Taiwanese original equipment manufacturers – known as OEMs — are bracing for an intensifying trade war between the U.S. and China, as the U.S. Trade Representative prepares to make a ruling in September on a third round of tariffs on Chinese goods worth US$200 billion.
President Donald Trump has threatened 25% tariffs on the US$200 billion list. The tariffs are expected to take effect in late September following hearings and a public comment period that ends on September 6.
The list includes a wide range of consumer goods including car tires, furniture and bicycles. If the tariffs go into effect, they add to existing tariffs worth US$34 billion on Chinese components and US$16 billion worth of semiconductors and other products that took effect on August 23.
The list of products slated for tariffs also includes popular consumer electronic devices including connected speakers and wearables, according to U.S. Customs and Border Patrol officials, while smartphones and computers so far have not been included. Goods manufactured by Apple, activity tracker maker Fitbit and speaker brand Sonos have been named.
In other words, the retail price of these products may increase and the profit of OEMs, which manufacturer for brand name companies, could decrease. Several Taiwanese OEM companies are considering reducing their dependence on China and diversifying their manufacturing locations.
Compal Electronics: wait and see
Compal Electronics is a key part of the supply chain that makes Apple Watches as it completes their final assembly in Chinese factories. It is not considering relocating Apple Watch production to another country, said Ray Chen, the vice chairman of Compal Electronics.
The production line for smart watches is very long and complicated, making it difficult to relocate. The company doesn’t have enough labor and factory space for this production on its home turf in Taiwan, either, said Chen.
“Everybody is waiting (for the results of the hearings),” said Chen.
If the new tariffs go into effect, there will be an impact on products shipped to the U.S., but not those that go to other regions.
Computers are currently not slated for tariffs. Compal Electronics, which mainly assembles computers, would consider increasing production in factories in Mexico and Poland if computers are added to the list, said Chen.
If computers are required to be shipped and be assembled in places other than China, manufacturing costs would increase at least 3%, said Chen. Compal Electronics produces 40 million computer products every year.
Pegatron to increase production outside China
Another OEM, Pegatron Corporation, which produces consumer electronics, including iPhones, iPads, laptops and smart watches, is already considering the U.S.-China trade war in its business planning.
The company plans to increase production in factories located in Mexico, Czech Republic and India if it is forced to decrease production in China.
It has also bought several factories in Taiwan within one year, including OEM company Inventec Corporation’s factory Daxi and networking manufacturer Arris’s factory in Xindian. Therefore, its Taiwan locations could also provide production support.
“We have established plans for short-term and long-term,” said Lian Sih-Jheng, the CEO of Pegatron Corporation.
The company’s short-term revenue would definitely be affected owing to factory adjustments. However, we plan to establish global infrastructure scattering production across the world in response to trading conflicts in the future, said Lian.
Besides these two companies, other Taiwanese big OEM names that will also be affected by the latest round of tariffs, include Foxconn for its smart speaker Echo, Quanta for helping to produce Apple Watch and speaker Google Home Mini, and Inventec for manufacturing Sonos and Fitbit.
The September hearing result will determine Taiwanese OEM’s’ sales performance for the last quarter of 2018.