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US device vendors to bear brunt of tariff increase, analysts say

U.S. computer and phone vendors such as Apple Inc., Dell Technologies Inc. and HP Inc. are likely to bear the brunt of increased tariffs on Chinese imports, analysts said.

The U.S. this month raised tariffs on US$200 billion of Chinese imports from 10% to 25%. The Trump administration has also told the Office of the U.S. Trade Representative to start the process of raising tariffs on remaining imports from China, which will cover goods in every sector.

China accounted for 22% of imports to the U.S. in 2017, according to data compiled by The Observatory of Economic Complexity, a data visualization website powered by MIT Media Lab. Some 50% of imports from China to the U.S. were machines including computer parts, smartphones and integrated circuits, the data shows.

Once the proposed tariff raise is effective, U.S. computer and phone vendors, most of whom have assembly teams and parts manufacturers in China, will be most at risk, Vice President of Client Devices at IDC Bryan Ma said.

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According to data compiled by S&P Global Market Intelligence, around 110 out of about 230 Dell suppliers and 16 out of 25 HP assembly plants were in China at the end of 2017. About 381 of more than 700 Apple supplier plants are in the East Asian country.

The tariff increase will impact the whole supply chain, from suppliers to retailers. Vendors, worried about losing customers, will be forced to absorb increased costs of production "to soften the blow to buyers," Ma said.

While U.S. companies could shield themselves from the tariffs by moving their production houses outside China, this is a costly process, experts say.

"The tariff barriers arising from political causes will indeed intensify the outward movement of China's industries," Mia Huang, analyst at research institute TrendForce said. She added that in the smartphone sector, "over 70% of phones worldwide are either produced in China or rely on materials supplied by China's electronic manufacturing services providers, which adds to the difficulty of outward transferal."

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Manufacturers have been looking to move their production to countries including Taiwan, Vietnam and Mexico to avoid the tariff burden, according to Ma. Compal Electronics Inc., Pegatron Corp., Wistron Corp. and Foxconn Technology Co. Ltd., major assemblers of HP, Dell and Apple products, are among those on the relocation list.

Compal has moved most of its notebook production to Vietnam, which protected its latest monthly revenue from the impact of tariffs, Taiwanese media China Times reported earlier in May.

Pegatron Chairman Tung Tse-Hsien said the assembler will adjust its production bases globally in response to client demand, according to a May 21 United Daily News report.

Wistron Chairman Simon Lin said the electronic parts-making company will seek a more "flexible" production strategy and deploy plants globally to prepare for the risks caused by the U.S.-China trade war.

Foxconn earlier said it would move its production of some of its telecom equipment and servers from China back to Taiwan.

The U.S. administration may also choose to be flexible on conditions protecting companies like Apple and Foxconn, according to James Lewis, senior vice president and director of the technology policy program at the Center for Strategic and International Studies.

Lewis said the U.S. government will not target domestic companies and may make exceptions for transactions that could include Apple. The U.S. Commerce Department issued a temporary license allowing U.S. companies to continue doing business with Huawei Technologies Co. Ltd. after an executive order effectively banned using the Chinese company's products, Lewis said.

"It is likely that Apple and therefore Foxconn will be shielded from the impacts of the trade tariffs as the U.S. administration, while clear about decoupling its economy from China, has shown that it can still be flexible," he said.

The temporary general license, effective May 20, authorizes transactions between U.S. companies and Huawei and its affiliates under certain conditions including those "necessary to maintain and support" existing fully operational networks and equipment.

"If Apple is not shielded, it will be interesting to watch the immediate reaction through stock prices," he said.

Indeed, some U.S. technology companies have "significant exposure" to the U.S. ban on Huawei, analysts at Fitch Ratings said. The breadth of this ban, namely its duration and whether it is copied by Europe, will determine its impact on Huawei's suppliers and competitors, they said.

Samsung Electronics Co. Ltd. may benefit from the Huawei ban as a rival smartphone manufacturer. Ericsson and Nokia Corp., who compete with Huawei in the supply of telecoms network equipment, also stand to gain, according to Fitch Ratings.

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