Tariffs Are Redefining the Electronic Component Supply Chain — Here’s How
Last July, the U.S. imposed $34 billion in tariffs on Chinese imports, with an additional 25 percent tariffs on $16 billion of goods to be implemented after a public comment period. While some analysts predicted that such levies would only last for a short while, in recent months, trade tensions between the two world powers have only escalated. In May, the U.S. administration gave a formal notice that it intends to raise tariffs from 10 percent to 25 percent on approximately $200 billion additional Chinese imports, while China has responded by vowing to take “necessary countermeasures,” according to the China Ministry of Commerce. The implications for everyone from the average consumer, to the OEM who provides many of their goods, to the electronic component manufacturers who support OEM products are vast, and they are worth taking into account in virtually every global supply chain moving forward.
The electronics industry in particular, with a business model that is uniquely global in nature, is poised to feel the effects of these tensions. Even a semiconductor manufactured in the U.S. will often be sent overseas three or four times to China, Vietnam, Taiwan, and other Asian markets to be assembled into circuit boards and similar components. Under tariffs as high as 25 percent
per transaction, such a model cannot sustain itself for long.
While the economy as of today continues to grow at a healthy rate (with a 50-year low unemployment rate), in the long term, should current trends continue, many U.S.-based OEMs will see their supply chains exiting the China market altogether, accepting marginally higher manufacturing and inventory costs that eventually may be forced onto consumers. According to a recent survey of 200 corporate executives by consulting firm Bain, 42 percent said that their companies expected to acquire materials from a different region in the next year, and 25 percent said they are planning to redirect their investments out of China.
To withstand this rapidly changing landscape, where the globalization that defined 20 years of manufacturing is evolving into something more local, a simple redirection of resources is not enough to guarantee continued long-term growth. With rising costs, through either tariffs or increased costs in alternative markets, greater attention must be paid to solutions that can mitigate the financial strain in any way possible.
One such place OEMs can start is by addressing inefficient last time buy strategies. By waiting to acquire critical electronic components and semiconductors late into the production cycle, OEMs run the risk of entering as a buyer into an already competitive market that inevitably leads to significant price markups, as well as lead times stretching as far as 52 weeks and beyond. A Last Time Buy Solution that promotes an upfront commitment to purchasing enough inventory to complete an entire product lifecycle is a guaranteed method of safeguarding against price increases, while also granting OEM customers leverage to negotiate bulk purchase discounts. Some solutions offered by supply chain partners such as Partstat will even purchase the entirety of the inventory on the OEM’s behalf, allowing them to preserve millions of dollars in working capital that could be instrumental in improving quarterly margins.
If acceptable costs cannot be attained through the choice of region, it must then fall to the OEM to look inward at its own processes, compensating where it can by increasing efficiency, bypassing potential disruptions, and avoiding strategies that involve passing costs to their consumers. Last time buy strategies may not be the only solution required to mitigate the coming costs, but they are something that can be implemented today that will significantly ease the financial burden manufacturers will face during this industry transition.