Home-Technology Industry Braces for Tariff War: Are You Prepared?
CEDIA, CTA, smart-home dealers and manufacturers share fears and strategies for impending tariff wars: on raising prices, absorbing costs, and communicating with clients while avoiding political arguments.
It’s a nervous time in the custom electronics industry. Just as integrators and manufacturers find themselves basking in the strong economy and growing consumer awareness, increased tariffs proposed by President Trump against China could have a major dampening effect on everyone’s business.
Manufacturers who source products from China have already been hit by tariff increases ranging from 10 percent to 25 percent, but the looming tariff proposed for January 2019 is another knee-buckling 25-percent increase that would hit a much broader swath of Chinese-sourced products. Vendors are literally “meeting every day” to come up with potential solutions, ranging from negotiating with their contract factories to absorb some of the price increases, ramping up production through the end of 2018, moving factories outside China, and petitioning for exemptions with the U.S. government.
For integrators, the blow is not quite has hard as it is to manufacturers, but still could represent a significant portion of your profit. Some dealers tell CE Pro they are already seeing the surcharges from vendors but have yet to react to the inflation.
Dealers who are specifying projects for 2019 with 2018 prices could be in for an unpleasant surprise when they are ready to buy the equipment after the new year. For those who do not watch their bottom lines as closely as possible, the tariffs likely represent at minimum a 1 percent loss in profit and very well could eat away as much as 12.5 percent of profit on a typical project (see "$10K Project" sidebar).
But all of this nervousness could be for naught. The tariff situation is fluid. President Trump and his Chinese counterparts could simply be playing an international game of brinksmanship, waiting for the other side to cave in. A resolution is possible before the new tariff kicks in. The U.S. and Canada came to an agreement at the 11th hour on the “new NAFTA” several months back. It’s also possible the January 1 tariffs kick in for only a few days, the stock market goes haywire, and then the duties are suspended.
No one knows, but failing to prepare and hoping the whole situation gets swept under the rug is probably not a viable option.
Impact on Home-Technology Industry: CTA, CEDIA React
For those not familiar, over the summer the U.S. and China engaged in a tit-for-tat tariff war with escalating tariffs on various products. Specifically, the third round of tariffs affected $200 billion worth of China-sourced products at a 10 percent duty rate. According to news reports, that tariff affects more than half of all products imported from China. Those same tariffs are set to increase to 25 percent on January 1. Also, President Trump has threatened to add another $267 billion in tariffs.
“There have been three tariff increases for products that we manufacture and sell, and we were hit by all three increases … unfortunately,” says Joe Roberts, executive vice president, products and marketing, at Nortek Security Controls (NSC), which owns its own primary factory in Shenzen, China. “The increases we have been hit with range from 10 percent to 25 percent. The amount is just too large to absorb completely. Our leadership team talks about this every week, without exception. We have reached out to the associations for support to try to get a louder voice than just our business. We have also followed up without our government representative to look for waivers and exemptions on some of the products. Finally, we have looked at other sourcing options, or moving from where we source product to mitigate additional expense.”
So far, the U.S. economy has not winced. But the new planned tariff hikes are worrying some in the industry, along with investors as the U.S. stock market is taking some wild swings.
“I don’t understand why the President is trying to put cold water on the hot economy,” says Gary Shapiro, president and CEO of the Consumer Technology Association (CTA). “10 percent hurts, but 25 percent makes companies reel.”
He admits, “What China has done has certainly not been fair. They have dumped product on the market, stolen intellectual property and other things while we just stood by. The President has stood up and he was right to do that, but raising tariffs is the wrong way to go.”
Shapiro, sadly, believes we are repeating history with the proposed new tariffs.
“In 1930, the Smoot-Hawley tariffs created a trade war. No one wins in a trade war,” he tells CE Pro.
He is referencing the Tariff Act of 1930, which is commonly known as the Smoot–Hawley Tariff after its two legislative sponsors: Senator Reed Smoot and Representative Willis C. Hawley. The Act implemented protectionist trade policies -- raising U.S. tariffs on over 20,000 imported goods -- in an attempt to protect U.S. jobs during the onset of the Great Depression.
