The ongoing trade dispute between the United States and China has entered its latest period of volatility, as IT managers brace themselves for price hikes on data center hardware in the coming months.
With the Trump administration raising tariffs from 10% to 25% on a range of Chinese imports into the United States and threatening to impose tariffs on an additional $300 billion plus of Chinese goods, what will be the supply chain impact on enterprise computing?
What the Chinese-American standoff has made clear is that the global instability is a permanent feature of the modern trading environment for manufacturers and distributors alike. What is equally clear is that supply chains must demonstrate increasing flexibility to accommodate these changing conditions.
Tariffs driving up costs and redistributing supply
This realization has come at a cost. Survey data from on-demand manufacturer Fictivreveals almost two-thirds (62%) of companies polled say tariffs have already driven up their cost of materials and components. In addition, approximately one in five of the companies surveyed has experienced delays to a product launch or decided to redistribute manufacturing supply in response to the tariffs, which first took effect in July 2018.
According to Fictiv, an increasing number of firms are deploying what it describes as “tariff engineering strategies” in an effort to lower exposure to import tariffs, insofar as possible.
Measures that companies are taking include:
- Reshoring assembly.
- Investigating local options for prototyping and manufacturing.
- Circumventing higher tariffs by importing goods either fully or partially-assembled, dependent on the more favorable rate.
Speaking to Design News, Fictiv CEO and co-founder Dave Evans said trade wars were not the only source of disruption companies should protect against when designing their supply chains.
“Product companies today must deal with challenges like trade wars, materials shortages, and even natural disasters that can radically impact their supply chain. We tell our customers that designing flexible and agile supply chains is more important than ever,” he remarked.
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Although Evans warns geopolitical trade tensions aren’t going away any time soon, he says technology can play a role in providing supply chain solutions in response to global uncertainty.
Disrupting the electronics supply chain
As with any trade disruption, tariffs have a direct impact on costs, which tend to get passed along the supply chain to the end consumer.
According to reporting from CNBC, the U.S.-China tariffs could eventually cost the average American household about $2,300 per year if extended to all Chinese goods. Although price increases will take time to kick in as distributors and retailers work through existing inventory, the prospect of higher prices for data center hardware and consumer electronics alike seems inevitable as things stand.
Indeed, buyers in the U.S. computer sector appear primed, albeit unwillingly, for the latest tariff hikes, originally scheduled to take effect January 1 but postponed as negotiations continued between the U.S. and Chinese governments. Unsurprisingly, the impact of the tariffs is felt particularly sharply by those importers most heavily exposed to the Chinese market, which remains a global powerhouse in the manufacture of computing parts and assembled goods for international distribution. “Many of our customers understand that there is going to be an increase that will be passed along,” Robert Grzib, marketing manager at CDM Electronics, a distributor of interconnect products and cable assemblies, told EPSNews.Indeed, buyers in the U.S. computer sector appear primed, albeit unwillingly, for the latest tariff hikes, originally scheduled to take effect January 1 but postponed as negotiations continued between the U.S. and Chinese governments. Unsurprisingly, the impact of the tariffs is felt particularly sharply by those importers most heavily exposed to the Chinese market, which remains a global powerhouse in the manufacture of computing parts and assembled goods for international distribution. “Many of our customers understand that there is going to be an increase that will be passed along,” Robert Grzib, marketing manager at CDM Electronics, a distributor of interconnect products and cable assemblies, told EPSNews.
Meanwhile, companies have been busy looking outside of China for alternative manufacturing options, with Vietnam receiving a sizeable uplift in its light manufacturing base and Taiwan also a beneficiary. Last year, computer maker Asus began preparing to move manufacturing operations out of China to protect itself from the uncertainty in the event a new round of tariffs is enacted. With the latest U.S. action, it says it will start putting its plans into practice.
For some original design manufacturers (ODMs) in China, the trade volatility is paradoxically leading to increases in production as they scramble to shore up stocks as quickly as possible. In what one source describes as a “reverse chain reaction,” production lines are temporarily ramping up day and night in an attempt to ship product out of the country before the next round of threatened hikes takes effect.
As this ODM considers its options for moving production of computing hardware out of China, it remains determined to boost output on the mainland to ensure a steady supply of hardware during any relocation and to avoid the potential for shortages.
For its part, computing giant Lenovo claims to be well-positioned to shoulder the tariffs having warned last year of the adverse impact that further duty hikes would have on the electronics industry. Yang Yuanqing, chairman and CEO of Lenovo, said an escalation of the tariffs between the United States and China would “have a big impact on the interests of consumers” if further extended to electronic goods such as phones and computers, according to 2018 reporting from Barron’s. It appears that prognostication is coming true.
The jury remains out on the likely impact of the tariffs on the global market for notebooks, with Trendforce forecasting major disruption if the next round of threatened tariffs takes effect.
Smartphones are caught up in the dragnet too. Apple is particularly exposed to the risk, heavily dependent as it is on Chinese manufacturing. Micron and Western Digital, both of which supply memory chips in smartphones, could be affected, among a raft of other companies.
