Few Positives Seen in Trump's $250 Billion Tariffs for EMS Companies

Vol. 28, No. 10 October 2018 Few Positives Seen in Trump’s $250 Billion Tariffs for EMS Companies The latest round of US tariffs is a 10% margins of the companies relying on The Office of the United States Trade levy on $200 billion worth of Chinese those imports, or both,” said Greg Representative issued a comprehensive list of goods, which is set to rise to 25% by the McBride, chief financial analyst at Chinese products that the Trump end of the year. That’s on top of the $50 Bankrate. administration plans to target. The list billion worth of tariffs on Chinese goods Today, the electronics manufacturing includes everything from vegetables and that went into effect in August. industry is caught in the middle. To seafood to chemical elements and construction EMS companies that MMI has offset potential price hikes from the materials. On September 24, a third round of interviewed are unanimous in their tariffs on PCBAs, for example, an tariffs went into effect at midnight. This round condemnation of the proposed tariffs, affected EMS manufacturer might pass includes some products used by the which by all accounts seem likely to through this cost to the customer, move electronics industry, such as copper, nickel, achieve little other than to punish US production to a region not affected by steel, and other metals; select tools; select EMS companies, raise prices on the tariffs (thereby creating potential wire products; select appliances, machinery, electronic assemblies, and threaten lay- domestic layoffs), or sell its products at and automotive parts; select batteries, offs and thereby cause unemployment. a higher cost. None of these options are insulators, LEDs, and printed circuit Let’s review for a moment the theory attractive for EMS companies, so most assemblies; television and broadcast behind tariffs and their proposed have developed mitigation strategies that equipment; solar panels; a range of substances positive effect. The intent of a tariff, or a involve a blend of these changes. But used in the soldering of electronic parts; and tax placed on imported goods, is to most will admit that in the end, the chemical preparations used in lead, metal, and benefit domestic companies by making customer will have to absorb the cost by plastics. These tariffs are currently at 10% but their product more affordable than a having to pay higher prices, at either the will increase to 25% on January 1, 2019, if the foreign alternative. If a car manufacturer distributor or OEM level, and then US and China fail to reach a successful suddenly needs to pay a 25% tax to passing these on to the end customer, agreement before the end of the year. This is a import steel, in theory, it will purchase according to the EMS suppliers powerful incentive for China to negotiate. In steel from an American supplier instead, interviewed by MMI. In some cases, at mid-September, Beijing announced its plan to and that will benefit the American companies like Kimball and Elemental impose retaliatory tariffs on 5,000 American economy and job market overall. Computer, layoffs are being considered goods worth $60 billion in total. The tit-for-tat as production is moved to operations in trade negotiations will continue until the What Tariffs Do in Theory—and in Mexico, where the US tariffs do not second quarter of 2019, at which point new Practice apply. policies could be finalized. However, that’s not always how things work out. For example, Harley- Davidson announced that US tariffs on Some articles in this issue Canadian steel and aluminum imports Cover Story…………………………………………………………………………………….1 could cost the company $45 million to Few Positives Seen in Trump’s $250 Billion Tariffs for EMS Companies $55 million this year, and analysts Some Quarterly Results…………………………………………………………………………….3 speculate that these tariffs will raise Celestica to Acquire Impakt Holdings.………………………………….……………………3 prices of its motorcycles by an extra Apple Buys Part of Dialog’s Business …..…………….………………..….…………….….5 $2,200. “US tariffs on Chinese imports IMI Opens Manufacturing Site In Serbia….