Electronics Manufacturers Analyzing Options as They Wait Out Tariff Uncertainties

Electronics, including amplifiers, took the bigger hit from tariffs, but the company sells far more speakers than electronics, so it shared the pain across the full product line, Berry said. The company concluded an average 3 percent increase would be “manageable for a dealer to pay a dollar more for a speaker so he doesn’t have to pay $50 more for an amplifier,” he said.

Now, Origin is in wait-and-see mode, Berry said. It has been using mitigation strategies, like warehousing product in China, as a hedge against the duty rate increase to 25 percent -- delayed indefinitely from March 1 for the third tranche of tariffs -- should it ultimately take effect, he said. “It keeps changing; we’re going to play it day by day,” he said. “If we see that things are going to go up, then we can get them on the water real quick: They’re built and we can avoid it going up even more.” Companies will get a warning about any impending tariff increase, he said, “so we’re preparing for that,” but that would be a “one-time, reactionary thing.” If 25 percent tariffs do happen, “then we only have what we have. Beyond that, we have no idea.”

Dealers asked if prices will go down if the tariffs go away, but Berry downplayed the likelihood. It's a “tough subject," with dealers, but "a lot of times, when something is put in place, it becomes the new norm.” Tariffs that are 10 percent today could maybe in the future scale back to 5 percent but aren’t likely to return to previous levels because “the government benefits from tariffs,” Berry said.

Origin looked at manufacturing elsewhere but those costs currently outweigh leaving China, where its facility “builds only our product,” Berry said. That’s primarily for speakers and a “small amount” of electronics, and it does use other factories in China, he said. It looked into manufacturing in Taiwan, but costs would have been 10 percent higher, he said. One manufacturer said it could open a factory in the U.S., “but you’re looking at a year [to get up and running], and prices will be 25-30 percent higher,” he said.

The Czech Republic and India are “still too risky” because of changing laws, the CEO said. India has tariff-free zones that would be exempt from the current tariffs, “but they always move the zones,” he said. Factories that move to a free zone and build for five years can suddenly find the zone is no longer tariff-free, he said: “It’s not established or secure,” so “we don’t necessarily trust it.”

Lighting company WAC assembles products in Atlanta, Los Angeles and New York, with manufacturing in China. Patrick Laidlaw, director-business development, said his company absorbed as much as it could in the most recent round of tariffs, but then instituted a 5 percent increase to its customers “trying to be as fair as we can.” Being in waiting mode about what’s going to happen next is “a challenge,” he said, “and we have to adjust.”

WAC hasn’t looked at taking manufacturing outside of China because it owns its facility that employs 900, including 110 engineers who do all the company’s design. “If you’re purchasing from a manufacturer, that’s one thing, but if you are the manufacturer, it’s not as easy to just pick up and build a new facility,” he said. WAC built “from the ground up” in 2007, including a metal shop, powdercoating area and an Underwriters Laboratories test operation.

Distributor ADI has heard some of its vendor partners discuss moving manufacturing to other countries to mitigate tariff impact, “but it doesn’t happen overnight,” Steve Trimble, business development manager, told CED. The distributor has seen some impact from tariffs on video products; other vendors with manufacturing in the U.S. haven’t been affected, Trimble said. Some vendors absorbed tariffs, but ADI had to pass price increases on to dealers for those that weren’t absorbed to remain profitable, he said. Shawn Dixon, national sales manager, said dealers are taking increases in stride: “Business is business and people are doing what they have to do. It affects everybody so it’s not like anybody in particular is being singled out.”

Vendors with manufacturing outside China have been largely spared from tariffs. JVC General Manager Fred Zecha reported “no issues” because most of the company’s products are made in Thailand. Yamaha owns its own factories in Malaysia and Indonesia, Paul Tamberelli, sales manager, told us. Yamaha has a company-owned factory in China that makes some speakers and a receiver model, but those products haven’t been affected, he said.

The tariff plight “has turned us off from building more electronics,” Origin’s Berry said, saying “it’s made us stop and think.” As a small company, Origin “can’t move the quantities to get the crazy price breaks,” and added tariffs made the amplifier business “more cutthroat.” A lot of small electronics vendors like Origin are going to be priced out of the market, he believes.

If 25 percent tariffs take hold, “Then what?” Berry said. “Does that make it too expensive to build product? To somebody like us it does.” A Sony might be able to overcome the tariffs because it sells a lot of TVs, but electronics are a small part of the Origin portfolio, and it would do “very few electronics” at the 25 percent tariff on finished goods, he said. “Most of your smaller manufacturers that have a handful of SKUs that are electronics will just say, ‘We’ll just buy those from somebody here and resell them, or distribute a product that’s already here in the U.S.'”

It could create an interesting debate about U.S. manufacturing, Berry said. The tariff makes it difficult to build electronics in the U.S. when required circuit boards and components aren’t produced in this country, he noted. “If it goes to that next level, I think that’s when people will really consider building stuff in America and actually producing the raw components that you really can’t get here in mass quantity.”