If you are keeping up with the news, you know that there is a trade battle going on between the US and China. Our president has already placed significant tariffs on many products imported from China and is looking at adding another $250 billion in tariff’s that would cover just about all products coming from China. While talks continue to go on between China and US, with trade officials trying to avert these new round of tariffs, many of my the sources in Washington tell me that they believe it is inevitable that President Trump will enforce these new tariffs after the first of the year.
To date, most, if not all of the major tech companies, have had their lobbying arms trying to get the President to back off these tariff threats and to try to find a diplomatic resolution to this trade problem. However, many in Washington are doubtful that China will give in to the US trade demands and are now starting to work out how new tariffs would impact them shortly.
Most tech companies are now doing some significant long-term planning to try and find ways to avoid paying these tariffs by looking at moving some of the final test and assembly to other countries like Viet Nam, Malaysia or India. They would then ship these products from there, thus avoiding any Chinese tariffs. However, since so much of tech is made in China and will be shipped from there, it would be difficult for the majority of companies to employ this tactic to avoid paying what may be as much as a 25% tariff on goods shipped directly from China.
The economists I have talked to about the impact these tariffs would have on PC’s and Laptop prices say that the worst-case scenario is that it would add a full 25% to the final consumer price of a laptop or PC shipped under these new tariffs. In this case, PC vendors would pass all of the tariffs onto the customer to pay this increase.
A best-case scenario is that the PC or laptop companies eat some of the profit margins and take some of the tariff burdens from the customer and could pass on half or a portion the cost of the tariff to the final buyer.
In either case, after new tariff’s become law, it is very likely that laptops and PC’s will have higher prices. That is why, if you are in the market for a PC or laptop, it would be wise to consider buying them before these tariffs go into effect.
From an industry standpoint, any new tariffs could not have come at a worse time. For the last five years, the demand for PC’s have steadily declined and only this year have we seen a slight uptick in PC and laptop demand. Even more interesting, the growth has not come in the low end of the PC and laptop market where margins could be as low as 3%. The area of PC and laptop growth have been in the $799-$999 range, and we have even seen strong sales for PC’s and Laptops in the $1100 to $1500 price range too.
While margins are better for products in these price ranges, how the PC vendors deal with their pricing due to these tariffs is not clear. As I stated above, they could eat some of the margins to offset price rises from the tariff’s, but some of the tariff costs will be passed on to the customer if they want to remain profitable.
However, the tariff impacts on the tech companies today is not the biggest problem they will have due to other trade issues with China in the future.
That will come from the initiative in China that wants only products made in China sold to the Chinese public by 2025. Called the Made in China 2025 policy, China’s current leaders are moving the country to be independent of products and services made anywhere but in China.
While 100% of the products and goods China needs can never come from or be made in China, they are working hard to get as much created and manufactured in China by 2025 as possible.
For example, China is the largest market for US Soybeans. They have a plan in place to spend billions on soybean farming in various areas of China and by 2025, plan to be 100% self-dependent for their soybean needs. China has already put tariffs on US Soybeans, and by 2025, they plan to make no purchases of US soybeans at all.
While Trump has tried to get more US Companies to manufacture in the US, many of the tech companies are instead expanding their mfg for the Chinese market in general and then trying to find ways around the tariffs by pushing final test and assembly out of China. One PC maker told me that should they even want to manufacture in the US, cost of labor and increased real estate and manufacturing costs would add at a minimum 25-30% to the final price of their PC’s or laptops. So even with paying the tariff’s now (which they hope will be a short-term issue), it would not make that much difference to bring that manufacturing back to the US.
As I look at the current crop of mid to high-end laptops and PC’s, it is clear that you can get a lot of technology still at reasonable prices now. But once the new tariffs kick in, if your PC maker has not found a way to get around these tariffs, prepare to pay higher prices for that special desktop or laptop you can get today at reasonable prices now.