From a historical perspective, the Act had a detrimental effect on the U.S. economy due to the retaliatory tariffs enacted by other countries, just at the Great Depression was beginning. According to Wikipedia, “the consensus view among economists and economic historians is that the passage of the Smoot–Hawley Tariff exacerbated the Great Depression.”
CEDIA is also watching the situation closely.
“Many manufacturers in the CEDIA channel use parts from or manufacture products in China, and the current and potential tariffs will hit electronic products," says Tabatha O’Connor, global president and CEO of CEDIA. "Those increases will be felt along the entire distribution chain.”
She urges home-technology integrators to begin the dialog with their customers and prospects today.
$10K Project: Hit to the Bottom Line
So while we know manufacturers are taking a direct hit of up to 25 percent, how much exposure exactly do integrators face?
Let’s do some simple math for a $10,000 multiroom audio project with in-ceiling speakers and cable, all of which is likely to be sourced from China, and being hit by a 25 percent tariff:
For a $10,000 project, assuming the integrator earns $5,000 in labor + $5,000 in equipment on the job ...
Assuming the integrator earns a 50 percent margin on the equipment = $2,500 in product outlay at dealer cost ...
The 25 percent tariff will equal $625 in increased equipment costs off your bottom line. ...
That is 12.5 percent of your total profit lost on the job (assuming you earn 50 percent profit on your labor).
“We recommend home technology integration firms might want to actively communicate with customers of the potential for price increases due to tariffs," O'Connor tells CE Pro. "I’ve certainly been seeing this personally from a few companies I do business with. Having conversations with clients now is important. Just factual information about the potential increase in costs from the manufacturer that unfortunately is seen by the consumer as well."
She suggests integrators review their proposals and related policy, taking tariffs into consideration.
“Because the sales cycle can be long for integrators," O'Connor says, "we also recommend they carefully review and perhaps rethink the expiration date of their quotes to help mitigate some of their exposure."
While they're at it, she says, integrators should re-examine their labor rates: "There is no better time to be looking at your labor rates and ensure that your firm is being paid fairly and correctly for its skills and knowledge."
Possible Boost to Holiday Shopping?
Shapiro believes the trade deficit with China will increase in the coming months due to lots of companies trying to get products made and shipped prior to January 1, 2019, when the 25-percent tariffs kick in. Ironically, the trade war could also lead to a “huge” (to coin a favorite phrase of President Trump) holiday buying season for electronics as consumer flock to buy before the higher prices kick in. That eventuality is not a foregone conclusion; it will like depend on how much play the tariffs get in the American media.
Stephen Baker, vice president at the research firm NPD Group, has another ironic possibility.
“Tariffs could cause consumers to buy larger TVs," he says, "because the tariffs are mainly going to affect smaller screens from China so the price differential will not be as big so people will possibly go ahead and buy larger screens."
Meanwhile, manufacturers are reacting. Various consumer electronics manufacturers are moving their factories to places like Taiwan to avoid the tariff, while companies like LG are even opening factories in the U.S. for their appliances and other products.
One industry expert who just returned from China told me he spoke with one cable manufacturer that planned to build the cable at its factory in China, then ship it to Vietnam, where the cable will be unpacked and relabeled before being shipped to the U.S.
SnapAV is another industry manufacturer that has been hit by the tariffs. The company works with more than 100 contract factories around the world (including in the U.S.), in what it calls Joint Development Manufacturing (JDM). The company wouldn't say specifically what amount of its product comes from China because its JDM relationships are constantly evolving.
“You can look at our boxes and see that we have products made in China,” says Eric Harper, SnapAV executive vice president of product marketing.
Because of the tariffs, SnapAV has been contemplating more JDM relationships outside of China, according to Harper, but shifting production is no simple task.
