inherent to Mexico or a USMCA artifact that could get repriced.
And DeWalt is where this question stops having a really clean answer because the final assembly in Mexico is real. There's a five hundred thousand square foot facility that's that's vertically integrated and it's making drills. but it doesn't qualify for the trade deal's own tax treatment. So it's not inherent either. So it it's not USMCA's own definition. So it's this really interesting piece where, yeah, it's Mexico for all
the structural advantages that Mexico has, but it's not qualifying for this trade deal that you would have thought would have
Hugh (00:34)
Yeah.
Aaron Alpeter (00:35)
moved it there in the first place.
Hugh (00:36)
It's fascinating. I find this so interesting. And it like it genuinely can sit in both buckets at at once, right?
Aaron Alpeter (00:50)
Hey everybody, welcome back to e-commerce on tap. I'm your host, Aaron
Hugh (00:52)
Yeah.
Aaron Alpeter (00:53)
Alpeter. Maybe you're on the job side right now, maybe you're driving a truck with tools rattling around in background, or maybe you're like me and you're standing in your garage pretending to do something. wherever you are, thank you so much for spending part of your day with us. This season, we've been asking a question of every company that we're gonna be profiling. It is what makes working with Mexico.
inherently helpful. Is it the fact that it's Mexico itself, or is it this USMCA trade agreement that's there? So far we've had a deep category kickoff where we walk through the industrial clusters, the trade agreements, as well as some common questions about manufacturing in Mexico. And if you're new to the season, make sure you go back and check out that episode. It'll be a really good foundation for everything else that we do. But today's company is our second stop and it's an iconic brand that you might have in your garage that has been spending decades toggling between both sides of the border.
my co-host today is somebody I've actually been working with for a couple of years now. Hugh Dixson is the founder and CEO of Switchboard. It's a supply chain integration platform out of Sydney. Hugh, thank you so much for being on here and for doing this.
Hugh (01:53)
Hi Aaron, thank you so much for having me. It's really, it's really good to be here. everyone, if you haven't already, please go ahead and hit subscribe, invite a friend. It helps much more than people think. so a quick version of I guess how I ended up doing this for a living. as you can no doubt tell, I am Australian, natively Australian. I was born and raised in Sydney and started
my life at BCG doing sort of you know strategy work consulting, management consulting, that kind thing. And then I moved into operations at Uber, working in the supply side specifically From there I went to Ofload, which was at the time a very small company and has since turned into a a very large Australian road freight business. and I ran operations for that company for
A number of years, building it from very small to very large, and then moved into running the MA department and led acquisition of another freight and logistics business in Australia. as you can probably imagine, running a big freight company myself and then buying them in an MA acquisitions job, I saw very close and and very f sort of firsthand.
exactly how this this industry runs. that's what led me to starting switchboard.
is really that connective tissue between supply chain systems. We integrate and connect ERPs and warehouse management and transport management and all sorts of systems really connecting two platforms that were not necessarily built to talk to each other but but actually can.
Aaron Alpeter (03:18)
well, we kind of have a tradition on e commerce on tap. Before we get started, we always like to share a tidbit. And the the thing that kind of has been on my mind over the last week or so is this associate member status that Canada is trying to go after with the EU.
And I think it's it's really interesting. It's it's certainly a good headline, a good tagline, but nobody actually knows what it means. So, the EU charter restricts membership to countries in Europe. so there's no way that Canada could ever become a full member of the EU. even in the EU itself, their members pick and choose which treaties and agreements they want to abide by. So, for example, Ireland is not part of the
despite being in the EU while Switzerland is, which Switzerland's not part of the EU. And the UK, which is not part of the EU now, struck a free trade agreement with the EU. So it's kind of this weird hodgepodge of like what it could be. but time will tell what this actually means, whether it's really just more of a political rhetoric of of Canada kind of looking toward Europe versus United States, or if there's something deeper that happens in defense and trade, in in other customs things that go there.
Hugh (04:29)
Very interesting, isn't it? I live in in London, I live in the UK, and so where I am, this is as you can imagine, relationship with the EU is very topical all the time. But I even saw a headline the other day that Australia was considering such a an associate partnership. So they can
Aaron Alpeter (04:47)
Really?
Hugh (04:47)
certain they can sure I mean it was just a headline. Let's not let's not get too far away, but
you know, there can surely be absolutely no possible geographic argument that could be mounted to support Australia's membership in the European Union that I can think of at least. I don't think we even border the same oceans. Like
Aaron Alpeter (05:07)
Yeah. Yeah.
Hugh (05:09)
anyway, to talk a little bit about tariff negotiations,
after a three-day pause and failed negotiations, the US put on an additional 50% tariff on some Canadian goods, building on the Canada theme. Under section 338 on August 22, which applies regardless of a covered product's US MCA eligibility, which I think is interesting. Canada has
responded with a reciprocal tariff on select US goods, including steel, including appliances and electronics. but I think what's interesting about it is that, and we're gonna talk of course about the USMCA today, but becoming USMCA qualified as being treated as the finish line. But now it seems that the US
has written a tariff that can more or less ignore that qualification status anyway. So even the two thirds of a company's products that that would pass the test, including, you know, perhaps some of our conversation today, maybe it's not necessarily safe.
Aaron Alpeter (06:11)
Yeah. Well, you know, when when one party can just put the agreement to the side and and rewrite things, it it kind of casts doubt on it completely. But it's certainly, a major theme in this season because it has defined forty or fifty years worth of relationships between Canada, the US, and Mexico. And and that gets us into Dewalt I wanna start by by just painting a picture and reading a headline.
And so in 2024, Stanley Black & Decker closed a plant in Fort Mill, South Carolina. It's just about 45 minutes south of me. Fort Mill's a wonderful place. But this factory was important because it built DeWalt cordless power tools. And with this announcement, there were about 192 jobs that were lost. A few months later, a separate plant in Fort Worth, Texas was also closed. And that was 175 more jobs.
we're we're familiar with these sorts of of narratives and these stories companies are closing plants constantly. It always feels like things are being closed in the United States. But these two happened in the same year in the same country on the same product line for DeWalt. And what makes it really interesting is in 2013, DeWalt spent a fortune convincing everybody in the States that they had come home and that they opened these factories. And yet in twenty twenty four, they quietly left again.
