When you’re in the business of electronic product consulting and hardware product development, like we are at Product Realization Group, you’re critically interested in the business of trade as well.
In order to converse about a trade war between China and the U.S., we need to establish a common vocabulary.
Common U.S. Trade Terminology
Customs Tariff: A tax levied on products imported into a country. The tax is used to generate revenue.
Customs Value: The value of a shipment of product declared by a shipper; the customs value is the value used for the computation of duties and taxes.
Harmonized Tariff Schedule Codes (HTS): A 10-digit import classification system that is specific to the United States. HTS codes, also called HTS numbers, are administered by the U.S. International Trade Commission (ITC). Every product subject to import has an HTS code assigned to it.
Tariffs: Tariffs are calculated based on the customs value of the goods to be imported multiplied by the duty rate. The duty rate is determined by the HTS code assigned to a product.
Most Favored Nation Rate or Most Favored Nation Status: This refers to the economic position where a country enjoys the best trade terms given by its trading partners. These trade terms might include the lowest tariff rates, the fewest trade barriers, and the highest import quotas.
Non-Tariff Trade Barriers: Used to restrict trade besides tariffs. Examples include quotas, embargoes, sanctions, levies and other restrictions.
Free Trade Agreements: Agreements designed to remove trade barriers between countries.
Landed Cost: The cost of your product from the factory to the buyer. The cost of goods, plus transportation costs, insurance, plus import taxes, plus any custom brokerage fees, plus warehouse charges and any other charges along the way. To understand the impact of tariffs, you must understand your product’s landed cost.
Duty Drawback: A refund of the duties previously paid on goods imported into the United States that are subsequently exported.
Request Exclusion From Tariff. A manufacturer importing a product can request that a product be excluded from a tariff. There were provisions allowing companies to file for exclusions from the Chinese tariffs. December 18 was the deadline to file for an exclusion for products on the August 23 China List 2 goods.
Substantial Transformation: Working or processing which results in the creation of a new and different article of commerce, having a name, character or use different from those of its components. The principle of substantial transformation is used to determine the country of origin of a product for purposes of determining duties.
Last Mile Manufacturing: This the part of the manufacturing process that happens in the final stages of the supply chain. It’s where subassemblies, semi-finished goods, and other components come together to form a finished product. Increases in overseas wages, intellectual property theft, political instability, transportation costs, and demand-side volatility are causing leading manufacturers to restructure their operations strategy and breaks the “local” end of a long supply chain off at a strategic point in the process and brings it back from overseas to the United States. (Extron)
Postponement: Holding your final configuration until the last possible step in the supply chain
A Discussion On The Implication Of The Trade War
Sandeep Duggal, CEO at Extron, Inc., Jeff Rosen, Principal at JSRosen Consulting and Deep SenGupta, CEO at DSG Global recently discussed the US/China tariffs announced by the Trump Administration in August 2018 and scheduled to take effect January 1, 2019. Mike Keer from the Product Realization Group moderated the discussion.
Explain the implication if any, of the recent Trump war actions on selecting a global manufacturing location. What are the different scenarios on how this trade dispute between the US and China will play out?
None of the panelists sees a long term solution to the current trade dispute. As Jeff Rosen noted, we are moving from transcontinental agreements to bilateral agreements, so the trade landscape is becoming more complex. Sandeep Duggal characterized it as a long term geopolitical realignment. Deep SenGupta noted that even if the Democrats are successful in the midterm elections, don’t expect change because both the Republicans and Democrats have a common foe in China.
Explain the implication if any, of the recent Trump trade war actions on selecting a global manufacturing location. What are the different scenarios on how the trade dispute will play out?
According to Sandeep Duggal, the Trump trade actions may be transformational in moving manufacturing near-shore and on-shore. As he explained, there are already a lot of industries where it makes a lot of sense to make things to do the last mile domestically and he’s been working in this area for many years now. There are many industries where it makes sense to do domestic manufacturing, and this only increases that list. Duggal sees Trump’s actions as part of his jobs creation strategy. He sees a lot more last mile manufacturing moving onshore, from different sourced countries.
