Tech companies say the Trump administration’s import tariffs have hit them with price increases too steep to absorb — and it’s going to get worse in January.
The tariffs on $200 billion worth of Chinese goods started at 10 percent Sept. 22. Cisco Systems added a 10 percent pass-through to 2,850 of its Chinese-manufactured items as soon as the tariffs went into effect, CRN reported, and Juniper Networks added an extra 3.5 percent charge on products containing Chinese parts.
Before the tariffs went into effect, Cisco and Juniper joined Dell and HPE in calling for networking and server equipment to be dropped from the list of products caught in the trade war, to no avail. The Information Technology and Innovation Foundation also warned the tariffs would ultimately give foreign tech competitors an edge, threatening U.S. leadership in cloud computing.
The tariffs will rise to 25 percent Jan. 1, and it’s not just the big players who are hurting — some Front Range IT firms are also feeling the pinch.
Navakai co-founder Shawn Morland said the company received “a kind of blanket notice” from all its suppliers, including Dell, TechData and Ingram Micro, saying they’d be adding the 10 percent tariff increase to all IT hardware — including firewalls, wireless devices, computers, servers and especially laptops — and moving to the 25 percent increase in January.
“We panicked a little bit at first because we thought, ‘My gosh, the first thing clients are going to think is that all of a sudden Navakai’s wanting to eat more steak, so they decided to go ahead and increase the prices for the fun of it.’ So we said, ‘Well, we’d better let clients know that this sudden increase in pricing — base computers that used to be, say, $1,000 are now suddenly going to be $1,250 — it’s not us doing that, that we’re just passing it on. It’s being imposed on us.”
The tariffs are claiming unintended victims, Morland said, because manufacturers won’t eat the costs, and suppliers and resellers can’t.
“We don’t have those kinds of margins on the product,” he said. “A lot of products, we’ve only got 10 percent margin on it anyway, so we’d essentially be selling it for free — and that’s not going to happen. So we’re all going to pass it on.”
TeamLogic IT General Manager Mark Kelly said the Springs-based company would have to pass any tariff-related price increases on to the consumer, and Amnet Founder and CEO Trevor Dierdorff also said margins on hardware sales are slim.
“I’m lucky if I get a 20 percent markup on anything,” he said. “Dell’s not going to absorb it; I’m certainly not.”
Karen Gerwitz, president and CEO at World Trade Center Denver, agreed customers will likely be the ones to pay the increased costs.
“When you think about who the customers are for IT companies, it is all other Colorado firms, such as manufacturers, energy firms and engineering firms, in addition to consumers in general,” she said.
The strategy of using tariffs as a protectionist measure to change behaviors has proven to be ineffective for decades, Gerwitz said, and does nothing to improve the United States’ major complaints about trading with China, like intellectual property infringement and currency manipulation.
“Instead it assesses a tax paid by U.S. firms, making them less competitive,” she said, “and more often than not passes on the burden to customers, doing nothing to change behaviors for the better for either side of the trading relationship.”
Tech companies can’t readily go elsewhere for the hardware they need, Morland said.
“The problem is that we’ve become … so reliant on China for producing this stuff. And it isn’t as easy as ‘Well, we’ll just pick up the toys and bring them back here,’” he said. “In most cases China owns all the equipment that manufactures this — we don’t.
“If there is any alternative to this,” he added, “I think what they’ll end up doing is move manufacturing to places like Vietnam or maybe Singapore, or places where tariffs aren’t being imposed.”
Morland said he expects to see customers “buying less because everything costs a bit more,” and the amounts being spent won’t change.
“People aren’t going to adjust their budgets by 25 percent to accommodate that,” he said. “Even the clients I’m working with today are still working with roughly the same — if they spent $35,000 last year in IT upgrades, that’s what they’re spending this year.”
Will that leave holes in companies’ IT infrastructure and security measures?
“Technically speaking, yes — that’s the simple math of it, I guess,” Morland said. “But in IT environments nothing’s ever clean and neat and concise. As a whole, I think we’re going to see a lot less things going in place because of these cost increases. … Instead of a customer replacing 10 computers this year, they’ll replace 8 or 9. So will they fall behind? Sure, that’s potentially true.”
Dierdorff sees an upside to the timing of the January tariff hike.
“Dell is one of our main suppliers and we have been warned of pending increases, in particular in February,” he said. “You know, for us it’s an opportunity to get our clients to make purchases before February. We often have a pretty light first quarter and this could help us to drive hardware sales in January, and project labor from those sales in February and March. I don’t think it’s necessarily going to be a bad thing.”
And after that first quarter?
“In the industry we’ve had things like earthquakes hitting Taiwan and the cost of RAM goes up 300 percent, or hard drives go way up because there’s a shortage of materials for solid state drives — things like that,” he said. “Our industry’s a little used to some of that price volatility and I think business owners also understand it’s beyond our control, beyond Dell or SonicWall or Cisco’s control. …
“For what they need, they’ll spend the money. The needs — when you need a server, you need a server. The nice-to-have … I think those purchases may be deferred.”
Morland thinks it’ll be “interesting to see how this unwinds — interesting not in a ‘haha’ way, but more in a cautious way. I’m not a betting man, and far be it from me to make predictions, but I don’t see how this is going to be a good thing.
“I don’t see any point to the tariffs, not in my opinion — not for what they were intended for,” he added. “If the intent of this was to make China behave, I think there are probably better ways to deal with that than to take this bully-like approach and ‘hit them and teach them a lesson.’ I would probably negotiate this. Most good things that happen in the world come from consensus and negotiation, not because you hold a gun to somebody’s head. So I’m not really sure that the intent and the spirit of why this was imposed is really going to solve anything in the end. It’s probably just worse for us.”
The premise that the United States “is acting defensively or that trade is a win/lose, zero-sum game, are both false to begin with,” Gerwitz said. “Companies engage in trade with partners to mutually benefit from the comparative advantage that the other has to produce products more effectively than they do, so both parties win, even if trade is imbalanced.
“Trade policy changes impact companies much more than most think,” she added. “Companies with tight margins may even close down because of some of these decisions.”
Ultimately, Gerwitz hopes Colorado tech firms will come up with new solutions around the tariffs.
“I see tariffs as impacting companies’ overall competitiveness,” she said, “but innovation and the tech economy will continue to grow and thrive in this market by diversifying international supply chains and partners, as well as continuing to make innovative products and services that are demanded globally.”
Disclosure: Navakai is a vendor for Colorado Publishing House, which publishes the Colorado Springs Business Journal.