Tariff Impacts Move from Jab to Uppercut

In the late 1990s to mid-2000s, there was a major global shift to source or manufacture products in Asia and parts of Eastern Europe for lower costs by leveraging lower labor costs and, in some cases, local foreign government incentives. Over the past 20 years, large global infrastructures have been created to support the global manufacturing and sourcing initiatives of such shifts. In the pressure for lower costs and increased revenues and profits, many organizations either built or outsourced their manufacturing offshore.  However, the year 2018 has proven to be a test to these infrastructures, as tensions between the United States and China have been increasing with every coming quarter.

TARIFFS FOR CHANGE

Over the summer, the Trump Administration announced that the United States would be imposing a 25% Tariff on over 50 billion dollars of Chinese imports, with more coming each month.  There has been much speculation on the reasoning behind the initiative, but ultimately it boils down to currency manipulation, unfair trade practices in reciprocity, and the handling of intellectual property.  Unlike the US dollar, which rises and falls in reflection of the free market, China’s currency, the yuan, is what is called a “policy currency”.  In laymen’s terms, this means that the currency is set by the People’s Bank of China, and because it is an extension of the Chinese government, this means it is set by the government itself.  The risk of currency manipulation lies with the unfair competitive advantage of cheaper exports, which is what happens when a country undervalues its currency.  Furthermore, China has been a long trade partner with the United States, but with these tariff initiatives, the huge trade deficit of $375 billion dollars of goods has been brought to focus in many discussions.  The Trump Administration has set its target on the unfair trade ratio, calling into question China’s relationship with the United States.  Success in these discussions with China would be a more fair and balanced trade relationship, where each country benefits evenly.  Finally, for many years, China has been forcing U.S. companies to joint venture with Chinese firms if they want to do business in China.  This is a blatant disregard and violation of the WTO (World Trade Organization) and has left U.S. companies with the fear of their intellectual property and its protections.

THE CHALLENGE to ELECTRONICS

These tariff initiatives have proven challenging to the Electronic Manufacturing Services (EMS) space in that the industry has seen a huge increase in electronic component pricing.  The components affected includes electronics like semiconductors, power modules, and ultimately raw materials that are sourced from China for printed circuit board assemblies that go into most electronic products such as consumer, automotive, industrial, robotics, avionics, communications and data hardware.  The price increase not only hurts supply chains that are reliant on manufacturing in China, but also companies who manufacture here in the United States but source electronic components or raw material from China and East Asia.  These tariff initiatives are hitting every part of the supply chain for electronic manufacturers and Original Equipment Manufacturers (OEMs).  Many companies are scrambling to re-evaluate their supply chains, and this is hurting the end-customers, as most costs are being pushed down the value-chain.

One of the problems that is being exploited by these tariffs is the unbearable pressure companies have put on their supply chains by decades of being solely dependent on Chinese manufacturing and sourcing.  Cost-efficiency was a good short-term move, however, in hindsight, this created a regional dependency problem within companies’ supply chains.  Unfortunately, without robust regionalization and segmentation, supply chains are fragile, and disruptions can be felt across the entire supply chain, as we are seeing now with rising tensions.  The main obstacle in maneuvering around the tariff initiatives lies in introducing new risk.  Moving supply chains into new regions introduce risk to cost-efficiency, resource availability, and time-to-market, as companies set up new systems and processes with new suppliers and EMS providers.  In the end, however, this disruption may prove to be beneficial to companies in the long run, as they build their supply chains back up with resilience and flexibility in mind, as well as efficiency.

Unfortunately for most companies, the tariff situation was viewed to be a short-term issue that would fizzle out as soon as it came to fruition.  However, against expectations, the China-USA Tariff initiatives have evolved into what some are calling “a trade war”.  The rising tensions have made it difficult to estimate how long this instability in the manufacturing environment will last, which has companies hastily calling their EMS providers or new providers for their solutions and strategies to navigate around these tariff initiatives.  The tensions have also brought an unappealing light to China manufacturing and sourcing, which has companies considering moving out altogether, either staying in the Asia Pacific area or moving more west-ward by re-shoring  into Mexico and United States.

UTILIZING THE SOLUTION

In some cases, companies in the manufacturing space need to make quick and efficient decisions regarding their supply chains, and EMS providers are here to help.  Integrated Micro-Electronics, Inc. has a unique advantage by being more nimble and faster than most of the major EMS providers and has a team readily available to guide customers in their new tariff risk mitigation strategies.  IMI also provides multiple manufacturing location options by having global footprint across 8 countries (Philippines, USA, Mexico, Bulgaria, UK, Serbia, Singapore and China), and with 19 factories companies can have the comfort in knowing they can stay in the Asia-Pacific low-cost region or move to a region closer to their consumer base.