Jeff Rosen concurred with the comments about last mile manufacturing and postponement. However, he noted that the next level down from a cost or a capacity, or a capability perspective isn’t necessarily the United States.
How should we assess different supply chain options to best mitigate risk?
In order to assess your supply chain options, you have to fully understand your current cost situation. Jeff Rosen analyzes his supply chain options from the “full move” point of view. Consequently, he must understand the full cost of his present position in order to complete a “full move” and replace it. As Jeff points out, the cost of your present position includes “all of the things that go into manufacturing, that location, the infrastructure, the sub-supply chain, what’s localized in that sub-supply chain– there’s a whole variety of costs that you have to do because you’re going to make analysis and comparisons to other locations and that analysis has to include all those cost items that you have.” Other factors include how stable you are where you are at, and whether you can replace that somewhere else.
Sandeep Duggal advises evaluating postponement with last mile manufacturing. Duggal noted that supply chain thinkers always looked at the relationship between offshore and onshore costs linearly. “Everybody always assumed it was a straight line or pretty close to it. The more offshore, the lower the cost was going to come. The reality is, the line comes down, and somewhere between 50 and 100% offshoring there’s an inflection point, (generally 90-95%).” Duggal said that there’s some point where it makes sense to do final transformation onshore, but that point is not enough to escape duties. He thinks the new tariffs will change this whole equation. Duggal does detailed calculations on transformation costs– that is, freight costs, costs of inventory, costs of intellectual property, capital loss– these are calculations that some manufacturers are not used to doing because the general attitude in Silicon Valley has been freight is a cost of doing business, and we’ll out-innovate the competition. The tariffs change the assumption that, the cost of business is always lower in China, and we can’t out-innovate the competition all the time. Structurally control the cost of doing business, including freight and transportation, by how you design your product and your supply chain.
What should companies do to respond to tariffs from an operations perspective? How can we reduce tariffs by changing the manufacturing source of where products are made?
According to Jeff Rosen, “for you really to think about the concept of moving your product, you’ve got to make sure that the product has got stability.” Is the product designed appropriately? Can it move easily? Is the quality relatively stable? Rosen warned that you don’t want to move a product that’s at the wrong point in the life cycle. Before moving, you should be “getting ahead of the curve; doing things that you should already be doing– stabilizing the product, getting the yields up, getting the costs down, making sure that the infrastructure is stable.”
Sandeep Duggal pointed out that moving manufacturing is a long process. But he also suggested that companies should start preparing for what will likely be a protracted tariff cycle. Companies should “start thinking about how they design their products and how they design the supply chains. Think not of the finished product coming off the factory, but think of the IP protection perspective, how you can source subcomponents from different locations, then think of how your supply chain overlays with that, and make it work for tariff, for intellectual property, freight, flexibility, — there are so many gains that you can take advantage of by taking control of the supply chain.”
What should companies do to respond to these tariffs from a product development perspective?
The new tariffs underline that supply chain becomes a critical factor in product development. Duggal used the following analogy.
“There is a term used in design called DFX, design for manufacturability. I’m going to use another one– design for supply chain efficiency. You’ve got to think about what kind of supply chain you’ve got, and design in accordance with that, with the goal of reducing the supply chain costs, reducing freight costs, reducing IP, reducing theft opportunities– so there’s a lot of X in that DFX. ”
Deep SenGupta advises companies to look at the HTS codes and recreate their products to benefit unaffected HTS codes. “Tariff engineering” is legal if you do it without the intent to defraud. You can redesign and re-market your product for tariff safe harbors.
Consulting That’s Up To Date With Current Events
If you’re concerned about the effect of current events on your manufacturing processes, product life cycles, or production goals, contact us at Product Realization Group today. We understand everything from the risks of introducing new electronic hardware products on the market as a startup to the intricacies of fine-tuning established organizations and portfolios in a turbulent economy. Let us help you.