Tariffs as a weapon in the fight against industrial espionage
One key driver behind the trade dispute is American insistence that China’s stealing of industrial secrets and the coercing of U.S. companies into knowledge transfer as a condition of doing business in China must stop. Advocates for the tariffs also point to the difficulties U.S. businesses routinely encounter winning patent infringement cases and gaining approval for corporate acquisitions in China.
This simmering conflict between the two superpowers has surfaced in a number of high-profile flashpoints. Tensions with the Chinese Politburo over technology giant Huawei show no sign of abating, with the company’s CFO held on bail in Canada while facing possible extradition to the United States and the U.K. prime minister recently firing her defense secretary over alleged leaks regarding Huawei’s involvement in the U.K.’s plans for 5G rollout. For its part, China is detaining several Canadian citizens in what Canada says is retaliation for its arrest of Huawei’s CFO.
Meanwhile, San Jose-based server maker Supermicro is asking its suppliers to shift production outside of China at the same time as it prepares to ramp up its in-house manufacturing capacity. This move comes after the company was stung by a Bloomberg Businessweek report in October 2018 alleging that Supermicro sub-contractors inside China were being forced by the Chinese authorities to add microchips containing hardware backdoors into its servers destined for assembly and distribution overseas, including the United States. Supermicro strongly rejected the assertions at the time, insisting later that a subsequent investigation turned up no evidence of rogue chips.
Nonetheless, the company remains eager to reduce its exposure inside mainland China. It recently broke ground on a new 800,000-square foot factory building in Taiwan and plans to expand its global headquarters in California.
The importance of agile supply chains
It’s unclear how the current dispute will resolve itself. Some suggest these are the opening salvos of a decades-long struggle between the United States and China for the global upper hand, a form of economic hot war. For hedge fund mogul Ray Dalio, though, there’s more to it than simple economics: two very different worldviews are clashing, and neither one will easily cede ground.
Predicting “a long ideological war,” Dalio argues we should stop calling the conflict between the U.S. and China a trade war because the term is misleading. Instead he argues “it is an ideological war of comparable powers in a small world.”
“In other words, it is not nearly as much about trade as it is about 1) two different approaches to life that extend to different approaches to government, business, individual behavior and global geopolitics, with 2) China emerging to be a comparable power to the U.S. now and in the not too distant future a greater power in a small world in which these two countries will be bumping into each other in all sorts of ways.”
However, the dispute plays out, the reality remains that computer companies must build as much flexibility as possible into their supply chains and not become overly reliant on any one country or location.
“The overriding challenge lies in managing fixed capital costs when making supply chain changes against an uncertain future,” wrote Stephen Buckler, chief operating officer of Horizon Technology, in a September 2018 piece on the impact of the tariffs on the storage market as the first wave of tariffs kicked in. “Despite mitigating the impact of the tariffs, increased complexity results in rising costs and an increased margin for error. In turn, this widens the chances of supply imbalances.”
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Future-proofing your international supply chain
Some things for companies to keep in mind when planning their supply chains and seeking to future-proof them against the economic impact of higher tariffs include:
- Spreading manufacturing operations across multiple countries insofar as possible.
- Analyzing the impact of tariff hikes in the context of the landed cost, in other words the total cost of shipping a product. How can distribution expenses be mitigated elsewhere to lessen the impact of tariffs?
- Considering adjustments to pricing that do not simply pass the tariff hikes directly on to the customer but instead offer different buying options, such as a continuation of the current pricing for buyers purchasing in bulk above a certain volume.
- Introducing value-added services to product offerings that reduce a company’s dependence on manufacturing-based revenue.
- Taking advantage of one of the various free trade agreements the United States has in place around the world
- Optimizing a company’s supply chain for further efficiencies through a thorough review of its bill of materials (BOM) management.
With no obvious end in sight for the tit-for-tat dispute between the two countries, computing companies large and small should plan proactively for continued disruption in the global markets. And while the U.S government hopes that American businesses will not only look outside of China for manufacturing options but consider reshoring aspects of their operations to the United States, firms should not give up on China altogether. The American Chamber of Commerce in Shanghai correctly insists the US-China trading relationship remains an important one. “There needs to be a deal that rebalances the economic relationship,” it said in a statement. China remains a vital market for U.S. companies and a deal could be beneficial for both countries.”
In any event, China’s “Made in China 2025” initiative, which aims for self-sufficiency in areas such as advanced manufacturing, alongside the radically different worldviews of both economic superpowers mean computing firms must be careful not to put their eggs in one basket when it comes to the global supply chain. Those companies which are able to respond with the greatest agility to changes in world events while strategically planning for their future are likely the ones that will emerge most strongly as we enter the beginning of a new and uncertain decade.
The overriding challenge lies in managing fixed capital costs when making supply chain changes against an uncertain future. Despite mitigating the impact of the tariffs, increased complexity results in rising costs and an increased margin for error. In turn, this widens the chances of supply imbalances. – Stephen Buckler
For help with navigating the international supply chain for your IT hardware needs,contact Horizon today and benefit from our deep expertise in the data center.