…………………………………………………5 can drive up prices for consumers, squeeze profit Here is what some leading electronics Carrier: Transicold, a unit of Carrier Q Company Location(s) OEM companies are saying about the Corp/United Technologies Corp, asked tariffs: USTR to exclude items including parts ASTEEL Tijuana Apple: The company claims a “wide for refrigerators, freezers, and other Guadalajara, Guayas, range” of its products would be affected, refrigerating or freezing equipment from Benchmark Tijuana including the Mac Mini, a low-priced the proposed tariffs. computer that comes without a keyboard or Celestica Monterrey mouse; accessories such as mice, Tariff Mitigation Strategies keyboards, chargers, Apple’s Beats Most EMS companies are employing Compal Juarez mitigation strategies to avoid import headphones, and the new HomePod smart Creation Mexicali speaker; and computer parts for its US tariffs when sourcing components that Guadalajara, Tijuana, operations. Apple’s iPhones and watches come from China. It’s not easy, because were exempted from the trade tariff. up to 90% of electronic components Delta Tlalnepantla Dell Technologies: Dell states that the originate from China and finding Firstronic Juarez proposed tariffs will increase costs of vital replacements is an arduous task. Aguascalientes, Some of the critical factors that have parts and components for its US services Guadalajara, Juarez, and manufacturing operations, specifically suppressed the overall tariff impact thus Flex Reynosa, Tijuana on products such as desktops, servers, far are: the distributor inventory levels, computer parts, and network switches. Dell the percentage of IP&E product made in Chihuahua, Guadalajara, is heavily dependent on electronics China (where roughly 20–25% of the Foxconn Juarez, Reynosa, Tijuana assembly imports from China. affected components are made), and IMI Guadalajara Intel Corp: The company said that the manufacturers with multisite proposed tariffs would negatively affect US manufacturing capabilities. However, Chihuahua, Guadalajara, businesses and “stifle advancements” in tariffs will start to have a greater impact Jabil Juarez, Tijuana telecom infrastructure, including next- on the market in 4Q18, as distributors are Katolec Guanajuato generation technologies like 5G, and would having to replenish their inventory levels also raise manufacturing costs for ICT and will start to pass along tariff charges. KeyTronic Juarez products such as desktop computers, Fourth-quarter tariff impacts will become laptops, and servers. more severe, as the China 301 tariffs Kimball Reynosa Fitbit: The fitness tracker maker says the have expanded to some semiconductor Lite‐On Juarez increased tariffs would compromise its product HTS codes as well. What’s not MC investments in US-based innovation, clear for 2019 is the duration of the China specifically wearable products; however, 301 tariff. It is conceivable that if the Assembly Zacatecas these products may soon be exempt. tariffs are not removed in 1H2019, their Micro‐Star Guadalajara Agilent Technologies: The company said impact will be large enough to stall the that the increased duties would financially current market growth rates. NEO Tech Agave, Juarez impede its US operations and its end T. H. Tung, chairman of Pegatron, has New Kinpo Reynosa customers in the US and abroad. It added noted that his company has reestablished that substantial tariff increases will limit its some manufacturing sites in Taiwan in Nortech Monterrey ability to reinvest in US operations, recent years, and that moving production affecting employees engaged in R&D, back to Taiwan, Pegatron has expanded Pegatron Juarez design, and other support operations. its manufacturing capacity there by Plexus Guadalajara Office Depot: The company believes the acquiring buildings and factories. (See tariffs will impact the non-household more examples on pages 5–7.) Qisda Mexicali seating and furniture, and computer and Guadalajara, Monterrey, electronics components it sells, and lead to The Mexico Option Sanmina Reynosa immense supply chain disruptions and a EMS companies without a Mexican Season likely loss of jobs. manufacturing facility must be proactive Group Reynosa Whirlpool: The company believes that in sourcing alternative materials. higher-cost components from China would However, there is considerable capacity SigmaTron Acuna, Chihuahua, Tijuana increase costs and create supply chain in Mexico for manufacturing electronics problems for US manufacturers, putting products. MMI counts 32 EMS SIIX San Luis Potosi them at a competitive disadvantage. companies and an estimated 72 facilities SMTC Chihuahua Whirlpool said the administration should representing approximately 19 million remove “critical components” such as parts square feet of manufacturing space. This Sumitronics Tijuana of refrigerators and mixers from the is summarized in the side table at right, proposed list and add finished products and while exporting production to TPV Tijuana such as dishwashers to mitigate the Mexico is not always feasible or optimal, negative impact on US manufacturing. it represents the leading mitigation USI Guadalajara strategy for avoiding the Chinese import Wistron Juarez tariffs. Manufacturing Market Insider, October 2018 2 Some Quarterly Results Revenue by Segment Sensors and LeapFrog Enterprises, Inc. Specialist Components (37% of group (LeapFrog) that were taken in the revenue): Revenue in

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