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How trade wars hurt gadget makers

 Honestly, if I knew everything that was involved in making hardware, I wouldn't have started the company. When you start looking atthe lists, it's daunting. Did you ever really think about tariffs up until recently? Was this a thing thatyou tracked closely? No. Not at all. It's been a bit of a wake-up call. Even us, like wewere watching it in the news, we weren't really thinking about it until we got the bill, and were just, like, “All right, we have to up our costs because, you know, wecan't just eat that stuff.” The US basically wanted to renegotiate the current tradingrelationship with China, and the tariffs were the mechanism the Trump administration chose to sort of, in effect, force Chinato the negotiating table. Friday, President Trump slapped a 25 percenttariff on approximately $200 billionworth of Chinese imports. We'll take in well over$100 billion a year. We never took in 10 centsfrom China, not 10 cents. President says Chinapays the tariff, but it's US businesses and USconsumers who pay, correct? Yeah. I don't disagree with that. Again, both sides, both sides, will suffer on this. Gadget makers are subject to political policy just like everybody else.

Over the past year, theUnited States and China have been in a trade war that involves both countries puttingtariffs on various goods. The consequence has been thatindependent gadget makers who already might havesmall profit margins are having to rethinkhow they do business. Unlike some other aspectsof their jobs, tariffs are totally outside their control,yet have major implications. Companies are reacting to the tariffs, and consumers might soon see the effects. (bouncy electronic music) So I’m Zolty. We are in Breakfast, which has been around about 10 years, and we are a group ofmultidiscipline designers, artists, and engineers who make kind of the most high-tech,crazy art installations that are happening in the world right now. We try to actually make one-offs. I'd say that is our specialty. It's just not the most efficient, and it is the most costly. Breakfast createslarge-scale installations that can end up inmuseums, building lobbies, or anywhere that wants toshow off inventive art. Their most recent project is Brixels. These are Brixels. Brixels are something wecame out with in October, essentially as one of our new mediums.

So motor, PCB, all of that just plugs into another PCB back here, and then there's a timing belt that spins this. This is how the new version works. So with importing stuff, what do you get? How does it come in? I mean, you'relooking at all of this. This is actually a goodsetup right over here. How many of these pieces aregetting hit with tariffs? I'd have to go check the slips, but at the end of theday, almost everything I'm looking at is steel, aluminum, and PCB, and all of those things get tariffed. Right now, the USputs tariffs on hundreds of billions of dollarsworth of Chinese imports. This means that if a company imports a tariffed good into the US from China, they're going to see that tariff cost reflected kind of like a sales tax. Every product that's made is given a very specific tariff code, and these codes form aclassification system. Raw materials and parts like steel, aluminum, and computer chips have their own codes that have tariffs placed on them when imported from China. These codes are selected somewhat randomly and are subject to change. Right now, it also means that a code for a fully assembled good that's imported might not be tariffed, even if that complete product contains parts that would be tariffed on their own.

This means the cost of production for the companies thatuse these parts goes up, and they need to figureout a way to make up that extra cost,especially if the situation goes on longer than it already has. Zolty's team has considered getting their supplies from the US, but the raw materials comefrom China regardless. So whether it's Zoltyor the US supplier, someone's always going toend up paying that tariff. I mean, this is a good example of… this was made in Brooklyn,this was made in China, and they're pretty much identical, but one costs half the amount, and that's the one that comes from China. And on top of it, they have to pay the tariff to get this in here. The Brooklyn people. I mean we have to pay it the same way, but this is kind of the situation where if the whole goal is to be creating more jobs in the country, you know, if you put the tariff on this one, it's half the price. So even paying that tariff, if we're trying to keep our costs down it doesn't convince us to go over here. I'll continue to say if we can pay the person here to do it and we can make the business work,then we would do it. But, you know, at the scale and the amounts that we have to pay for this stuff, we wouldn't be able to sell these things. Technology's running our lives. You know, it's obviouslyour phones and tablets, and it's governing everything around us, our data, our houses, our communication.