“Let’s use bulk wire as an example," Harper says. "Bulk wire is in the list of HTS (Harmonized Tariff Schedule) codes impacted. That’s a relatively easy product to consider moving, because it’s largely based on copper, plastic and paper. You got the copper in the product, the plastic that goes around that, and a cardboard box. Of course, you want to make sure it’s verified quality and manufactured to spec and you have artwork and all the things that go into that, but that’s a relatively simple supply chain compared to a loudspeaker."
Harper continues, “A speaker has copper linings in the voice coil. It has a box for the speaker itself, which is usually wood. You have a cardboard box needed for the packaging. You have foam for the inserts. Even the driver itself, depending on the type of cone, can come from a paper pressing facility, or if it’s poly-injected, it is a different process. The crossover comes from a PCB supplier. You can imagine how the list goes on pretty long from there. That’s the challenge… even considering a new factory is a major undertaking.”
Even U.S. Manufacturers Hit
One unintended consequence from the tariff war is the effect on U.S.-based manufacturers. JL Audio in Miramar, Fla., employs 500 people and builds its speakers in America, but it sources many of its components from China.
“I don’t think the intention was to punish companies like us," says Doug Henderson, senior vice president, home audio at JL Audio. "It’s ironic that U.S. manufacturers are being hit.”
He says the 25-percent tariff increase in January would be “potentially more dire” to the market, but adds, “As long as the market stays strong, it will not be debilitating at any level. Inflation can be good because it allows you to put more money in your pocket. The CE world has been living in a deflationary world for so long.”
The company sources its magnets and steel from China. It has already been hit by a 6-percent increase, which it absorbed for a while, but the 25-percent hike will be on top of that.
“We try to hold back on increases to remain maximized competitive," Henderson says. "Dealers should be reaching out to vendors now about what to expect. They should be informing clients there will likely be increases, and avoid the final bid price if possible. If someone challenges you, say, ‘It is not about politics, it is the reality. We hope America benefits in the long run.’”
On the flip side, companies like Séura are quick to point out to integrators that their products are made 100 percent in the U.S. and are "tariff free," as noted in a recent social media post.
What Integrators Are Doing
However you slice it, the tariffs can hurt. CE Pro 100 integrator Shawn Hansson of Logic Integration in Lone Tree, Colo., has already done the math for his business. Last year, Logic Integration purchased $2.8 million worth of products at dealer cost.
“Just a 5 percent increase would cost $140,000 (assuming all the product was affected by the tariffs). That could be almost half of our yearly NET profit,” says Hansson.
He is not waiting around; he is already reacting to the surcharges he is getting from vendors. When possible, Logic has absorbed some of the price increases, but for proposals out for 2019, the company has added an addendum to all its contracts that states:
“Due to regulatory changes and possible upcoming economic variations in Tariffs, the cost of bulk wire and other parts may increase up to 25% starting Jan 1, 2019. All existing proposals which are not assigned a live PO will be subject to revision and potential increase.”
Tom Doherty, director of new technology initiatives at the Home Technology Specialists of America (HTSA) buying group, advises dealers to use phrases like “duty taxes” if they believe the discussion will devolve into a political argument.
In terms of getting information about planned price changes, he recommends, “Don’t rely on a rep or distributor. Get a written response from the manufacturer. Don’t just do it on a phone call… you must have clarity among all parties.”
Joe Barrett at Barrett’s Technology Solutions in Naperville, Ill., tends to do very large six-figure projects, so the tariff hit could be substantial. But while Barrett admits he has not fully finalized exactly what he plans to do, he said the company will not go back to any client and change its price for a 2019 proposal spec’ed in 2018 or switch vendors.
6 Tariff Tips for Integrators
- Poll your vendors to find out who sources from China and what price increases you can expect to see.
- Look for alternative products not sourced from China if possible.
- Go back to manufacturers to try to find middle ground on the price hikes.
- Have early conversations with your clients about possible price increases.
- Add an addendum to your current proposals opening up the possibility of a price hike
- Re-examine your labor rates and utilization to ensure the company is charging enough for labor and working as efficiently as possible.
“We will have the integrity to eat the added costs, and we would not look at changing vendors to hit the same profit goal," he says. "Labor utilization and repeatable processes are important so we won’t change components. It could be real big money lost if a programmer has to spend 10 hours more on a system because we swapped products."