And and this Fort Mill plant wasn't just any plant. It was meant to be the plant, right? Like, you know, one plant to rule them all. they put their entire domestic manufacturing story on it, gave them the right to put an American flag on a cordless drill. And the company didn't close it because of the idea of near shoring had failed on its own. It closed because at the same time
Hugh (07:49)
Mm-hmm.
Aaron Alpeter (07:50)
there was a much larger facility that was opening up in Mexico that was scaling to take over the same job at a fraction of the marketing fan for the original launch had. And so
It's just so interesting that
you could be born in America and all this sort of stuff that's going on in twenty thirteen and then all of a sudden you just quietly leave eleven years later.
Hugh (08:07)
Hmm.
That's right. And for me, it's the point that you make there, Aaron, around that gap in coverage that I that really leaps out to me. And we see this all the time, you open a facility, there's a press release, the ribbon cutting, local official would show up for for a photo, but
You know, nobody sends the release when it quietly winds down eleven years later. And if you want to actually know what a company's worried about, watch what they don't release a press statement for. I mean, not just a company, right? Any anything. Companies are very good at announcing the things that they photograph well that and they're very quiet about the plumbing underneath it.
Aaron Alpeter (08:42)
Yeah, this is the same company, they had the same underlying logic, their business didn't change that dramatically in in eleven years. And, one decision was a massive marketing campaign and fanfare, and the other one was
Hugh (08:53)
Mm-hmm.
Aaron Alpeter (08:54)
barely two paragraphs in a newsletter.
Hugh (08:56)
Yeah. hang on a second. Didn't they already do this whole bringing manufacturing home thing before?
Aaron Alpeter (09:03)
Yeah, exactly. So let's get into that because it is more literal than you might guess. And so they actually moved the same product line into the United States and then back out again. And I think it's it's important to try to understand why a company would spend a decade building something and then and then quietly walk away from it. And so just some quick background first, because there's there's really not much of a founder story here, at least in the s the way that we normally profile things on the podcast.
But the high level things are that Raymond DeWalt invented a radial arm saw in nineteen twenty-two and he founded the DeWalt products company two years later in Pennsylvania. And the company changed hand a couple of times. American Machine and Foundry bought it in nineteen forty nine, Black and Decker bought it in nineteen sixty, and then nineteen ninety two, Black and Decker relaunched the name entirely as a professional grade brand that you know today. And this is really like the corporate brand story, nothing nothing about like
working in a garage but there's really no scrappy founder ideal behind this. Like this was just, business seeing a marketing asset and leaning into it. It was a very large professional organization that was making a deliberate manufacturing location decision with full knowledge of what it was doing both times. So if we fast forward to twenty thirteen, consumers are starting to push back on offshore manufacturing. tariff politics are beginning to heat up, although,
we wouldn't imagine what that looks like compared to today. but in 2013, people were talking about reshoring. the manufacturing PR team is suddenly being attached to to all of these sorts of decisions. And DeWalt decides to build a 75,000 square foot space in Fort Mill, South Carolina. And it starts to set up assembly cells and equipment to basically wind the electric motors on site.
And the first cordless
Hugh (10:53)
Mm-hmm.
Aaron Alpeter (10:54)
tools ship about six weeks after the setup, which is a factory guy. Like that's that's great. That's amazing to basically go from let's build
Hugh (11:00)
It's amazing, yeah.
Aaron Alpeter (11:02)
it now. We're shipping within six weeks.
Hugh (11:04)
Mm.
Aaron Alpeter (11:05)
by 2015, the facility runs 1.2 million square feet and employs about a thousand people. And 350 of them are working on direct manufacturing. all of this sounds like it's something
it should be.
Made in America. But the label that DeWalt put on here was never made in the USA. It was built in the USA with global materials.
Hugh (11:27)
Hmm. Isn't that isn't that interesting? it's such an interesting nuance. I've seen an exact version of this this play, this move outside power tools as well. Anytime I think that you see a a qualifier attached to survive legal review, it's the qualifier that's that's really doing the work and nobody is stopping to read that. I mean, carbon neutral shipping is
a classic example and one that I run into constantly. carbon neutral with an asterisk, where it's about offsets that nobody can can really necessarily trace, or where they're maybe purchased from a registry that most customers have never heard of and it's not necessarily a, auditable, it may or may not be a change in the company's real behavior or or anything like that at all. And it's the same sort of broader shape every time.
The compliance team writes three words, nobody sort of disputes it in a meeting. The marketing team puts it out onto the front of the box. in a font size that means that absolutely nobody reads past the first two words of it. And does anybody even clock what with global materials meant at the time? or is it just the flag on the box, the made in USA part that people
Aaron Alpeter (12:38)
yeah, I think they put the factory in the United States so they put the flag on the box. Like that that's that's the key thing. and
Hugh (12:42)
Yeah. Mm.
Aaron Alpeter (12:45)
I think the phrasing of with global materials isn't just marketing flourish. It's it's actually FTC compliant disclosure. And so the Federal Trade Commission requires
unqualified made in the USA claims to to mean virtually all or or almost all of the product's content is domestic. Not most of it, not the expensive part of it, but like all of it. And DeWalt couldn't say that because it wasn't true. Final assembly was domestic, but the motor, the electronics,
and and most of the components weren't.
And so that label really told you the truth in the fireprint while the flag in the box was what people looked at. And so it's just it's very interesting that, you know, we talk about domestic manufacturing, like what is that? And nobody ever blinks or questions a drill that has an American flag on it. but
Hugh (13:32)
Mm.
Aaron Alpeter (13:33)
twelve years later, that same footnote of with global materials it begins to run the entire Mexico strategy for DeWalt.
Hugh (13:41)
Right. And the whole thing reads very differently depending on was this a struggling brand hoping no one was gonna look too closely and that they could, you know, take a bit of wind in the sails from being made in America, or was it already the biggest name in the room doing this anyway?
Where do where do they sit in the category at the
Aaron Alpeter (14:01)
Yeah, they're they're not struggling, particularly in the category. So
Hugh (14:04)
Yeah.
