Since the White House announced its intention to impose tariffs on Mexican imports earlier this week, consumers have been reading the mainstream press to figure out how this might impact consumers. Supply chain professionals meanwhile have been wrestling with how these shifts might impact the global electronics supply chain.
The President affirmed the intention on both Monday and Wednesday this week. “[President Trump’s] position has not changed, and we are still moving forward with tariffs at this time,” White House press secretary Sarah Huckabee Sanders said in a statement.
For the electronics and associated industries that use electronic components, such as automotive, Mexican manufacturing has been a staple of the supply chain for the past several decades or more. Mexico launched the Maquiladora, Manufacturing and Export Services Industry (IMMEX) in 1964. Although much of the attention started in the clothing industry, it soon spread to other sectors.
Manufacturing operations established in Mexico that import raw materials and equipment for assembly, processing, or manufacturing (called maquiladoras) have long enjoyed tax breaks and other benefits. Especially in the wake of rising wage costs in China, Mexico’s manufacturing sector has become an important part of the strategy of many OEMs.
Meanwhile, China tariff changes have had huge impacts on the industry already. “The US electronics and electronics components industries were some of the first to be impacted by this trade war,” according to a statement from the Electronic Components Industry Association. “The first two tariff lists enacted in July and August 2018 resulted in tariffs on $50 billion in Chinese products. Out of the list of products from China with new tariffs, total electronics components represented $9.4 billion,19 percent of the total value of products with new tariffs. Virtually all electronics components were included in the first two lists with only a relative handful of electronics products added in the next two lists that will result in tariffs on all Chinese imports.”
We sat down with a number of contract manufacturing experts to get the scoop on how the current tensions and potential changes on the horizon in terms of Mexican tariffs might affect global electronics OEMs. In our roundtable, we included
- Ron Keith, director and member of the Board of Directors, Supply Chain Resources Group;
- Chris Mitchell, vice president, Global Government Relations at Association Connecting Electronics Industries (IPC);
- Mathieu Kury, regional director, Business Development & Program Management for AsteelFlash Americas;
- Albert Yanez, corporate executive vice president & president of AsteelFlash Americas; and
- Howell Wang, CEO, Insight Solutions Global.
EBN: Following the addition of a 5% tariff on imports to the US from Mexico, how much impact do you see on the electronic manufacturing supply chain?
Keith: As with a number of initial proclamations from President Trump, it is unclear whether the initial tweet actually ends up becoming American trade policy or not. It’s interesting to note here that White House chief-of-staff Mulvaney stated this weekend that the threatened tariffs were not related to trade policy, which potentially opens the world up to a brand new geo-political economic policy tool. Having said that, the threatened 5% tariffs are not likely to stem the tide of manufacturing being brought back from Asia to the shores of North America. But should the tariffs become progressively more punitive with time and with a perceived lack of progress on migration and attempted immigration, then this ‘tweeticy’ from the administration could have significant global repercussions.
As I mentioned a few days ago in my interview with EMSNow, Mexico and Vietnam are clearly the two primary beneficiaries of the US/China trade dispute. But adding an additional 10%, 15%, or even 20% tariff burden to imports from Mexico would clearly swing the balance in favor of Vietnam, as well as benefit other East Asian countries such as Thailand, Malaysia, and to a lesser extent the Philippines.
Mitchell: If the 5% tariffs go into effect, the implications for the North American electronics industry are significant but, for most companies, probably manageable in the short-term . The greater fear is that these tariffs will remain in effect for an extended period and that they will escalate between now and October to 25%. Tariff Increases of this magnitude and/or duration would prove catastrophic for some companies and force many others to radically shift their supply chains in a manner that would undercut U.S. manufacturing strength.
The $155 billion in North American electronics trade has grown and matured in the 25 years since NAFTA was signed. Leveraging the industrial strength of all three countries has allowed companies to maintain and grow their manufacturing operations. These tariffs undermine the partnership that U.S. and Mexico have formed to compete in the global economy.
Kury & Yanez : As we operate under a special maquiladora status, we’re currently working with our import/export expert internally as well as with authorities to evaluate the impact. While tariffs are always particularly hard to navigate, we don’t see an immediate impact as of right now with our daily shipments being made from Mexico to the US.
Wang : There’s a slowdown in the decision-making process for most of those companies who planned to move electronics manufacturing and its supply chain from China to Mexico, especially since the Trump government may increase tariffs to 15% or more if Mexico fails to resolve illegal immigration. Trump may not be satisfied if Mexico wants to make progress step-by-step. He already did this kind of things on the negotiations with China. Mexico may not step back quickly because lots of immigrants, moving from other countries, are force to stay in Mexico to wait for review and approval for a long time. Mexico would carry a large burden.
EBN: This is part of ongoing trade issues and tariff that are having real consequences, some unintentional. How do you see these issues impacting you and your customers?
Keith: For Supply Chain Resources Group's core business, its roughly a zero-sum game. We provide services to OEMs in all the primary beneficiary destinations of Trump's trade policy. So, if our business in China declines dramatically, we would expect that decline to be offset by increases to our business in other low cost geographies around the world as we help our OEM clients relocate production and key upstream suppliers.
