BOSTON – As the makers of leading brands like Harley-Davidson, Daimler and Whirlpool move or contemplate the relocation of manufacturing from the US, questions over the import tariffs have become real to the electronics supply chain this summer.

As a CIRCUITS ASSEMBLY survey taken this week reveals, several US-based EMS companies are struggling to make sense of the new regulations. In turn, distributors appear to be holding off on passing on the higher material costs to customers, but only temporarily.

Over the past week, CIRCUITS ASSEMBLY spoke with 10 EMS companies ranging from Tier 1 to Tier 4. The companies represented included five with plants in the US, Mexico and China, four with plants in the US and Canada or Mexico, and one with a single plant in the US.

Generally, all are trying to figure out how to respond to the new tariffs, which tack a 25% import tax on several types of components imported from China. And none seem enamored with the extra work.

“It’s a nightmare,” said John Sammut, president and CEO of Firstronic, which has plants in the US, Mexico and, through its partnership with Lacroix, Europe and China. “Component manufacturers are trying to figure out how to manage it,” he told CIRCUITS ASSEMBLY.

Under the USTR action, the point of sale has to be China for the tariff to apply. All of the major distributors that support North America are warehoused in the US, and often parts are moved onshore even if they are earmarked for assembly elsewhere. Sammut noted some parts “come in and out of China as part of the process, where they are packaged or tested, but the final assembly is somewhere else. If that’s the case, it’s the final point of sale that applies. If not China, the duty doesn’t apply.” Another multinational EMS told CIRCUITS ASSEMBLY they are looking at how to get material into Mexico and convert it into something that doesn’t get the tariff when imported back into the US. “What we don’t want to do is pay a duty for Mexico and then again for China.”

Each company contacted said they are relying on their distributors for some level of guidance, as those companies are the frontline for the new tariffs. In turn, those suppliers are in some respects chasing ghosts, trying to determine the country of origin for the 800-plus components currently listed, and fretting about the hundreds more that might be added in coming months. And CIRCUITS ASSEMBLY has heard US Customs officials are refusing to release shipping containers until the tariffs are paid.

Parts Price Hikes Imminent

Distributors, however, have generally not immediately begun passing the costs along. Instead, the focus has been on how best to add the costs to their line cards and invoicing systems. Said Brad Heath, CEO and founder, VirTex Assembly, which has plants in the US and Mexico: “Most of our suppliers are still trying to find country of origin and how to track and charge for this.”

The situation has amplified the pain for already overburdened procurement staff. Materials buyers are putting in an incredible amount of extra hours, one large tier company that wished to remain undisclosed said. “The tariffs are so much noise and extra work,” they told CIRCUITS ASSEMBLY.

Stephanie Martin, senior vice president of supply chain at Vexos, said, "Component distributors are still trying to sort it out, to figure out impacted parts by country of origin, pass-through strategies, mitigation strategies for Canada and Mexico. Arrow and Avnet have notified us they will do 100% pass-through of the tariffs starting on Aug 1. Future starts passing through costs on July 28, Sager is Aug. 15, and TTI and Digi-key haven’t indicated when they are starting to pass the additional costs through."

“The market situation is still very critical, particularly for MLCCs and resistors,” Chris Ramirez, vice president of global procurement at Zollner, told CIRCUITS ASSEMBLY. “In the area of discretes, Infineon will be moving into strong allocation; particularly with International Rectifier, the parts situation will get worse in the third quarter because holiday (consumer) production is starting in Asia.” Zollner has plants in the US, Asia, Europe and Central America.

Firstronic’s Sammut said, “There’s been no change in availability, although that’s a relative term because of all the shortages and long lead times already in place. The biggest distys don’t have their arms around this yet, and their business model depends upon getting this right.”

“The effect of component lead times and shortages is making more of an impact than the tariffs, but the tariffs are not helping in an otherwise difficult supply chain market,” said VirTex’s Heath. That effect, EMS companies, say, has been brutal. One multinational who wished to remain undisclosed called the allocation market “way worse” than any previous cycle, noting they have heard of component suppliers quoting up to 75 weeks for certain SMT parts. Connectors are in some cases out past 30 weeks, with additional constraints due to a lack of electroplating capacity in Europe.

Few companies contacted by CIRCUITS ASSEMBLY report being hit with the pass-through tariff costs yet, although that is expected to change in short order. Ana Wold, director of sales and marketing, Bestronics, said “TTI is holding off on charging all customers for the tax until August, while Future and some parts suppliers are adding the tax to the component price.” Bestronics operates a single plant in the Silicon Valley.

SigmaTron International, which has plants in the US, Mexico, Vietnam and China, said that because that tax is government-imposed, it will pass it on to customers. The firm is adding country of origin to all its approved material list (AML) tables and HTS codes for each component, which will also enable searches for sources of material in other countries. 

