The tech industry has spent years dealing with the massive surge in demand created by COVID. Semiconductor manufacturing proved to be a significant bottleneck for everything from Wi-Fi routers to cars. Over the past year, supply and demand have begun to come into closer alignment with the inventory rebalancing producing some over-supply of chips from many embedded/Internet of Things (IoT) applications on one hand and continued constraints in hot areas leveraging the latest process technology like Graphics Processing Units (GPUs) and high-bandwidth memory (HBM) for data center AI applications on the other. In general, however, it appeared that the electronics industry was moving toward more moderate and predictable growth driven by both demand and a steady decrease in the bill of materials required to build next generation solutions. Unfortunately, with the new tariffs being levied by the US under Section 301 of the Trade Act of 1974, that vision will not come to fruition.
Among the new tariffs announced on $18 billion in Chinese imports are the following:
– EVs – 102.5%
– Solar cells – $50%
– Chips – 50%
– Lithium-Ion batteries – 25%
– Steel & aluminum – 25%
Note that some of the tariffs, such as those on batteries, will be phased in over the next few years impacting EVs first and other applications later. In addition, the tariffs must be reviewed at least every four years, so they may be temporary. In the short term, however, they will drive up prices to consumers, especially for consumer electronics due particularly to the tariffs on chips, batteries, and steel/aluminum.
The situation may be further exacerbated because the drastic increase in these tariffs is sure to further incite the trade war, which will further drive up not only the cost of other materials used on consumer electronics but also the cost of doing electronics assembly in China. The negative impact will be felt across the tech industry as every segment from consumer electronics to appliances to automotive will struggle to deal with the impact of higher labor, material and device costs.
The real question is what is the benefit? China has already subsidized these industries to a point where they have the capacity to fill more demand than it can consume domestically. In the case of solar cells, the capacity exceeded global demand for a short period. Will the new tariffs provide enough time for demand to exceed this capacity while allowing American and other western countries to become competitive with China’s manufacturing might? History indicates that tariffs do little but delay the inevitable. In the case of semiconductors, the western world still has a lead over China and is investing heavily in new capacity and intellectual property, but the broader electronics industry still relies heavily on China for battery cells and for the assembly of everything from smartphones to servers. The electronics industry spent decades becoming decentralized to leverage global resources in the most efficient manner. While many companies have been working over the past decade to globally diversify those resources to lessen the impact of China on the global electronics supply chain, it will still take at least another decade to completely mitigate the impact of China. So, having a competitive semiconductor segment is of little benefit if the rest of the electronics industry becomes tangled in a trade war that negatively impacts the global supply chain.
Tirias Research believes that while these new tariffs may be a positive move politically – especially in an election year, they are going to have a negative impact on the semiconductor and electronics industries and global GDP beginning in late 2024 and through whatever duration it remains in effect. The extent of the impact will be determined by China’s inevitable retaliation. It is important to remember that a chain is only as strong as its weakest link. In the electronics industry that could be a single semiconductor material or component, such as the tantalum shortage that limited capacitor supplies in 2000.
Creating a level playing field through the levying of tariffs is a difficult and sensitive thing to do and must be done with an understanding of the full ramifications through the complete value chain. Unfortunately, when a delicate balance is not achieved in its application, it is always the consumer that pays the price, and in this case, so too will the tech industry.