Aaron Alpeter (14:04)
the the top three competitors in power tools then and now are Milwaukee, Makita, Bosch, DeWalt is the biggest name in the room in 2013. And they've been named the favorite power tool brand by independent consumer surveys for five consecutive years, And it's really interesting because it it is
Not really about where the tools came from, it's about how they perform. That's what people care about. And so from day one, this built-in the USA always had this asterisk on it, but that asterisk came from federal law. Eleven years later, that same asterisk is there. but you know, people have just moved the factory a thousand miles south, and it's starting to get measured by a completely different regulator in there.
So I think the real question that comes to mind is if the brand is so strong, why was the company closing plants in 2024 at all?
And it's not for the reason
Hugh (14:52)
Mm.
Aaron Alpeter (14:53)
you guess because Stanley, Black, and Decker spent 2022 and 2023 in like a major margin crisis. They had inflated input costs, bloated post pandemic inventory, a softening of consumer demand, because again, everybody was doing all of these do-it-yourself projects during the pandemic, and then there's that letdown. And they had a $304 million net loss in the third quarter of 2022 alone, which is pretty big.
And in response,
Hugh (15:19)
Yeah.
Aaron Alpeter (15:19)
the company basically launches this multi-year cost program targeting $2 billion in cumulative cost reductions by the end of 2025. And even though like those factories were working well and they could claim the built-in USA piece, that Fort Mill and Fort Worth factory network was closed as part of that consolidation. So it really wasn't a verdict on.
built in the USA specifically, at least not one that some someone said out loud. It was really more
Hugh (15:49)
Mm.
Aaron Alpeter (15:49)
of a, hey, we think we can save however much it was. And so we're gonna
Hugh (15:52)
Yeah, yeah.
Aaron Alpeter (15:53)
spend the CapEx and we're gonna move it down because you know the parent company is struggling from a margin perspective.
Hugh (15:59)
Yeah, interesting. And obviously my background in management consulting at BCG, you know, I I can see a lot of those themes there. It
Aaron Alpeter (16:07)
It was your fault. You did it.
Hugh (16:08)
Yeah, a hundred percent. That's right. Add it to the tab, Aaron. I think it's interesting because it cuts against the instinct to read the closure as as some kind of admission.
You've watch boards make cost calls that have nothing to do with the story the company's telling externally. They can be two very different conversations happening in in two very different rooms, you know? Somebody's staring at a plant by plant, fixed cost schedule, deep in an Excel spreadsheet or whatever, not at a marketing deck from a year ago.
And the plants that the that's easiest to consolidate away, is the one that goes, regardless of whatever brand equity may be sitting on top of it. The spreadsheet doesn't care what the marketing department said in twenty thirteen and it doesn't necessarily care what the marketing department's saying this quarter either, for that matter.
Aaron Alpeter (16:59)
Yeah, and I think what's what's really interesting is why what place the Fort Mill factory is so much more interesting to me. because
Hugh (17:05)
Mm.
Aaron Alpeter (17:06)
at the same time that they were closing these two factories, they were also building
this massive factory in Reynosa, Mexico. it's 500,000 square feet and it's vertically integrated. they were going to fabricate a real share of their own components instead of just bolting things together that came from elsewhere.
you don't invest in vertical integration if you plan on just moving as soon as labor costs
Hugh (17:29)
No.
Aaron Alpeter (17:29)
go up. Like this is this is a concrete decision that people are making. And the logic
Hugh (17:33)
Yes.
Aaron Alpeter (17:33)
for choosing Mexico wasn't particularly complicated. I mean, yes, they have lower labor costs in the US. it's it's
Hugh (17:40)
Mm-hmm.
Aaron Alpeter (17:41)
close enough to the border that the plant managers can be on a call with the Charlotte facility and then in the same afternoon, you know, talk to Mexico pretty easily.
Hugh (17:46)
Mm. Mm-hmm.
Aaron Alpeter (17:49)
And that trade agreement, which again
in twenty twenty four was seemed to be ironclad, was supposed to mean that things could cross over duty free. And so that you look at and the logic makes sense. And so the fact that they are choosing to invest in vertical integration in Mexico versus the US
Hugh (18:05)
Hm, hm.
Aaron Alpeter (18:06)
is is very interesting to me.
Hugh (18:08)
so if Reynosa is genuinely that vertically integrated, as you say, like this is not a shell operation, this is serious capital, doing real work in one place with real people, real concrete on the ground, real jobs that depend on it being permanent. this sounds exactly to me like the sort of
thing that you'd want a client to build and it's the kind of investment that you'd point to that someone is serious, why why isn't that enough on its own?
Aaron Alpeter (18:33)
Yeah, so we're gonna come back to that because I think that's kind of a core question of the episode. you know, the scale of what's shifting around is very interesting. And less than a decade ago, a huge share of what Stanley Black and Decker sold in the US came out of China. And the company has been actively cutting that share aggressively ever since then. Stanley Black and Decker cut its China sourcing from roughly forty five percent to fifteen percent in under a decade. And that's by their own numbers, things that they reported.
And it still isn't enough. They have a target of being under five percent by the end of twenty twenty six. And so there's this bigger global reshuffling. It's not just US going to Mexico. It's it's about how do you take stuff out of China because that's something that trade policy and it's just politically expedient to to not be sourcing as much from China.
Hugh (19:18)
Right. And but and also a very significant and very rapid pivot,
it's completely physically rerouting a very significant chunk of a sophisticated supply chain in under 10 years. And I mean, that is monumental. I don't think people can f necessarily fully appreciate how much capital, how many supplier relationships actually have to move to make a number like that real. And it's not just the factory itself, it's the vendor contracts, it's the qualification tests, every logistics lane.
Every redundancy, just thinking about the legal bill involved makes me sweat. there's a just a massive amount that goes into this. when a client tells me they're
They're moving sourcing to Mexico like it's a single decision. I mean that's that's an immediate red flag that you've not thought about or scoped what's gonna sit beneath it at all.
Aaron Alpeter (20:11)
if the assumption is that if you move the assembly line two thousand miles south, that your tariff exposure should move right along with it. that didn't actually play out the way that they expected. in twenty twenty five, Chris Nelson, who was the COO and president of the Tools and Outdoor Division, later became CEO. He said on an earnings call,
when he was asked, how much was tariff free he said less than a third of the bomb. That's how much of this company's Mexico-made product actually qualifies for duty-free treatment under the trade deal it's betting whole strategy on. And so that was that's close to his exact phrasing. So on the same call, he also confirmed that the strategy behind moving
factory in general was deliberately shifting dual source SKUs, meaning procs the company can make more in one place out of out of China and into Mexico. And so by October 1st of the same year, Nelson became CEO of the entire company. And Donald Allan, who was the previous CEO, moved into the executive chair role. But it's just so interesting that you know here you are in Mexico, you think you got USMCA,
and you
Hugh (21:14)
Hm.
