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…
The Real-World Costs of Tariffs So Far…
In the same statement in which CTA’s Shapiro expressed optimism about the truce, he pointed out: “While China’s restrictive measures should be addressed, tariffs are taxes–and these past five months since the tariffs went into effect hurt U.S. businesses and consumers. Through September, the tech industry alone paid $349 million more on imported goods from China–a nearly 200 percent increase compared to last year–and more than doubling the ten percent tariff rate would likely hurt consumers, put several American companies out of business and displace thousands of American workers.”
“I’ve been running this company for seven years. I’ve never raised one price and now I’ve had to raise two,” Yacoubian told me. Although SVS was “planning to absorb” the extra cost, he said: “The math wasn’t working. So, that was tough. I’m hoping that something gets resolved, so the bigger [25 percent tariffs aren’t implemented],” he said. So far, at least two SVS wireless smart audio products have fallen under the “second wave” of tariffs that were already implemented, he said. SVS didn’t have to pay extra for those items yet, but he expected to “in a few weeks,” before the end of 2018, he said. SVS is launching two new products impacted by the tariffs at a higher price than he expected to: one $50 higher than originally planned (at about $100) and one $20 higher (at about $500), he noted. “Nothing that’s going to break the bank,” he admitted of the products, but he pointed out that “it’s a highly competitive world out there,” so it’s still an issue for his company. After all, “we need to be competitive on all products” to be successful, he said. If a manufacturer is “sitting on a mountain of cash,” it might opt to absorb the tariffs because it can buy market share and maybe its competitors are weaker, he said. “But if you’re in a business that has razor-thin margins and you don’t have a ton of cash, you don’t have a lot of choices,” he added.
One other point about the tariffs worth noting is that they not only hurt companies whose products or components have been on the list of products receiving the tariffs: They also hurt companies whose products are used in conjunction with products targeted by the tariffs. For example, Yacoubian said: “The custom installation business is all about Wi-Fi technologies and routers and such and they’re all affected by the tariffs. So, maybe you don’t make a thing that is an actual Wi-Fi router. But you definitely are in a business that is negatively affected by the tariffs.”
Just One More Issue
The tariffs are also just one more hurdle being thrown at CE device makers, Yacoubian noted, explaining: “Component prices are rising in other countries and labor rates are rising. It’s a very confusing world out there and introducing obstacles to American companies’ success is a dangerous game to be playing for our U.S. economy.”
There also continues to be irony in the whole tariff policy, the executives I interviewed noted. After all, one of the Trump Administration’s stated objectives has been to boost U.S. manufacturing. “What it’s doing is actually hurting us,” JL Audio’s Oxenhorn said, hoping all the tariffs will come to an end.
It also seems unlikely that including components on the list of tariffed products will encourage more manufacturers to make products in the U.S., Oxenhorn added. But he pointed out that his company, prior to the tariffs being implemented, hired almost 150 employees in the U.S. this year–most of them manufacturing jobs at its Miramar factory–as part of an initiative to boost its production in this country. The company has no current plans to change that strategy, he said. JL Audio is now assembling more than 50 percent of its products at the U.S. facility, he told me. But he conceded that the strategy doesn’t mean that “if a 100 percent tariff went into [effect], we wouldn’t have to reconsider all options.”
One need only look at the case of Element Electronics to understand the irony of the situation. As the only U.S. TV maker that actually assembles low cost HDTVs in the United States, it was the only one that stood to be hurt significantly by the tariff on TV components. Element warned early this year that it would have to close its South Carolina factory and lay off workers there as a result of the tariffs. However, the company said in an August 7 Facebook post that it was “working hard to have our parts removed from the tariff list and we remain hopeful that the closure of our South Carolina factory will be avoided.” The company didn’t respond to requests for comment for this article.
JL Audio will consider raising prices further if the tariff ends up jumping from 10 to 25 percent on its affected products, and the company is also “in the process of readjusting our supply chain to source fewer parts [from] China to mitigate the effects of the tariff,” Oxenhorn told me.
I asked Yacoubian what he expected will happen with the tariffs and he replied: “Who knows? I talk to lobbyists in the tech world and they’re like, ‘We don’t even know who to talk to. Not only is no one listening. We don’t even know who to talk to.’ So, I think to make a prediction is irresponsible.”
But it’s safe to make one prediction: If the tariff battle isn’t permanently halted, U.S. consumers can expect to see increased prices on many tech and other products in the months to come.
•The Impact of Trump’s Tariffs & Tax Cuts on the CE Industry at HomeTheaterReview.
•Evolve or Die: The Changing Face of the CE Retail Landscape at HomeTheaterReview.