As the tech world prepares to take on the threat of an increase in US tariffs from 1st January 2019, we look at how the procurement function deals with macro-economic events which impact the cost of IT products. 7 years ago it was the Thai floods which caused a worldwide shortage of hard drives. The Thai market was the second largest producer of hard drives after China, and the floods impacted the supply of 30% of global production. The result was a large hike in prices, and delays in the production of PC’s. It was not all necessarily bad news for the manufacturers who were able to reset expectations and raise prices in a competitive market. But how do procurement departments navigate in a time of increasing IT product costs and how they can assess how real and long-lasting these changes are?
There is no shortage of such issues. Currently there is a shortage of Intel processors due to unexpected growth in the PC industry, according to Intel CEO, Bob Swann. For the earlier part of this year, (as can be seen on the graph showing ASP’s) the cost of RAM has increased significantly due to shortage of supply only stabilising in recent months.
And last year there was a large increase in the price of graphic cards due to the increase in gaming PC sales and the use of graphics cards in bitcoin mining in Russia.
In each of these cases the root of the price increase was a shortage of components. So the parallel with the threat of tariffs is very relevant, as the major impact of the currently announced tariffs is on components and raw materials – leather (the new HP Spectre Folio), glass envelopes and fans used in computers, screws, stainless steel, printed circuit assemblies, certain monitors, and, the item which has caused Cisco and Juniper to increase their prices, switching and routing apparatus. What no procurement department wants to hear the IT vendor say is “Sorry, the tariffs are causing increases in the cost of components which means we have to put the price up by 10%”.
So, we expect that there will be standoffs and all parties will try to work round these issues.
- IT manufacturers will get creative in the coming months to plan as effectively as possible for the next round of tariffs and return to practices from another age which in an era of ever increasing free-trade may have been forgotten. Tariff engineering is one such term – the “adapting of an item [being imported] so that [the importer doesn’t] have to pay any levy.” Is this the time to engineer out the need for fans in a computer and to find another way of achieving the same goal?
- Switching the place where a product is manufactured may also be a choice, but this needs long-term planning, and in all likelihood, the endgame of President Trump is not to create a long-term trade war but to get a new deal with China on their level of imports from the US, and with Mexico and Europe for revised car trading deals. Apple is one of the companies potentially under threat as 100% of their smartphone production is based in China. So far, through successful lobbying they managed to get the Apple Watch out of the first wave of tariffs. But will they be as successful with the second wave in January 2019 or will they have to consider relocating smartphone production?
- IT procurement departments will be pushing for more and more visibility into underlying component costs. This will involve both open book cost visibility of vendors sharing their own procurement data, as well as recourse to 3rd parties who provide independent verification of price indices.
- IT procurement will also want to track closely the impact of price movements over time – increases do not flow through the supply chain immediately whilst there is inventory at the old prices. Visibility into the supply chain is vital from sell-in to distribution (for those products which go through the channel) and then to end-user. When new prices flow through, the impact should be clearly identifiable at each stage. Then in the case of tariffs, which are likely to be short-lived, transparency about the removal of the price constraint is necessary for procurement.
One of the unintended consequences of the Trump tariff war, may be a greater collaboration and transparency between procurement departments and the manufacturers of IT products, and a consequent increase in efficiency.
For more insights, please join our webinar on the 6th December, titled Technology and the trade war – navigating your way through the tariffs