Aaron Alpeter (21:15)
are saying that yeah, less than a third of our bomb
qualifies for this duty free tariff and so you're like, well, where's the benefit here?
Hugh (21:23)
Yeah, well that's exactly right. it's a interesting bit of career timing. so the guy who says this doesn't work is now the guy in charge of fixing it. Is that is that necessarily reassuring? Because at least the person running the company isn't in denial about the number. Or
Is that the problem because now he's personally on the hook for a fix that he told everybody was incomplete?
Aaron Alpeter (21:46)
I mean, it's a good question. I I don't know to what extent DeWalt went into this with their eyes wide open and knew that they were gonna have this tariff free treatment, or if they were surprised, right? They they penciled something in and said, yeah, this this moves gonna make a ton of sense. And in reality, like, my gosh, nope, it didn't come through. but I don't think you have to pick one, right? I think it's reassuring that whoever is running the company now clearly isn't confused and understands what the actual problem is. He said on the record in an earnings call.
And the the
Hugh (22:14)
Yes.
Aaron Alpeter (22:14)
problem you know of being clear eyed about it is that it's a structural issue and being able to fix it on a predictable timeline is is actually a very difficult thing to do.
Hugh (22:22)
before we before we go further on that, like help me understand that. Qualifies how? What's what's being checked here? I don't think that's it's certainly not obvious to me, but maybe not to others listening as well.
Aaron Alpeter (22:34)
Yeah, so it's it's an important point. USMCA duty-free treatment isn't decided by where the final assembly happens. It's decided by something called regional value content or RVC for short, and it's a calculation of how much of a product's value, not its labor hours, but its value, originates inside the US, Mexico, or Canada.
Hugh (22:54)
So it's not where you've kind of bolted it together. It's where the dollars in this thing come from. Tracked all the way back through everything that went into it. That's a a significantly harder question to answer than where's the what's the zip code of the factory it was built in. and that's presumably the sort of question that
Many operators will only stop to think to ask after they've accepted a sourcing decision rather than before it.
Aaron Alpeter (23:28)
Yeah. And we see this all the time in Sourcify where people want to move to to Mexico and and they're looking at this and we'll just have our factory in China make the stuff and then you guys put in a box. Like, well, it doesn't quite, quite work. I mean, RVC is calculated in in kind of two accepted ways. There's the transaction value method that starts with what a product actually is sold for and then subtracts the value of anything that was not
from North America that went into it. And the net cost method starts from like your total production costs and then works backwards in the same way. And so different companies kind of pick whichever their own bookkeeping supports. whatever's most clean. But the underlying question is the same. It's how much of of what this thing is worth actually happened inside of North America. And that threshold needs to
reach a certain threshold depending on the category. And it's generally anywhere between fifty and seventy five percent for the whole thing to be duty free. I don't know specifically how things apply to DeWalt's, you know, tariff codes for for power tools, but we know that the outcome based on what the CEO said is that less than a third was qualifying,
Hugh (24:32)
Hm.
Aaron Alpeter (24:33)
which meant that they were well below that 50 to 75% range.
Hugh (24:38)
Indeed. A company's self assessing this and reporting it to the IRS or whoever.
Aaron Alpeter (24:44)
basically have to include it in your customs declaration. you don't have to import to the US with USMCA. in fact, an interesting tidbit is that before all the tariffs hit, particularly in Canada, most suppliers would not file USMCA paperwork because the tariffs were already so low in the US that it like saving one
Hugh (25:03)
It just didn't make sense, yeah.
Aaron Alpeter (25:04)
percent.
And and they're like, I don't want to go through all that compliance to show them and prove all these sorts of things. Once the tariffs become fifteen, twenty, thirty percent, suddenly, you know, there's a real economic reason to do that. And so it it's just yeah,
Hugh (25:16)
Right. Isn't that interesting?
Aaron Alpeter (25:18)
it's this interesting tidbit that I've always thought about where higher
Hugh (25:21)
Yeah.
Aaron Alpeter (25:21)
tariffs actually make the free trade agreements more attractive and more helpful. If we have low tariffs everywhere, then the free trade agreements don't really matter in general.
Hugh (25:31)
And so The higher tariffs meaning that it's at it's encouraging sourcing back into North America effectively.
Aaron Alpeter (25:40)
Well think there's two parts here, right? So if
Hugh (25:42)
Yeah.
Aaron Alpeter (25:42)
if we want more people to value the free trade agreements higher, then you need high base tariffs in the United States, period, right? So
Hugh (25:47)
Hmm, mm, hm, show.
Aaron Alpeter (25:51)
stuff coming from Mexico, US, if it's not USMCA, needs to have a
Hugh (25:55)
Mm.
Aaron Alpeter (25:56)
a high tariff base. and what that will
Hugh (25:58)
Mm-hmm.
Aaron Alpeter (25:58)
do is it'll force people to start looking at this and saying, All right, well, how do I how do I source more content from North America so that I can qualify for USMCA, right? If if the tariff
Hugh (26:08)
Yeah.
Aaron Alpeter (26:09)
already one percent, then it's like, well, I'm you know, this is five cents
Hugh (26:11)
Mm.
Aaron Alpeter (26:13)
cheaper. Let me order it from Asia and bring it in as
Hugh (26:15)
Yeah.
Aaron Alpeter (26:16)
opposed to to really starting to re engine their supply chain.
Hugh (26:18)
To your point earlier though,
These kind of agreements 100% can change. And people may, as we've been talking about, sourcing decisions and manufacturing decisions are often frequently long held decisions due to the immense cost or immense complexity in changing them. It's like putting about a huge big cruise ship, right? It's not a it's not a jet ski. that's that's a a potentially material assessment that these companies are having to make, right?
Aaron Alpeter (26:44)
for sure. And you know what's what's really interesting about this is that the the trend is higher tariffs in the US. Like that that is the trend. It happened in Trump one. Biden didn't take
Hugh (26:52)
Yes, yep. Mm-hmm.
