Tariffs: More Than a Political Strategy

Editor's Note: This is the second of two articles examining the impact of tariffs — positive and negative–on the electronics industry. For the first article, click here.

For political pundits, the United States government’s tariff strategy is about political leverage. For electronics OEMs, however, tariffs are about business 

 “As a United States patron, I look at it through the lens of the intention in imposing taxes against China; and I ask myself if it helps us in our communities or overall in the country,” said Jens Gamperl, CEO of electronics distributor Sourceability.  “Then I ask whether it is necessary and why, and what are the goals. At the end of the day, every business owner evaluates things based on whether it helps achieve their goals or not. As business owners, we know tariffs will impact our organization.”

Image courtesy: Pixabay

Image courtesy: Pixabay

Nothing new

Tariffs have been part of the political landscape for literally hundreds of years. As a rule, manufacturers or other businesses try to find a way around them.

OEMs outsource their manufacturing to other countries to take advantage of lower tax or labor costs. Today, China fits that bill, but in the past companies have asked Sanmina to manufacture in Canada, India and other locales to suit their business needs, said Gelston Howell, senior vice president of EMS provider Sanmina Corp., which operates 75 manufacturing facilities in 23 countries.  “Every year we are asked to do new things for customers who want to address new markets,” he added.

The great unknown

In some sense, the fact that tariffs are still around is a stressor for many organizations. Tariffs create uncertainty in global markets and with uncertainty comes risk. “Tariff wars and related uncertainty/repercussions mean top-level executives are relying much more on supply chain professionals and trade compliance personnel to rethink supply chain strategy and operations,” said Dan Clark, founder and president at Kuebix, a transportation management system vendor. “Their major strategic focus? Managing global operations risk, understanding and mitigating the role of tariffs on company financials, and dealing with ongoing business uncertainty and rising global supply chain costs.”

Pinch in the pocketbook

Of course, the first repercussion is usually price hikes as manufactures try to pass expenses on to customers. “Many of our customers understand that there is going to be an increase that will be passed along,” said Robert Grzib, marketing manager at CDM Electronics, a specialized distributor of interconnect products. Those in the telecom, consumer and medical electronics space are feeling the pinch, while military/aerospace, which source most product domestically, are impacted less.

Suppliers to commercial Chinese companies are dealing with tariffs in a variety of ways, Grzib added. Some companies have restructured price lists to accommodate the added cost. Others hold prices on existing products but apply tariffs to new orders. “In our industry, the expectation that a single entity will swallow all the extra costs is simply not realistic,” said Gamperl. 

In both cases, everybody feels the pain.  Some percentage of costs are passed to distributors such as CDM; others are absorbed by suppliers or OEMs. “The end user is being affected but I haven’t seen much anxiety other than a groan when a product price goes up a lot,” said Grzib.

At the same time, OEMs look at costs more broadly to keep things in perspective. “Tariffs and duties are part of a complete total landed cost analysis,” said Howell. “There are many considerations that go into where a product is built. The tariff might be 10 percent or 20 percent, but there are many other factors.”  Other considerations include the size of the product, the complexity of the engineering, logistics costs or the country of origin for components and subassemblies.

Uncounted costs

In addition to absorbing costs, many electronics organizations are picking up the tab for services such as tracking products to ensure tariff compliance. “We are talking about [increased vigilance] so, as we find out if products are on tariffs, [we] investigate other product options,” said Gamperl. “Then you have to make sure you are not violating laws and finally you have to communicate back to the customer about what’s going on. It disturbs our existing workflow.  Especially in distribution, where you try to optimize workflow, it causes some pain.”

The math for estimating the cost of these activities is sobering. A large manufacturer may, for example, have many products that each have a bill of material (BOM) calling for hundreds of components. Smaller companies, although they may have fewer products, often have fewer human resources to apply to the task.

Mixed results

Questions remain about the impact of U.S. tariffs on China. “Based on a trip to China in late 2018, I believe that China does feel some impact in the production environment,” said Gamperl.  “It definitely has a mental and psychological impact.” Measuring that impact, though, is a difficult task, he added.

Meanwhile, others point to a high cost to the United States. “I don’t see it doing any good,” said Glenn Hitchcock, owner at Technology Partners Consulting. “If anything, it’s tearing up the market. Even though the administration has put off going to 25 percent tariffs, the industry is still acting as if those tariffs are in place or they soon will be.” Hitchcock points to TPC’s most recent tariff survey, which finds that more than one-third of electronics industry professionals have seen a negative impact on demand due to tariffs.

Image courtesy: Technology Partners Consulting

Image courtesy: Technology Partners Consulting

Further, U.S. tariffs may be a propaganda tool for the Chinese government. “If there is a downturn in the Chinese economy, their political elite can use the tariffs as an excuse,” said Gamperl.

For existing products, relocating manufacturing may be so difficult companies choose to remain in China. “China makes it very difficult [to leave] if you have a footprint in China and it may get next to impossible to pull that out,” observed Hitchcock. “We’ve seen an increase of building in Mexico. However, stuff already in China will pretty much stay there at least for a while. It’s impossible to yank stuff out over night.  It’s a three- to five-year process.” 

For new products, global electronics OEMs have many choices about where to build. Tariffs on Chinese-made products may result in businesses moving to other Asian countries rather than re-shoring in the U.S. Taiwan, Vietnam, and Thailand all provide cost-effective options.   “The EMS companies that I’ve spoken with are trying their best not put new business into China,” Hitchcock added.

Not forever

Even as tariffs present a measurable downside to electronics OEMs, most take comfort in the fact that this political tool won’t be used forever. “In the past two years, there’s been a sense that there might be legislation that will change tariffs in a couple of years or months,” said Howell.

Distributors are similarly optimistic. “I myself am hopeful that there will be some agreement of some sort soon so tariffs would be lessened or go away,” said Grzib. “Our suppliers who build secondarily are banking on that as well. 

Currently, tariffs and their subsequent risks have manufacturers seeking profit margins beyond hardware. “Historically, when other tariffs were approved, there was a concept of an artificial pricing floor, but we don’t have that now,” said Grzib. “Value added service is going to be the way of the future for most businesses, but especially for the electronics industry.  Services are being offered now to make up margins and companies that have never offered a service may have to learn to do it.”

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