PC Makers New Strategy for Getting Around Level Four Tariffs

Early last week, we got a look at the proposed level 4 tariffs that Trump and the US government could place on thousands of products, including PC’s, laptops, notebooks and some smartphones manufactured in China.

Most PC and device makers had thought we would never get to level 4 tariffs, but the trade war with China is intensifying. Tim Cook and other tech execs have been lobbying President Trump for over a year and explained to him how tariffs on PC, CE and Smartphones could impact their companies and industries.

However, Trump and his advisors seem to be willing to apply these new round of tariffs regardless of their impact on major tech companies and consumers. They have not heeded the requests of the tech CEO’s who have told them that it would raise prices on their products and in turn, impact consumer buying and hurt their bottom lines. Unless there is a last minute change in the trade war talks, the level 4 tariffs could go into effect later this summer.

These tariffs leave all of the PC vendors scrambling to try and find a way to avoid these tariffs if at all possible. Unfortunately, since most did not believe we would get to this place, moving to manufacture out of China fast is a real challenge.

In talking to ODM’s and OEM’s, it appears that a manufacturing strategy is emerging that could help in the short term and, over time, allow them to move a lot of their manufacturing out of China. A few OEM’s were proactive and have already worked with their OEM’s to move at least part of their products to countries like Viet Nam, Indonesia, Malaysia, India, and even Mexico.

The problem is that most of the ODM’s shuttered their factories in many of these countries when they moved a majority of their manufacturing to China. Now they too are scrambling to try and get their factories in these countries back online to handle some of the production of products targeted for the US market.

Indeed, this is the first step for most of the OEM’s to deal with these potential upcoming tariffs. Many PC companies are either trying to move actual manufacturing of US-bound laptops and notebooks to countries outside of China or at the very least, do final assembly in these countries, which would allow them to ship from there and avoid the Tariffs placed on products manufactured out of China.

A move to manufacture products outside of China will be a slow and challenging process, but from talking with OEM’s, they no longer believe they have a choice. Even if the level 4 tariffs can be avoided, they do not trust this or even future government’s in dealing with China trade issues and now believe that regardless of the outcome of the trade wars, they most likely can’t trust that putting all of their manufacturing eggs in a China basket is feasible.

The initial strategy to move US-bound products to manufacturing plants outside of China is an essential start to this transition. But this will take time, and some products may still be subject to these tariffs throughout this year as moving to manufacture out of China really can’t accelerate until the second quarter of 2020, according to my sources in Taiwan.

Moving even some manufacturing out of China could have dire consequences for China, though. A key to China’s current economic boom is that about 12 years ago they began a major program to bring young people from their agricultural work roots and recruit them to work in the growing number of factories springing up in dedicated commercial zones.
Millions of youth were recruited out of what would be called poverty level farming and given a chance to work in factories. While on the farm, these youth earned about $10 a week. But in their new factory jobs, they started with salaries of about $100 a week. Making ten times more they made in the fields was transformational for most of these young people, and they helped China become the manufacturing powerhouse they are today.

However, if China’s loses even 10% of the PC, Notebook, printer and smartphone manufacturing to other countries around the world, my Chinese sources tell me it would mean a loss of at least 200,000 jobs and could even shutter some of the smaller factories in China today. This move is bound to impact China’s future growth and impact their GDP.

The trade war ramifications for the tech industry is just starting to hit home and will be forcing PC, Smartphone and many CE vendors to make some radical moves in terms of manufacturing choices throughout 2019 and 2020. There will be a real pain for them and consumers as this move out of China moves forward, and it will impact thousands of jobs in China too.

Published by

Tim Bajarin

Tim Bajarin is the President of Creative Strategies, Inc. He is recognized as one of the leading industry consultants, analysts and futurists covering the field of personal computers and consumer technology. Mr. Bajarin has been with Creative Strategies since 1981 and has served as a consultant to most of the leading hardware and software vendors in the industry including IBM, Apple, Xerox, Compaq, Dell, AT&T, Microsoft, Polaroid, Lotus, Epson, Toshiba and numerous others.

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