Aaron Alpeter (26:55)
the tariffs down for the most part. And of course in
Hugh (26:57)
Mm-hmm.
Aaron Alpeter (26:57)
in Trump too, it's it's gone ballistic. It's it's huge. And so you're starting see more protectionism in other countries as well. And so I think that you're right. Like if this was just, the first two years of Trump two and
People would probably make a decision to just wait it out and s you know,
Hugh (27:14)
Mm.
Aaron Alpeter (27:14)
assume it was gonna go back. But we now have roughly 10 years, 12 years of of higher tariffs as a trend across two party lines. while there can be some questioning of how the tariffs are implemented and if they should have been implemented, I think the question of the debate is gonna be: should it be 50% or 30%? Not
Should it be 30% or zero? And so you're starting to look at
Hugh (27:37)
Yeah.
Aaron Alpeter (27:37)
all of these things that come through. And this is why it's so important because if we come back to the DeWalt example, with with a low tariff environment or one that didn't
Hugh (27:46)
Mm.
Aaron Alpeter (27:47)
really matter with the USMCA, just having your assembly in the United States was good enough. Like you could source
Hugh (27:52)
Yeah.
Aaron Alpeter (27:52)
all of those components from China. And as long as you put it in the box in America, you could say assemble in the US. Yeah.
Hugh (27:55)
Yep. You golden. Hmm.
Mm-hmm.
Aaron Alpeter (27:59)
And and now
it's being restructured and you're building things out. And you have to go beyond just the assembly line. You have to look at the the housing, the motor, the parts that nobody ever really looks at. And you know, RVC
Hugh (28:08)
Yeah. Yeah.
Aaron Alpeter (28:11)
gets measured on the entire bill of materials, not just the last
Hugh (28:13)
Mm.
Aaron Alpeter (28:14)
thing that happens to it before it goes in the box. And and so a tool
Hugh (28:17)
Yeah.
Aaron Alpeter (28:17)
that is fully bolted together in Mexico can still fail to qualify.
if the motor, the battery, the cells, the the electronics, the castings underneath are all sourced from outside the region. the big lesson for DeWalt is that moving the drill to Mexico doesn't move where the motor inside, which is a very expensive part, comes from.
Hugh (28:34)
Right, so if it's not the assembly line that's deciding this, where does the number where is the number coming from?
Aaron Alpeter (28:41)
Yeah, so if we just kind of do a hypothetical, right? This just to be illustrative. let's let's kind of break down a hypothetical DeWalt product. And I don't know if these are real or not, but let's just go with it. So let's suppose we've got a cordless drill that sells for eighty dollars. That's that's my my sale price. the motor might be twelve dollars, the battery sales might be ten dollars, electronics might be eight dollars, and and maybe casting's another six dollars. That's thirty-six doll of value that
if I didn't source them from North America are sitting outside the region. That's before anybody has touched it for final labor or final assembly at all.
Hugh (29:17)
so assembly was never gonna close a $36 gap on an eighty dollar product by itself, no matter how efficient the plant is. it's simple mathematics, right?
It's easy to make this sound like DeWalt has dropped the ball somewhere. But what you're describing is closer to a company that did the assembly move correctly and discovered the assembly move was never going to be the whole answer because of the rule was not built to reward
Aaron Alpeter (29:42)
Yeah, I think that that's basically it. I mean, I I
Hugh (29:44)
Yeah.
Aaron Alpeter (29:45)
don't know if anybody at the company published an actual component list and and really thought through this number of of you know being a third versus two-thirds. I just
Hugh (29:54)
Mm.
Aaron Alpeter (29:55)
kind of am walking through like this logical reading the rule, not looking at at their spec sheet. but this is where the machinery from our kickoff episode it really comes into focus. You know, IMMEX, CTPAT, AEO certification, all of these things apply in Mexico.
And it still doesn't touch this specific problem. all of this governs how the goods move across the border efficiently and securely. none of it changes where the motor came from before it got there. And so the the company that invented this phrase built in the USA with global materials is now running the exact same asterisk. It's just now in Spanish. And and so I
Hugh (30:29)
Ha ha
ha.
Aaron Alpeter (30:30)
I
I think that I want to give this problem lame because we're gonna we're gonna run into it for the rest of season. And let's just call it the messy middle. So final assembly is is the visible front page part of the near shoring move. it's it's actual jobs that are there. But all of these tiers that fall up behind it, these supplier of suppliers, that's the part that
Hugh (30:49)
Mm.
Aaron Alpeter (30:49)
never makes it into the press release. It has a bigger impact on on USMCA and and duty treatment than anything else.
Hugh (30:56)
Yeah, absolutely. and this is something that is very very familiar to me. it's a part of my job and it never demos well. tracking which component came from where, three suppliers back, in real time, at scale. these are challenging problems to solve in the industry. it's not something that you can just solve by slapping a dashboard on top of it.
something or buying something, right? Like so you're gonna have to go and physically verify a supplier relationship, and that that doesn't get faster because you can see it more clearly. Like visibility is gonna tell you the size of that problem
Aaron Alpeter (31:27)
Yeah, and like integration platforms have a hard job, right? The the data layer is necessary. it's not just sufficient. knowing precisely which motor came from which supplier doesn't mean that you have to requalify the supplier for you. Like there's you're always looking at this and
Pricing can change. What happens if you get a a tariff increase in one country and so now you're shifting? So you're juggling a lot of balls in the air. If you don't have good integrations or data, you could be way off when you get audited.
Hugh (31:54)
Totally. And and I mean this raises a question that I keep coming back to maybe this doesn't keep not getting fixed because nobody's tried. Maybe the fix and the deadline were never running on the same clock to begin with. And everybody involved is quietly aware of that. And nobody wants to be the one who says it out loud, least of all on an earnings call, because this is a permanent condition, not a project.
That's not a sentence that makes analysts feel good or write positive buy reports.