Others said the distys were either in too much flux to factor in the additional pricing, or are notifying customers of what the tariffs would be but not yet charging for them.

Meanwhile, EMS companies are casting about for ways to sort through the confusion and mitigate the pending financial hit. The good news is they have not lost customers yet. OEMs are not, they report, changing their ordering strategies.

Ramirez said that while it's too early to tell, to his knowledge, Zollner hasn't seen any customers change strategy. Another EMS with sites in multiple countries, including Mexico and the US, said that while OEMs have not changed their ordering patterns, the EMS company has accelerated its own purchasing schedule in order to get material by Aug. 1 to avoid tariffs. “We have been pulling in parts earlier than needed; securing it tariff-free before they replenish it.”

Firstronic receives a lot of material in El Paso, which is then sent over the border to Mexico for assembly and shipped to Mexico customers. The firm is slammed with more paperwork, as it has to bring in the parts in bond, process it in bond, ship to the customer and document it. Firstronic said there’s some discussion of taking delivery of parts outside the country for affected parts. “But that’s counterproductive,” pointed out Sammut, “because it would push assembly outside when the tariff is supposed to help the trade imbalance. If the product is ultimately going to end up on vehicles to be sold in the US, it shouldn’t matter.”

One EMS said they have seen a slowdown among OEMs that were considering adding or changing suppliers but are now waiting to see how the tariff situation shakes out.

Navigating a Solution

Every firm contacted by CIRCUITS ASSEMBLY is scrambling for a solution. At least three have contracted with consultants that specialize in Mexico. Other approaches include talking to international accounting firms and even law firms that are experts in international trade structures. Some firms see a silver lining to the tariffs. “Since Bestronics is local US only,” Wold said, “I am hoping it will help us win business. I already received a call from a customer currently doing business in China who wants to move manufacturing back to the US.”

Firstronic’s Sammut says there is renewed interest by Tier 1s in EMS providers that can shift production between the US and offshore. “If you can have multiple plants, with similar equipment and tooling and processes, and can move pretty seamlessly between your plants, there’s a competitive advantage. It reinforced the concept of a global footprint, with the same capability, and ability to react quickly.” A large tier EMS agreed, saying “OEMs are looking at building where they can avoid tariffs,” although they haven’t seen any switch factories yet.

Vexos, which has sites in China, Canada and the US, told CIRCUITS ASSEMBLY they have at least one customer that is investigating program relocation. Vexos' Martin said, "One major customer who receives subassemblies from China and has manufacturing in Canada and the US is evaluating the different tariff impacts on their products and looking to possibly realign their supply chain to deliver direct from China to Canada and build more product in Canada for final assembly. The product is sold in the US, so they are looking at the impact from all directions and trying to determine the best path." Milwaukee Electronics president Rick McClain said that while they are not seeing any indication that customers plan to move production, their Mexico facility can accommodate additional production for customers that wish to use a NAFTA strategy to mitigate tariffs. ""The challenge for customers is that moving a project incurs internal transfer costs that may cancel out any savings for six to 12 months," McClain said.

While acknowledging conversations with customers over the pros and cons of program relocation have begun, SigmaTron pointed to the hurdles involved. John Sheehan, vice president – director of materials and supply chain, said, "We have had conversations with customers evaluating the benefits of migrating production from China to Mexico or Vietnam. One of the potential issues we see is that most projects have some customer-specific production equipment, such as test stations. Chinese customs gets involved with equipment moves into and out of the country. We believe this approval process would likely slow down in the event of significant tariff-driven production migration due to higher volumes of requests. . Consequently, one of the costs companies considering this should factor in would be duplication of dedicated custom equipment."

However, CIRCUITS ASSEMBLY has learned that since the tariffs went into effect one Vietnam-based has been receiving an average of seven new inquiries a week from Japanese and Korean OEMs who literally show up at the lobby looking to speak to management. A source told us this is reminiscient of the 1980s, when outsourcing assembly in Asia first started to take hold.

What appears untouched to date has been corporate capex plans. While some EMS firms are reassessing their new equipment buys, none indicated putting any planned purchases on hold. In fact, one company said they are having preliminary talks about opening a plant in a “more favorable” geography.

The theme of the day is confusion reigns. As one EMS summed up: “No one knows what to expect. The tariffs could be gone in a week. No one wants to make any long-term commitments for something that could be gone tomorrow.”

Does your firm have a solution for the tariff situation? Share your story with CIRCUITS ASSEMBLY.

Register now for PCB WEST, the leading trade show for the printed circuit design and electronics manufacturing industry! Coming Sept. 11-13 to the Santa Clara Convention Center.

 

Updated July 27, 3:30 pm

Updated July 30, 1:30 pm to include comments from Sigmatron

Submit to FacebookSubmit to Google PlusSubmit to TwitterSubmit to LinkedInPrint Article