The impact on our customers however is not a zero-sum game. They are spending an additional 3.5% to 6% of cost of goods sold (COGS) over the next 12 months to relocate production to avoid tariffs, and that is excluding the soft costs of start-up inefficiencies in a new geography. But the real cost incurred by our OEM clients is in the uncertainty, or what I refer to as the continually changing certainty, of how undefined trade and foreign policy objectives cast a long duration shadow over key investment decisions that need to be made today. Uncertainty is bad for business and ultimately creates a price borne by all consumers, employees, and stakeholders regardless of their home geography.
Mitchell: Many IPC members are reporting a feeling of whiplash from the Trump administration’s multi-front trade disputes, as well as frustrations about the lack of clarity on the supply chain impacts.
The electronics industry has some of the most complex supply chains and thinnest profit margins of any industry in the world. In this competitive environment, marginal cost increases matter a great deal, especially considering that electronics components may cross borders multiple times on the way to final assembly.
Trump administration tariffs have already led to shifts in supply chains, but it would be a mistake to conclude that these shifts have always or usually benefited U.S. manufacturers. For every call I receive reporting that the tariffs have helped a U.S. manufacturer, I have received calls from two others that the tariffs have hurt.
Kury & Yanez : Eventually, there are always consequences. They may not show up immediately, and for us it makes it even harder to keep track of them as we may be subject to tariffs only when a PO is placed (not necessarily at the quotation stage), or when the goods are actually entering the US. It complicates our business, but since the rise of tariffs against China and now Mexico, I believe we’ve addressed most of our customers’ concerns either through clarification of HTS Code making their products exempt, or thorough analysis of the overall manufacturing and content of the product to be able to qualify it as a NAFTA product, for example. These “services” are brought to the table by our sales team worldwide to provide all the necessary information to our customers, for them to make an educated decision in line with their business requirements.
Wang: Some of our clients are talking about moving their outsourced manufacturing, mostly to Malaysia or Vietnam, rather than other geographies. As we are a service company, we are expanding our service geography with more local resources and a better supply chain network to support clients regionally. However, the largest amount of demand is still in China because most of the critical and customized components are made in China. We are adding our supply chain resources to help clients organize and manage the sub-supply-chain so we can help to shorten lead time and speed up their supply chain.
EBN: What is the response of your clients to this issue and how can you protect them against the complexities of ever-changing international trade challenges?
Keith: Phil, if we could truly protect our OEM clients from ever changing international trade challenges, I would certainly not be here giving you an interview at 10:00 PM on a Monday night (nothing personal my friend). We can, and are, helping our OEM clients create a more transportable and more responsive supply chain. We are doing that 24/7 for most of our clients including a number of prominent unicorns and Fortune 100 companies. But until such time as we learn how to predict the future with a high degree of accuracy, the best we can do is cushion the blow, and create better responsiveness for our clients so that they can react more efficiently, and more quickly, to a rapidly changing and highly uncertain global trade environment. We can help shield them, but today our services don't yet make them bullet proof when the bullets are coming this fast and furious from so many random directions.
Kury & Yanez: All and all, and as we’ve discussed it together during one of our panel discussions at APEX in San Diego a few months ago, it comes down to the total cost of ownership. Tariffs being a consistent trend now for our industry, we must do the math and provide the analysis to our customers. I think it brings a reality check to a lot of industries and companies where the location of manufacturing was always China, by default. Now Mexico, maybe tomorrow we’ll see tariffs on Malaysia, Philippines or Thailand? If that happens… what country of manufacturing will be the lowest cost, landed, for a given product? What we can do is monitor the situation and provide our customers with valid information, to guide them to the right decision for each product. Transferring a product from one region to another can take from four to eight, or even ten months depending on the complexity of the products. And this might not make sense even with lower tariffs as some of the materials could still be coming from a country of origin subject to tariffs. All of this should be carefully reviewed before pulling the trigger.
Wang: Our clients are really concerned, especially those with consumer electronics products. Industrial and medical device brands are less concerned, because it’s not efficient to change supply chains. Clients are also applying for waiver of the extra tariffs. We are producing cost benchmarks, pros and cons, and SWOT analysis on business, manufacturing, quality, supply chain, etc., all to help them to make better decisions on their supply chain mapping or supply network design. We are also finding suppliers who either have international operations, or have a solid plan to establish new plants develop make joint venture in South East Asia to resolve these challenges.
We also asked the IPC’s Chris Mitchell, how can those concerned can access more information?
Mitchell: IPC is tracking these issues, and we are updating our website to provide a “cheat sheet” on all the issues in play. In addition, companies should track policy developments at on the website of the U.S. Trade Representative. For those companies with implementation questions, U.S. Customs and Border Patrol (CBP) is your best resource. Companies can reach out to the CBP’s Electronics Center of Excellence and Expertise.
How are tariffs affecting your supply chain? What are your chief concerns? Let us know in the comments section below.