Aaron Alpeter (32:22)
Yeah, and I think this is kind of the argument that I want to get into because DeWalt itself is not struggling. Right. In twenty twenty five it posted low single digit organic growth across every product line and region inside the tools and outdoor segment that had declined one point one percent overall. So they're they're currently gaining market share in a declining market, right? So they're doing just fine.
when you look at at the pricing picture. DeWalt holds about a 19% unit share in US power tools tied with Ryobi. but it has roughly a 28% dollar share, which is double Ryobi's. And so they have this premium pricing power that's been built over decades,
Hugh (33:01)
Sure. And so to take your logic, then the brand's fine, it's growing, its price is a premium. So why does any of this actually matter to anyone outside an earnings course?
Aaron Alpeter (33:13)
Well, because I think it it does show up in earnings, right? It shows up on that bill. Every dollar of tariff exposure that doesn't get resolved by qualifying either eats margin or gets passed through as a price increase. And so that's not the problem being solved. It's a problem being paid for quietly every quarter, kind of indefinitely. And so here's here's my actual argument: is this season we've been asking whether a company's advantage is inherent to Mexico or a USMCA artifact that could get repriced.
And DeWalt is where this question stops having a really clean answer because the final assembly in Mexico is real. There's a five hundred thousand square foot facility that's that's vertically integrated and it's making drills. but it doesn't qualify for the trade deal's own tax treatment. So it's not inherent either. So it it's not USMCA's own definition. So it's this really interesting piece where, yeah, it's Mexico for all
the structural advantages that Mexico has, but it's not qualifying for this trade deal that you would have thought would have
Hugh (34:07)
Yeah.
Aaron Alpeter (34:07)
moved it there in the first place.
Hugh (34:09)
It's fascinating. I find this so interesting. And it like it genuinely can sit in both buckets at at once, right? Not as a temporary state on the way to when landing in one or the other, but permanently, structurally, you are in both states.
I think we can we can all see that, surely.
Aaron Alpeter (34:27)
Yeah, you know, I I think you're right, because we we tend to have this idea that that trade policy is fixed. It will never change, right? Like we will always have USMCA, we will always have pick your favorite free trade agreement. But trade
Hugh (34:34)
Yeah. Yeah. Yeah. Hmm.
Aaron Alpeter (34:40)
policy in and of itself is temporary, right? you know, USMCA
Hugh (34:44)
Yes, yes.
Aaron Alpeter (34:45)
resets by design.
you know, there's a scheduled joint review every six years, which if all three countries agree, means that they'll extend it in its current form for 16 years. that review point is is this year and it's it wasn't automatically renewed. So we're kind of talking through it. But this is part of how it was put together. This is part of the intention is that, we want to give enough time for businesses to plan, but the the trade policy is not a fixed thing that that is immutable.
Hugh (35:10)
yeah, And then there's this whole complicated calculation that needs to be made then around exactly how do you think about potential changes in trade policy, how do you think about locations, compliance with current and future potential trade agreements. It's so interesting. It's very nuanced. I push back on permanent actually because
I've built a whole company really on the premise that the boring, unglamorous fix is usually possible. People just don't want to necessarily pay for it because it may not necessarily announce well. and that's, you know, definitely one of the reasons that switchboard exists. Someone somewhere decided the unglamorous integration work between two systems was permanently too hard to bother with. and and it turned out it ne wasn't too hard. It was just unfunded, it was just unowned and and and not being done
in the most efficient way. Is this genuinely unsolvable structurally, or is it the case that nobody's made it somebody's job to solve with a budget, with a deadline, with a process, the way that you would for, you know, literally any other initiative in a sophisticated business, of this size?
Aaron Alpeter (36:20)
Yeah, I mean, that's a good question. I I don't know if I have a clean answer for you. I think you're you're describing a funding and privatization problem.
if I'm describing that's closer to physics of the time problem or you know, what's going on, but DeWalt has made this the single most funded initiative in the company. re-qualling flying suppliers three tiers back.
at this volume still takes years. And so whether that is unsolvable or unfunded might not be the right split. It could just be that this just takes so much time. It's too slow to ever look finished or fit on a timeline that you know would look good in a quarterly earnings recall.
Hugh (36:58)
Yeah, maybe. Or maybe that's exactly the story a company tells itself so that it, you know, never has to put a name in a budget line against a fix. I mean we've we've all heard this kind of argument before, usually from from people who haven't tried yet. And that's a comfortable argument to believe because it means that nobody has to be the one who owns the failure to move faster.
Aaron Alpeter (37:22)
Yeah, I I I think you're right. Like we're we're probably not gonna settle that here. You know, my point is that a trade agreement that has a six-year policy clock that is always being
Hugh (37:31)
Mm-hmm.
Aaron Alpeter (37:32)
reset or adjusted, and a multi-year
Hugh (37:34)
Hmm.
Aaron Alpeter (37:34)
decade timeline where you're trying to reset things, those are just inherently not the same speed. You can't rebuild and
Hugh (37:40)
Right, right.
Aaron Alpeter (37:40)
move your supply chain in six years based on what the trade agreement says. So you have to kind of like look at this and project out what's likely gonna happen.
absent of a trade agreement. And you know, that's that's why like the math of the company actually matters in terms of making it pencil out.
Hugh (37:58)
Yeah, completely. It makes it makes a lot of sense. And so what does it actually cost then to close this gap?
Aaron Alpeter (38:05)
Yeah, so let's just look at the revenue that sits inside the tools and outdoor unit. they did thirteen point two billion dollars in twenty twenty five, and that was eighty-seven percent of the whole company's revenue. And you know, according to their their details, tariff exposure sat around eight hundred million dollars a year before any mitigation.
Hugh (38:27)
Oee. That's a serious number. Eight hundred million dollars a year. That is a look, it's not a rounding error, it's definitely not a not a small a small impact on a segment of this size. But against thirteen point two billion, it's also small enough that a company of this magnitude could plausibly decide to to to wear it quietly forever rather than trying to fix the underlying problem. And I suppose that's
That's the uncomfortable part of it. You know, if if this were a bigger cost issue, if the number were bigger, it would force a decision. Whereas, you know, at this size, maybe it's just too easy for them to absorb.
Aaron Alpeter (39:12)
Yeah, you know, and I think that's like the discussion we had earlier about high tariffs forcing people to rethink things. And and this is why the other side of the ledger matters. I mean, that that's just the revenue number, but long term debt for Stanley Black & Decker was about four point seven billion at the end of twenty twenty five. And that's that's against a target that they've set of two point five times net debt to EBITDA. And so the company is is not even at that place yet.
where they're at their their debt level, they're above where they where they said they wanted to be. And now we're looking
Hugh (39:45)
Mm.
