Editor's note: Following the news of possible tariffs on goods imported from Mexico – and the ongoing trade war with China – EPSNews' sister publication EBN reached out to a few friends and colleagues from the electronics manufacturing services (EMS) world to find out what they and their customers think of this thorny issue. This is the second of two parts.
Since the White House announced its intention to impose tariffs on Mexican imports, consumers have been trying to figure out the impact. Supply chain professionals, meanwhile, have been wrestling with the impact on the global electronics supply chain.
The Trump administration, as of June 10, had backed off its tariffs on Mexico. They remain a tool the government is willing to use.
For the electronics and associated industries that use electronic components, such as automotive, Mexican manufacturing has been a staple of the supply chain for the past several decades or more. Mexico launched the Maquiladora, Manufacturing and Export Services Industry (IMMEX) in 1964. Although much of the attention started in the clothing industry, it soon spread to other sectors.
Manufacturing operations established in Mexico that import raw materials and equipment for assembly, processing, or manufacturing (called maquiladoras) have long enjoyed tax breaks and other benefits. Especially in the wake of rising wage costs in China, Mexico’s manufacturing sector has become an important part of the strategy of many OEMs.
Meanwhile, China tariffs have changed the supply chain already. “The U.S. electronics and electronics components industries were some of the first to be impacted by this trade war,” according to a statement from the Electronic Components Industry Association. “The first two tariff lists enacted in July and August 2018 resulted in tariffs on $50 billion in Chinese products.”
Out of the list of products from China with new tariffs, total electronics components represented $9.4 billion, 19 percent of the total value of products with new tariffs, ECIA added. “Virtually all electronics components were included in the first two lists with only a relative handful of electronics products added in the next two lists that will result in tariffs on all Chinese imports.”We sat down with several contract manufacturing experts to get the scoop on how the current tensions and potential changes on the horizon in terms of Mexican tariffs might affect global electronics OEMs. In our roundtable, we included:
- Ron Keith, director and member of the Board of Directors, Supply Chain Resources Group
- Chris Mitchell, vice president, Global Government Relations at IPC-Association Connecting Electronics Industries
- Albert Yanez, corporate executive vice president & president of AsteelFlash Americas
- Mathieu Kury, regional director, Business Development & Program Management for AsteelFlash Americas
- Howell Wang, CEO, Insight Solutions Global
EBN: This is part of ongoing trade issues and tariffs that are having real consequences, some unintentional. How do you see these issues impacting you and your customers?
Keith: For the Supply Chain Resources Group's core business, it's roughly a zero-sum game. We provide services to OEMs in all the primary beneficiary destinations of Trump's trade policy. So, if our business in China declines dramatically, we would expect that decline to be offset by increases to our business in other low-cost geographies around the world as we help our OEM clients relocate production and key upstream suppliers.
The impact on our customers, however, is not a zero-sum game. They are spending an additional 3.5 percent to 6 percent of cost of goods sold (COGS) over the next 12 months to relocate production to avoid tariffs, and that is excluding the soft costs of start-up inefficiencies in a new geography. But the real cost incurred by our OEM clients is in the uncertainty, or what I refer to as the continually changing certainty, of how undefined trade and foreign policy objectives cast a long duration shadow over key investment decisions that need to be made today. Uncertainty is bad for business and ultimately creates a price borne by all consumers, employees, and stakeholders regardless of their home geography.
Mitchell: Many IPC members are reporting a feeling of whiplash from the Trump administration’s multi-front trade disputes, as well as frustrations about the lack of clarity on the supply chain impacts.
The electronics industry has some of the most complex supply chains and thinnest profit margins of any industry in the world. In this competitive environment, marginal cost increases matter a great deal, especially considering that electronics components may cross borders multiple times on the way to final assembly.
Trump administration tariffs have already led to shifts in supply chains, but it would be a mistake to conclude that these shifts have always or usually benefited U.S. manufacturers. For every call I receive reporting that the tariffs have helped a U.S. manufacturer, I have received calls from two others that the tariffs have hurt.
