Confused about the new U.S. Tariffs on electronic components from China, and how they impact your hardware development? Well, you’re not alone. I think most people have found them confusing.
In this article I’m going to discuss how these new tariffs may impact your electrical components, printed circuit boards, integrated circuits and even your assembly choices.
These tariffs add up to an additional 25% cost to any specified components which are imported into the U.S. from China, so you have good reason to be concerned how they will impact your product.
Currently, all of these tariffs are at 10%, but they were set to increase to 25% on January 1st, 2019. Notice that I said were set to increase, and not that they are set to increase. Things sure do change fast these days!
President Trump and President Xi agreed on the sidelines of the recent G20 summit to delay the tariff increase from 10% to 25%.
The two sides agreed to delay the increase to 25% for a 90 day period of negotiations. If the two countries do not reach an agreement in 90 days, the 25% tariff rate will be activated at that time.
The first round of tariffs published by the Office of the U.S. Trade Representative went into effect on July 6, 2018. As far as electronics it included primarily just passive components (capacitors and resistors), discrete components (transistors, diodes, etc.), switches, and connectors.
For those doing manufacturing in the U.S. this first round of tariffs weren’t too significant because they were primarily focused on very low cost passives (resistors and capacitors) and discrete components (transistors, diodes, etc.) which typically cost only from fractions of a cent to a few cents.
If the passives and discrete have such a low cost even a 25% tariffs doesn’t have a big impact. For example, if your product costs $40 to manufacture you may only have $1 in passive and discrete components.
In this case, the tariffs will only add $0.25 to your product’s final cost. This comes out to only a 0.6% increase.
Unfortunately, the situation got much worse with the second round of tariffs which when into effect on August 23, 2018. This second round covers nearly $16 billion worth of imports from China, across 279 product categories.
From an electronics standpoint, the most critical component addition was microchips. Unlike passives and discrete, microchips do account for a significant amount of a product’s total cost. So a tariff on microchips has the potential to increase your cost significantly for manufacturing in the U.S.
Keep in mind that these tariffs don’t apply on a final assembled product. If you have your product entirely manufactured in China, and then imported into the U.S., these tariffs don’t apply.
Yes, this negatively impacts electronics manufacturing in the U.S. and encourages manufacturing in China, so I don’t claim to understand the logic behind these tariffs.
For most products these tariffs won’t impact you in the long term, simply because once you reach significantly high volumes you will almost definitely want to do all of your manufacturing in China. It is very difficult to be competitive with electronic products manufactured in the U.S.
But when just starting out I never recommend that you do full manufacturing in China. This is primarily because you need to be able to easily monitor and control the quality of your product. You also need to be able to quickly work through any manufacturing issues.
This is best done close to home until you get all of the manufacturing bugs worked out.
For your first few hundred units or so you will be best off if you do as much manufacturing as possible domestically. This will give you the most control over every element of your product’s quality.
The tariffs should have no impact on this decision because at this manufacturing stage you shouldn’t be concerned about profit. Instead you need to focus on decisions that minimize the amount of upfront capital you require.
Once you reach mid-level volume (from hundreds to a couple thousand units) then I recommend a hybrid manufacturing strategy.
For this strategy you should build your plastic enclosure and assemble your PCB in China, but then do the final product assembly and packaging domestically.
This allows you to reduce your manufacturing costs, yet still allows you to closely monitor the final product quality.
Yes, you will still have to pay the tariffs, but even then your costs will be much lower than choosing to do everything domestically. Also, even at this stage you shouldn’t focus too much on maximizing your profit margins.
Once you reach high manufacturing volumes (10,000+ units) that is when you will likely want to transition to doing all of the manufacturing in China. This is the stage where it will be essential to maximize your profit margins.
So don’t let these tariffs scare you too much (unless you’re an electronics manufacturer) since they will only likely impact you in the early, low-volume stages when profit shouldn’t be your priority anyways.
Are you unsure of your product’s manufacturing cost and what the exact impact of these tariffs will be on your product? If so, then check out my Predictable Hardware Report service.
Do you need affordable coaching, training, and support to bring your new electronic hardware product to market? If so, join the waiting list for the Hardware Academy and get early access with discounted pricing.