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Trade War Tying Up American Gadget Makers

July 23, 2018
Small electronics makers who manufacture on the cheap in China are getting tangled up in the new tariffs, with high consumer costs imminent.

by Selina Wang

Win Cramer never thought his small consumer electronics business would suffer so much under a Republican president who promised to put America first. The chief executive officer of JLab Audio has had to rethink his entire strategy as a result of the tariffs that Trump has levied on China and says about 70% of his company's products will be affected.

Having already pushed ahead with a plan to slap tariffs on $50 billion of Chinese shipments, the Trump administration has threatened to impose tariffs on an additional $200 billion worth of goods (and the president has said the amount could go much higher). The 200-page list of products affected by the latest round of tariffs includes finished consumer electronics. JLab Audio designs earbuds, headphones and speakers in the U.S. and manufactures them in China. If the new tariffs go through, most of the Carlsbad, California-based company's products will cost more to produce—forcing Cramer to either eat the costs or pass them onto consumers.

"A haircut like this isn't something we can just afford," Cramer says. "We are not multinational and we are not multi-product. I'm competing with Apple, which sells in countries that don't necessarily have tariffs, and they have multiple product lines that aren't impacted. This hurts the little guy."

In recent years, scores of small hardware manufacturers have prospered despite competition from Apple Inc. and other tech giants. They've managed this feat in large part thanks to cheap manufacturing in China. But because they're small they typically have thinner margins than their larger rivals and are the first to feel the pain of the trade war between the U.S. and China.

The pain also could spread to medium-size hardware companies like Sonos, which manufactures its speakers in China and warned that the tariffs could crimp sales when it filed to go public this month. Ultimately, even Apple, Inc. and Google could be affected. Sage Chandler, the Consumer Technology Association's vice president of international trade, says the tariffs are written so broadly that they could include any product connected to the web, from video streaming sticks to voice-activated digital assistants.

The big guys are probably immune for now. Apple, Bose and Sony Corp. have the option of using other products or services to offset rising costs and avoid raising prices on their hardware. JLab Audio doesn't have that luxury and could be forced to stop selling products that are no longer competitively priced. If, on the other hand, big players opt to pass the costs onto stores, sales for the whole category could slow. 

"We are more cautious with our long-term plans than we would be if there was stability," Cramer says. "We are rethinking plans, especially in our speaker business. If the 10% tariffs go into effect, we could be costed out of the market."

The new tariff list also includes a massive number of parts that go into hardware devices, like glass, wires, cables, semiconductors, chargers, power adapters and surge protectors. It will take significant time and resources for companies, especially smaller ones, to figure out what exactly the impact will be, Chandler says. President Donald Trump has pledged to ease regulation, but the tariffs add a bureaucratic layer.

"One of the problems is the pure time and effort it takes to educate these small companies on what exactly is happening, because the big companies have government affairs, customs people and trade experts on staff," Chandler says. "These tariffs become a tax on U.S. businesses."

About half of the goods targeted in the first round of tariffs that went into effect on July 6 fall in the consumer electronics sector, according to the CTA. Included in those tariffs are battery packs, capacitors, navigation devices, Internet-connected LED lights and disk drives. Proposed tariffs on another $16 billion worth of products would impact startups making e-cigarettes, vaporizers and electric scooters.

Robert Heiblim is the co-founder of BlueSalve Consulting and the president of Boulder International, which makes e-cigarettes. The company designs all of its products in the U.S. and outsources manufacturing to China, which is the dominant supplier and assembler of vaporizers.

"Over the next month we'll determine if price raises are sustainable," Heiblim says. "If they aren't, then we may have to make price cuts. Do we decide to not hire people we thought you needed? It's foolish to think this won't set us back."

The first wave of tariffs could also hurt smart-home companies. One is HiberSense, a Pittsburgh-based outfit that makes an automated heating and cooling system that hit the market just last month after more than two years of development. Bob Fields, HiberSense's chief revenue officer, is proud to say that the majority of the system is manufactured in the U.S.—but not the thermostat, which is made in China and subject to the tariffs. 

Rather than passing the extra costs onto price-conscious consumers, HiberSense has decided to fast-forward its plans to design a new product that will be produced entirely in the U.S. However, Fields says, research and development will cost hundreds of thousands of dollars and take as much as a year or more. HiberSense has already spent capital buying up inventory of thermostats so it wouldn't have to raise prices on the current mode.

"Instead of focusing on building my company and hiring new employees, I have to worry about protecting my company," Fields says. "It's a diversion of resources, which doesn't make investors happy." He adds: "I'd rather be in control of our destiny rather than subject to the whims of politicians. What happens if things escalate?"

Budding hardware entrepreneurs may simply decide to abandon their plans. Christian Vizcaino Jordan, vice president of global customer brokerage for freight shipping platform Flexport, believes the tit-for-tat trade war will broadly hurt innovation and dampen the startup community's can-do spirit. (Bloomberg Beta, the venture capital arm of Bloomberg LP, is an investor in Flexport.) "If you had an idea on a piece of paper for a product," he says, "now you might not get started at all."

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