Aaron Alpeter (39:46)
at this and saying, Okay, well do we s we we're gonna have to spend money to get out of this eight hundred million dollar tariff thing. But right now we we just can't do that.
Hugh (39:52)
first of all, that is a very high net debt to EBITDA leverage ratio. But even leaving that aside, we talk about earnings calls and board meetings of of listed companies.
we literally had to take on additional capital to make this work.
Meet these requirements.
Aaron Alpeter (40:08)
we talked about high tariffs change the supply chain, high interest rates change the debt posture. And,
Hugh (40:13)
Into.
Aaron Alpeter (40:13)
you know, in in December of twenty twenty five, the company sold its aerospace fashioners business. And it was, I think it was called consolidated aerospace manufacturing. They sold it to Howmet for one point eight billion dollars. And after taxes and fees, they netted about one point six billion dollars.
Hugh (40:29)
where's that one point six going?
Aaron Alpeter (40:32)
Yeah, so they explicitly earmarked it for paying down the debt. this is what's interesting, the company hasn't really outlined its priorities in these exact terms, but a full multi-tier supply chain requalification at something like Reynosa's scale would compete directly with hitting that leverage target. And it's the exact same capital
Hugh (40:50)
Hm, certainly, yeah.
Aaron Alpeter (40:53)
on the exact same balance sheet. And so right now the freed up cash
is going to debt, not to accelerate a requalification. And so this isn't a scandal. It's just what the current plan actually prioritizes And and this $1.6 billion that the company just freed up by selling its aerospace business isn't going toward the supply chain. It's going toward the debt.
Hugh (41:11)
Yeah, and so to be clear, this is not this is not conspiracy. This is just how a covenant managed balance sheet behaves by default. The debt payment is the thing with a deadline attached to it and a number the market watches every quarter.
Aaron Alpeter (41:24)
Yeah. if you look at the other things that they've talked about, they have announced a one billion dollar commitment to US manufacturing. so they call it US manufacturing RD and workforce training all through 2028. And it's it's not the same pool of money, even though you would think it's you know, it's roughly the same. but it's it's more aimed at partly reshoring rather than fixing the RVC problem that Mexico has.
but this gives you a the the idea of the order of magnitude that a serious manufacturing initiative actually runs when you're looking at moving established businesses across the border.
Hugh (41:58)
Right, which means then that that even the one number the billion dollars, isn't earmarked for this specific problem either. It's not a rounding error, that's the whole gap. It's sitting right there, in plain sight, in the materials, ready to go.
Aaron Alpeter (42:12)
Yeah, I mean again, eight hundred million dollars a year, one billion dollar one-time charge. I mean, you do that math, you're like, hey, maybe
Hugh (42:17)
Mm. Mm.
Aaron Alpeter (42:19)
we spend a billion dollars over here and we see if we can knock this bill down from eight hundred million to four hundred million, right? We get our money back in three years.
Hugh (42:24)
Yeah, that's right. Hmm.
Aaron Alpeter (42:27)
but this this pressure to hit the leverage target ahead of schedule.
and a further delay in the USMCA renegotiation might buy some more runway. but it's it's a decision that's gonna prioritize the requalification to say, you know, do we want to spin over that two point five target that we have on purpose? but nobody said that that's what they want to do.
Hugh (42:45)
What actually happens if nothing changes?
Aaron Alpeter (42:48)
Yeah, so probably nothing dramatic they're doing great. They keep growing. Prices go up at the at the margins as tariffs require it. consumers are kind of expecting them. So there's a there's a place where they can just pass this along. you know, these SKUs will get requalified one at a time. So it's not that the entire plant would now, have a higher RVC. They would do, one type of drill and then another type of drill, maybe a saw, those sorts of things.
And so it's it's not really like this permanent condition that plays out in real time.
let's let's take a look at this and and put our investor hat on. So why don't you walk us through what you would actually flag if you were looking at a company like DeWalt from the outside?
Hugh (43:25)
Sure. I think there are four things that I want to talk about so the first one is customer concentration. And so the most recent numbers that I could find are a few years old now, but Lowe's alone was able to do something in the order of fifteen to seventeen percent of the tools and storage business.
Home Depot around 13 to 14%.
so when two retailers can move that much of your revenue with a a single space decision, everything else we've talked about today, the RVC gap, the leverage target.
gets negotiated in the shadow of that that relationship, not independently of it. Second point, this entire segment is tied to housing turnover and DIY spending.
the segment at large is is challenging. Interestingly, in other countries, not not the case. But that's maybe a conversation for another time.
Aaron Alpeter (44:19)
Mm.
Hugh (44:21)
the third, and this is this is the real one, and I mean
For me, that two and a half X leverage target is a genuine ceiling on how fast other things are going to get funded, including the fix that we've just spent the last section on. A company managing to a covenant doesn't get to spend faster just because a problem is embarrassing. they've got they've got serious duties here.
and finally,
Built in the USA with global materials exists specifically because the plain, unqualified claim wouldn't survive FTC scrutiny. And nobody sued DeWalt over it that I that I could find. But the FTC has gone after other equipment makers for this kind of labeling.
none of those four is a five-year plan with an end date. There's no easy way out of this.
Aaron Alpeter (45:11)
Yeah, I mean I I think the reputational piece is is what sticks out to me. Because those first three bullet points you shared, those are fairly standard, right? Those would be things that any analyst that's covering any company would probably look at. But four is different because
it's sitting next to the whole premise of this episode. it's this underlying gap, right? It's it's how assembly happening in one place competes with where the value is being derived from. And, something that shows up as a marketing label in 2013 becomes a trade compliant center in 2025. it's not these separate weaknesses, it's one weakness wearing two different regulators' clothing. And the the key thing here is that,
In the US, it we had to have this disclosure because the stuff was coming from outside of North America. Now in Mexico, we we don't get the tariff treatment that we would want because it's coming from outside
Hugh (45:55)
Hmm.
Aaron Alpeter (45:56)
North America. And so it's this this thing that's looking very different from either side.
Hugh (46:01)
Yeah.
Aaron Alpeter (46:02)
yeah, when I when I think about the takeaways that I have from this episode, there's a couple things that come to mind that I want our listeners to to think about as they're thinking about manufacturing Mexico.
