The U.S. consumer electronics and technology industry recently breathed a collective sigh of relief when the Trump Administration and Chinese government each announced a 90-day truce in their trade war, which put on hold the Trump Administration's plan to automatically boost tariffs placed on $200 billion in Chinese products from 10 percent to 25 percent on Jan. 1, 2019. However, the U.S. tech sector, which has already been hurt by the tariffs to varying degrees depending on the company and specific products it sells, is far from out of the woods yet, and uncertainty reigns supreme, according to several industry executives I interviewed.
After all, if the Trump Administration and Chinese President Xi Jinping fail to come to a deal of some sort that will make both sides happy, those 25 percent tariffs will just go into effect in the second quarter of 2019 instead of the first quarter of the upcoming calendar year. American tech companies have, thus far, managed to cope with 10 percent tariffs by either raising prices, eating the extra costs, or a combination of the two. But dealing with 25 percent tariffs will be a much more difficult pill for them to swallow--especially the small, independent businesses selling products with small profit margins who face steep competition. That accounts for a significant percentage of the American companies making home theater and other consumer tech devices.
Reasons for Optimism...
Fortunately, the tariffs imposed on Chinese imports so far haven't included three of the most significant and popular consumer tech products: finished HDTVs, computers, and smartphones. Although the tariffs have impacted components for at least some of those products, the tariffs that have been imposed so far haven't been as devastating for the industry as they could have been.
At least some folks in the industry are optimistic about the truce, including Gary Shapiro, president and CEO of the Consumer Technology Association (CTA), who issued a statement, saying: "We're encouraged to see Presidents Trump and Xi working together to reduce trade barriers between the U.S. and China. We applaud President Trump's decision not to raise tariffs to 25 percent on Jan. 1."
Also optimistic about the truce were tech manufacturers we interviewed who told me they had either already been impacted by the tariffs or expected to be impacted soon, whether they increase from 10 percent to 25 percent or not. Gary Yacoubian, president and CEO of Ohio-based speaker and subwoofer manufacturer, SVS, told me his firm was already hurt by the tariffs and he was "very encouraged that some progress is being made in the trade talks." He added: "What needed to happen here was real dialogue and some degree of transparency. It appears that we are on a promising path. Fingers crossed!" And before the truce, the new NAFTA deal with Canada and Mexico--officially the United States-Mexico-Canada Agreement (USMCA)--was also signed, and that was "encouraging" too, Yacoubian said. (Congress, however, has yet to vote on it as we publish this article.)
Florida-based JL Audio was "very happy" about the 90-day reprieve, Robert Oxenhorn, its director of finance and accounting, told me, noting his company was slammed in September by the 10 percent tariffs. JL Audio assembles all its home products in the United States, but "we do use lots of foreign components in our speakers...and a lot of those components do come from China," he pointed out, noting the company's powered subwoofers use processors and amplifiers that "were all subject to the additional 10 percent tariff." JL Audio boosted the prices it charged retailers on those items by 5-6 percent in November to help offset the increased cost to the company, he said, adding: "We're eating a portion of the tariff bill." But sales haven't been hurt by the tariffs, he told me. On a positive note for retailers, meanwhile, they benefited from increased margin dollars on the products as a result.
"Everybody thinks it's great that there's a pause" in the tariff battle, said Robert Heiblim, a CE industry veteran who serves as chairman of the CTA's Audio Division and is also a partner at CE consulting firm BlueSalve, which he co-founded, and president of e-cigarette maker Boulder International, which has been hurt by the tariffs, he told me. "We're glad they're talking," he said.
Meanwhile, Roy Hall, president of high-end audio manufacturer and importer Music Hall, in Great Neck, New York, said he hadn't been impacted significantly by the 10 percent tariffs, but would be hit hard if tariffs on China-sourced amplifiers used in his products went up to 25 percent in 2019. To overcome that huge increase, he told me he was "just in Europe looking at making goods in Slovakia which will match Chinese prices and avoid the tariffs." In the meantime, the trade truce was "encouraging," Hall said.
Reasons to Be Skeptical...
Hall said regarding the tariff truce that it is "encouraging if true [but] I just don't trust Trump or anything he says. Look at NAFTA... He will pull out if the new agreement doesn't pass [in] the new Congress. He is too fickle. Try formulating a long-term business plan when the rules are constantly changing."
Also adding his reservations about the truce was Heiblim, who told me: "It leaves us all not knowing what to do." For one thing, many companies will be showing new products at CES in Las Vegas in early January, like they do every year. "How do you price them? Will these tariffs really be worked out or will they go to 25 percent? Anybody who does pricing knows that you don't want to announce a product and then, two or three months later, raise the price." The truce, Heiblim said, just "leaves us all uncertain, and that is one of the biggest problems in business. How do you buy your inventory? How do you price things?"
While moving product sourcing from China to Cambodia, Malaysia, Vietnam, or another country is an option for at least some manufacturers, Heiblim also pointed out: "It's no small task--it is a major, gigantic task--to move production." Until manufacturers know whether the tariff is 10 or 25 percent, it's hard for them to gauge whether it makes economic sense to shift their sourcing or production, he said. There's a big difference between 10 and 25 percent, after all. Even more importantly, Heiblim added: "If tariffs are going to be the tool that is used, then what is to prevent the tariff wand to waive over Vietnam or Malaysia or some other country?"
It's not outside the bounds of reality for a manufacturer to be afraid that if they go through the trouble of shifting production from China to Vietnam, the Trump Administration will then start a similar trade battle with Vietnam. Let's not forget that China isn't the only country the Trump Administration has battled with over tariffs and unfair trade claims. Heiblim agreed that China has engaged in "unfair trade practices," but "it's not limited to China" and tariffs are not the way to solve the problem because they are "a tax on everybody," he said.
Continue to Page 2 for the ironic real-world costs of the tariffs thus far, and speculation about the future...