Kury & Yanez: Eventually, there are always consequences. They may not show up immediately, and for us it makes it even harder to keep track of them as we may be subject to tariffs only when a PO is placed (not necessarily at the quotation stage), or when the goods are entering the United States. It complicates our business, but since the rise of tariffs against China and now Mexico, I believe we’ve addressed most of our customers’ concerns either through clarification of HTS Code making their products exempt, or thorough analysis of the overall manufacturing and content of the product to be able to qualify it as a NAFTA product, for example. These “services” are brought to the table by our sales team worldwide to provide all the necessary information to our customers, for them to make an educated decision in line with their business requirements.
Wang: Some of our clients are talking about moving their outsourced manufacturing, mostly to Malaysia or Vietnam, rather than other geographies. As we are a service company, we are expanding our service geography with more local resources and a better supply chain network to support clients regionally. However, the largest amount of demand is still in China because most of the critical and customized components are made in China. We are adding our supply chain resources to help clients organize and manage the sub-supply-chain, so we can help to shorten lead time and speed up their supply chain.
EBN: What is the response of your clients to this issue and how can you protect them against the complexities of ever-changing international trade challenges?
Keith: Phil, if we could truly protect our OEM clients from ever changing international trade challenges, I would certainly not be here giving you an interview at 10:00 PM on a Monday night (nothing personal my friend). We can, and are, helping our OEM clients create a more transportable and more responsive supply chain. We are doing that 24/7 for most of our clients including a number of prominent unicorns and Fortune 100 companies.
But until such time as we learn how to predict the future with a high degree of accuracy, the best we can do is cushion the blow, and create better responsiveness for our clients so that they can react more efficiently, and more quickly, to a rapidly changing and highly uncertain global trade environment. We can help shield them, but today our services don't yet make them bulletproof when the bullets are coming this fast and furious from so many random directions.
Kury & Yanez: All and all, and as we’ve discussed it together during one of our panel discussions at APEX in San Diego a few months ago, it comes down to the total cost of ownership. Tariffs being a consistent trend now for our industry, we must do the math and provide the analysis to our customers. I think it brings a reality check to a lot of industries and companies where the location of manufacturing was always China, by default. Now Mexico; maybe tomorrow we’ll see tariffs on Malaysia, Philippines or Thailand?
If that happens what country of manufacturing will be the lowest cost, landed, for a given product? What we can do is monitor the situation and provide our customers with valid information to guide them to the right decision for each product. Transferring a product from one region to another can take from four to eight, or even ten months depending on the complexity of the products. And this might not make sense even with lower tariffs as some of the materials could still be coming from a country of origin subject to tariffs. All of this should be carefully reviewed before pulling the trigger.
Wang: Our clients are really concerned, especially those with consumer electronics products. Industrial and medical device brands are less concerned, because it’s not efficient to change supply chains. Clients are also applying for waiver of the extra tariffs. We are producing cost benchmarks, pros and cons, and SWOT analysis on business, manufacturing, quality, supply chain, etc., all to help them make better decisions on their supply chain mapping or supply network design. We are also finding suppliers who either have international operations or have a solid plan to establish new plants or develop a joint venture in Southeast Asia to resolve these challenges.
We also asked the IPC’s Chris Mitchell, how can those concerned access more information?
Mitchell: IPC is tracking these issues, and we are updating our website to provide a “cheat sheet” on all the issues in play. In addition, companies should track policy developments at on the website of the U.S. Trade Representative. For those companies with implementation questions, U.S. Customs and Border Patrol (CBP) is your best resource. Companies can reach out to the CBP’s Electronics Center of Excellence and Expertise.
About the author: Philip Spagnoli Stoten enjoys sharing his views on what's new or disruptive in the industry where he has spent a career of more than thirty years working in. First and foremost, Stoten likes to write, but he is happy moderating a workshop or interviewing an executive on video. Since Stoten was young, he wanted to be a journalist, but an aptitude for science, the technology boom in Cambridge and his weak performance in English at school, led him into manufacturing, where he worked in design, manufacturing, management and sales and marketing. "You can do anything you want," was the inspiring advice given to Stoten by his entrepreneurial father Paul, an approach that led Philip to start his own design company in Cambridge in his twenties. Stoten founded Scoop to help companies in the electronics manufacturing industry plan, produce, deploy and measure content, supporting their brand and their lead generation strategy.