But most of us don'tunderstand how technology works, and we can't be creative with it. We can't be creative with electronics, and so littleBits waskind of an answer to that. Ayah foundedlittleBits in 2011. The company makes magnetic modular pieces that help kids learn about engineering. littleBits are a product thatcould be subject to tariffs so their VP of operations, Diana Pincus, monitors the situation closely. Luckily for us, in thefirst round, no impact at all, and only in the second and third did we start having a few parts that we were bringingin really get impacted, and so we don't really know how to predict what's coming. Butwe have a few components that are impacted thatwe pay the tariff on. What are those components? One, in particular, is a,we call it a tackle box. It's basically a plastic container that we send with someof our larger collections for people to put their product in. So it's a piece of plastic. In the third round, that was impacted. That's so random, and it's funny because it's maybe like the least technological thing thatyou guys actually ship. Yes, exactly. In the history of littleBits, we had been buying our bits from China and then doing final assembly in the US. We actually moved thatfull assembly to China right toward the beginningof my tenure here. So before any of these tariffs, but even with this new scenario, we would still make that same decision because it's still cheaperfor us in the long run.

Tariffs are complicated, as are the political circumstancesthat caused them most recently. Brad Setzer is a senior fellowfor international economics at the Council onForeign Relations who has studied and monitored the situation. From what I understand,if you build a phone, let's say, completely inChina, it isn't taxed? It doesn't have a tariff.Whereas if I import the chips or the PCBs or whatever into the US and then build my phone here, I'm going to be paying tariffson those specific parts. That is now basically true. That's a consequence of the decisions that the Trump administration made. In broad terms, the US imports a little over $500billion from China. In broad terms, we in the US have put, or the Trump administrationhas put, tariffs now on $250 billion of that trade. The half that was leftout without any tariffs, in general, is final consumer goods. So fully, clothes, assembledcomputers, cellphones.

The things which receive tariffs either at the 25 percentrate or the 10 percent rate tend to be intermediate goods, parts. It's a little bit arbitrary, though, and I think that's whatyou just highlighted. We, in many cases, have tariffs on imported electronic components,but not on the final good. Does that costeventually get passed down to the customer, or how do companies typically make up forthat added cost to them? So a company has a choice. One choice is to raise their prices. They try to pass on the increase in cost entirely to the consumer. They run the risk ofseeing their sales fall and the consumer ends uppaying a higher price. In some cases, companies may decide, Hey, it isn't in our interest, even though our costs have gone up, to fully pass that on to the consumer. We have competitors. Those competitors aren'tproducing in China. They're not going to raise their price. Let's absorb some ofthe increase in our cost through reducing our profit margin. And then there will becompanies which say, Hey, I want a betterdeal from my supplier. I want my supplier to cut their price. Otherwise, I will find another supplier. In which case the tariff is, to some degree, borne by the producer in, say, China. I think the empirical evidence on the last round of tariffs is that the bulk of the cost hasbeen borne by consumers.

 At this point,the Trump administration is going to pursue tariffs if it thinks it'll advance its goals, and us consumers, we're going to have to deal with the consequences. The gadget makers, however, will keep on doing what they always do: churning out new products and adapting to whatever challenges come their way. For anyone maybe getting into this space or making things, makingproducts, whatever it might be, I think you could lookat the tariff situation like any other real business problem. I wouldn't say that it's so different than other things we've experienced in that contingencies is crucial. So like if you're going to go and build a company on something,you can't expect that, you know, we live in this perfect world where you're alwaysgoing to get the same stuff and it's always going to be the same price and it's always going to show upwhen it's supposed to show up.

So this is kind of just oneof the bumps in the road of business, which isyou need to make sure you're compensating forthe stuff you don't know or don't see coming down the pipe. My advice is: start acompany with a mission. It's the most powerful fuel you could have for the kind of business that we're in. I think, in general, but also particularly for the kind of business that we're in because when things are tough and you're having a hardtime because of tariffs or because of supply chain issues or because of a copycat or because of all sorts of things, themission keeps you going. And I think that there's no better thing to advise an entrepreneur to do but to really make sure thatyou're feeling the mission. Thanks so much forwatching In the Making. If you haven't seen all the episodes yet, make sure you go back and watch those. I'm going to be gone for a little while because I'm going to be working on my podcast Why'd You Push that Button? So make sure you check it out. It premieres for ourfourth season tomorrow anywhere you normally get your podcasts. All right, I'll see you later. Bye! 

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