The situation is even more complex for Greg Simmons of Eagle Sentry in Las Vegas. The company does a substantial amount of prewire business with large production homebuilders, much of which is already contracted out for 2019. As most integrators know, builders are averse to price increases. Thus, Simmons is seeking out new vendors for wire and cable that are not based in China.
Jim Sanfemio of Wicked Smart Homes in Sarasota, Fla., has already seen tariff surcharges in his bills from manufacturers. He is planning to get out in front of the situation and converse with clients now about the potential price changes, but somehow avoid the potential political elements of the discussion.
“First you have to analyze what type of client it is," he says. "After you get to know the client, then you can recognize the ones who are more open so you can have a discussion and simply explain the situation. You will either get pushback or work it out."
Sanfemio admits it is not an easy conversation to have because many clients are already in a state of “buyer’s remorse,” so it is very difficult to go back to them with a price increase. Like many integrators, Wicked Smart Homes has a large 70+ condo project already spec’ed out for 2019 at 2018 prices. The tariff would be a hard hit.
“I am hoping President Trump might be just using the proposed tariff increases as a negotiating tactic but it doesn’t look that way,” he sighs. “The tariffs are going have domino effect on the entire building industry.”
For its part, NSC, makers of noted brands such as 2GIG, Elan, Panamax, SpeakerCraft and many others, has already notified its dealers of the price increases.
“We gave them ample notice so they can adjust their bids, or possibly buy the product now at the current price,” says Roberts. “For us, the tariffs are a tough pill to swallow. We absorbed some of the increase because we couldn’t pass it all on to the dealers. But when you go up 25 percent… we can’t absorb all of that. It’s difficult, but we have to pass some of that along to our dealers, who have to pass along those costs to their customers. We have also tried to cut other costs in our organization.”
Noting that the tariff situation is "very fluid," Roberts advises dealers limit the amount of time their pricing is valid, "just to reduce their exposure."
For example, rather than having a bid that is good for two months, he advises, "make it only good for three to four weeks so they can make sure they source the products at the cost they expect to pay.”
As yet, there has been no exclusion request process set up for the next round of tariffs. CTA signed on to a broad coalition letter to the administration requesting and exemption process and currently, Sen. Pat Toomey (R-PA) is circulating a sign-on letter for senators to the U.S. trade representative Robert Lighthizer calling for an exclusion process. Senator Toomey is looking for a Democratic co-sponsor of the request.
CTA is encouraging its member companies to contact their senator requesting he or she sign the Toomey exemption letter.
Shapiro adds, “There is definitely reason to question the legality of what the President has done. Suing the government is a real consideration but we haven’t decided to do that. As far as we can find there is only one economist who supports these tariffs, and he just happens to work in the White House.”
Could it get even worse? Yes. “It is our belief that ‘list four’ [of tariffs] has already been drawn up and tariffs on another $267 billion will essentially hit all product shipped from China,” says Sage Chandler, vice president, international trade, at the Consumer Technology Association (CTA).
2019 State of the Industry Special Report - CE Pro Download
The custom electronics industry saw a healthy 8 percent growth rate in 2018, down slightly from the blazing 11 percent growth in 2017 but still admiringly strong. Our 2019 State of the Industry indicates that readers expect to see even more growth in 2019. Get your copy today.
Jason Knott is Chief Content Officer for Emerald Expositions Connected Brands. Jason has covered low-voltage electronics as an editor since 1990, serving as editor and publisher of Security Sales & Integration. He joined CE Pro in 2000 and serves as Editor-in-Chief of that brand. He served as chairman of the Security Industry Association’s Education Committee from 2000-2004 and sat on the board of that association from 1998-2002. He is also a former board member of the Alarm Industry Research and Educational Foundation. He has been a member of the CEDIA Business Working Group since 2010. Jason graduated from the University of Southern California. Have a suggestion or a topic you want to read more about? Email Jason at firstname.lastname@example.org
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