The first is that you shouldn't confuse a real physical move with a finished one. the Reynosa factory is is genuinely the largest facility of its kind. if you're evaluating your own suppliers, hey, we should move to Mexico conversation. The follow-up question is is like, well, moved or or moved and qualified. And the second
Hugh (46:29)
Hm.
Aaron Alpeter (46:29)
piece that sticks out to me.
Is that when you hear a company describe something as a multi-year initiative, ask what kind of clock it's actually running against? Is this a five-year plan that's measured against the supply chain's own timeline? or is it a a five-year plan that's measured against a trade agreement that may reset first and and then you're already behind? What what were the takeaways
Hugh (46:48)
Mm.
Aaron Alpeter (46:49)
for you?
Hugh (46:49)
So for me, I think the first one is that the unglamorous fix is almost always the real bottleneck. and it's almost always the thing that gets funded to be solved last. And that's because frankly it's genuinely hard to put it on a press release. Nobody announces, you know, we requalified our tier three motor supplier this quarter, or that we've reallocated our supplier for ball bearings or whatever.
But everybody can announce a ribbon cutting. It looks good on LinkedIn. it sells newspapers for a new building or a new manufacturing site. the work that nobody wants to fund and do, is usually
where the load bearing is in the process. And you're only gonna find that out when you're going to go look for it.
Aaron Alpeter (47:34)
Yeah, and I think what's what's really interesting is that in the case of DeWalt, they have run this test twice, right? The first time with the North Carolina, and the answer didn't hold, right? They could not get past the FTC disclaimer of saying, you know, built with global, global materials. And then they they ran the same test on the other side of the border, and they were hit with all of this tariff stuff that they probably would really hope they didn't have. And so it's the same test, a different border.
And the only real question left is whether anyone actually changes it in the end. And I think what's been interesting so far this season is we've been talking about whether an advantage is inherent or an artifact of a trade agreement. And DeWalt is is an answer that it can be both, maybe even permanently and at the same time. And a company this size has to learn with how do you operate inside that answer instead of waiting for it to resolve into something cleaner on either side. when we look at a company in the future.
What is deciding to do some sort of manufacturing in Mexico or just trying to be strategic and have to think about it outright?
You've got to go a level deeper. I think that's what founders, whether you are running a billion-dollar company like DeWalt, or you're just getting sort of, you've got to think about where is your stuff coming from because that's ultimately gonna have a bigger impact on what's going through. So Hugh, thank you so much for being on this episode. This is fantastic. I had a lot of fun here. I know a lot more about Power Tools than I did.
Hugh (48:52)
Thanks.
Aaron Alpeter (48:53)
and for all of you
Hugh (48:53)
Definitely.
Aaron Alpeter (48:53)
who are listening, thank you so much for for making this part of your day. If this was useful, leave us a rating. if five stars is is what we love, if you have somebody
who's who's thinking about this and saying, hey, we we should be moving production to Mexico, think about sharing this episode with them. There's so much that we're gonna do this season as we go through her.
And you know, the the sourcing story is really just the beginning of a much longer story when it comes to manufacturing in these two countries.
Hugh (49:18)
Thank you very much for inviting me along today. this is so this is fascinating. I mean, a company's really expected to do these kinds of granular calculations. I mean, how enforceable is that?
Aaron Alpeter (49:29)
So they are. They absolutely are, regardless of your size. And so like this is one of those things where if you want to take advantage of USMCA, you've got to go through this compliance work. That has never, that's been the case ever since it was signed and it was NAFTA and stuff like that. What has changed is that the penalty of not going through the compliance work has gotten higher. go back to my Canadian example.
it used to be that most people did not bother filing the USMCA stuff because it was like one percent or half a percent. And you're like, hey, it's just easier. But now but
Hugh (50:02)
Whatever, right? Yeah.
Aaron Alpeter (50:03)
now that's like fifteen or twenty percent. They're like, Hey, I'm I'm gonna fill
Hugh (50:05)
Sure.
Aaron Alpeter (50:06)
out this piece of paper.
Hugh (50:07)
Yeah, yeah, yeah.
That calculus around the RVC is nuanced, and you would need to consider, yeah, the tariff, what it could potentially change up and down. What are your levels? What's your threshold? You know, okay, we're comfortable if the tariff's in this range or or whatever. So do we believe that it's that it's going to stay there and we should open this facility or we should choose that that supplier? that's a lot to bake into
these kind of supply chain decisions, you know.
Aaron Alpeter (50:34)
yeah, I mean
I I t I tell my wife all the time that we're living in a historic time. people will read about the Trump years for decades. love him or hate like i h historic time.
Hugh (50:42)
Mm. For sure. I can already
see the high school history essays, yeah.
Aaron Alpeter (50:48)
for sure. And and you know, I have got a couple of examples where we we had a client who was manufacturing in Missouri, right? They were they were making call it like modular home units. And they had final assembly in the US, and they were getting
Hugh (51:04)
Hmm.
Aaron Alpeter (51:05)
steel from Mexico. And when the tariffs went up on Mexico on the steel, there's a particular type they needed, it now became
Unprofitable for them to have a US manufacturing base, even though that's where the assembly was. And it was actually cheaper for them to buy Chinese steel, send it to the Dominican Republic, have it basically finished and turned into something else, and then sent in the US. And so it was this really interesting knock on effect where the whole point of the tariffs was, you know, in some part to bring jobs back to the US. But because of the RVC content, you start pushing
Hugh (51:39)
Mm.
Aaron Alpeter (51:42)
jobs out, and you're like, well.
We can't actually do it because the stuff that we're getting from this this very unique steel, you know, we can't get in the US.
Hugh (51:50)
It just goes to show how how complex this the whole piece is, right? There's so there's so much flow on effect of it. we've been talking about Dewalt right? This huge business. if you're running a small or mid size or even a pretty large operation, I mean, yeah, there there's a lot to consider baked up all in all of this.
Hey, this has been awesome. It's been very nice to see you again and and to chat
Aaron Alpeter (52:11)
Yeah.
Hugh (52:11)
today.
Aaron Alpeter (52:12)
Yeah, we should we should have a a a more proper catch up here sometime soon.
Hugh (52:15)
I would like that.