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Market Insight

Most US CE Import Tariffs Delayed ... except TVs

August 13, 2019

Paul Gagnon Paul Gagnon Research and Analysis Executive Director, TV, Consumer Electronics and Devices

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On August 1, President Trump announced that the Office of the US Trade Representative would impose an additional 10% tariff on the remaining $300 billion in trade products imported from China. This would effectively include the core US consumer electronics goods that have so far avoided the additional tariffs imposed by the ongoing trade war. This is a step down from the 25% tariffs that were proposed back in May, to be implemented in July, but had been avoided after negotiations following the trade meetings between the US and China in Japan at the end of September. 

The increased tariff would have meant possible price increases for consumers during the holiday season across a broad range of consumer goods, but it was not clear whether brands and retailers would try to absorb the additional cost, or whether to pass it along to consumers. The profitability of the products would play a major factor in determining which course of action to take.

In the comments today about postponing the implementation of tariffs for some goods, the President seemed to indicate concern about higher prices during the holiday season, and potential negative impacts on demand.

TV sets remain impacted by higher tariffs

In the case of TV sets though, additional tariffs are schedule to proceed as planned on September 1st. This directly impacts the cost of products imported for the US holiday season, including Black Friday in late November, and all the pre-Black Friday shopping sales that run throughout November. TV products slated for these promotions typically start arriving in September and October, although inventory levels are currently quite high at retailers and brands who had prepared additional inventory levels in case of a 25% tariff being levied in July. 

For TV brands and retailers, the 10% tariff level represents a border between incurring the additional cost to assemble in Mexico, or continuing to import from China, although the depreciation in the Chinese Yuan currency recently helps to mitigate some of the cost. According to interviews with several brands, the cost to assemble TVs in China, mainly for Chinese brands with well-established supply chains in China is about 15% higher in Mexico. So, the combined existing 3.9% tariff and the additional 10% tariff barely falls below this threshold and should lead to them continuing to import finished goods from China to benefit from supply chain efficiencies.

In addition, transitioning the manufacturing focus from China to Mexico would have incurred additional costs above the variable costs, and if the implementation of the additional tariffs is seen to be temporary or uncertain, then they would conclude that keeping established supply chains minimizes disruption and unnecessary cost.

In 2018, 56% of TVs imported to the US came from China, while 41% came from Mexico, according to the US International Trade Commission. The TVs imported from Mexico were higher value and larger sizes, and we know that brands like Samsung and LGE source most of their US TV products from their own factories in Mexico.

What to expect for the remainder of 2019

In the Q1’19 forecast update, published in the TV Sets Intelligence Service Premium, we highlighted the assumption that the proposed 25% tariffs announced in May would not be implemented, or would be significantly reduced. Both situations have happened, with the tariffs initially being suspended, and now re-introduced at a lower level. Therefore, the impact to our forecast is relatively minimal, but there is probably some downside if certain other CE product categories that are popular during the holidays now are unencumbered by tariffs while TVs are.

The other implication revolves around how retailers choose which promotions to take and which to avoid based on cost and possible product availability. As mentioned earlier, most of the sets imported from Mexico under free trade rules, tend to be larger screen sizes, bigger than 50”. For promotions, this would imply that the biggest deals will be around 55”, 65” and even 75” screen sizes, with a reduction in promotions for smaller sizes likely due to the poor margins.

As for 2020, a lot of time remains between now and then, with plenty of opportunity for the trade situation to continue changing.

Geography
China USA
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