A storm in the electronics industry is spreading into automotive, aerospace, healthcare industries and more — just about any supply chain that calls for electronic components. 

What storm am I talking about? The storm caused by the convergence of two trends: rapidly escalating trade wars and historically high electronic component shortages. Taken together, the two trends likely will increase the cost of goods, slow down introduction of new products, cause shifts in sourcing strategy, drive supply chain redesign and potential re-thinking of manufacturing location strategy.

Let’s take a closer look at the two issues, and why they are worrying companies across every industry that depends on electronic components in its products.

A New Era 

The world’s largest economies are in the midst of a growing trade war that shows no sign of abating. The so-called war was launched by President Trump with the levying of import tariffs — first on commodities like steel and aluminum from the European Union and elsewhere, and now on more complex products that include electronic components.

In late September, the Trump administration imposed a 10 percent tariff increase on $200bn in Chinese goods imported into the United States, adding to the $50bn in goods slapped with higher tariffs earlier in the year.

According to Bloomberg News, “The combined $250bn in products facing levies is almost half the value of imports from China last year.”

Needless to say, the broad-scale tariffs do not sit well with the Chinese government. Nor do the electronics industry — and other electronics-dependent sectors — like them.

Before the latest round of tariffs went into effect, the U.S. Trade Representative (USTR) held a hearing in Washington, D.C., to gather public comment on the proposed tariffs. SEMI, the global industry association serving the manufacturing supply chain for the electronics industry, was among the groups that testified before the USTR. SEMI stressed that tariffs on products critical to semiconductor manufacturing “will harm companies in the semiconductor supply chain by increasing business costs, introducing uncertainty, and stifling innovation.”

If the September round of new tariffs was bad news for the electronics and electronics-dependent industries, the news is about to get worse. The Trump administration says that the 10 percent increase on Chinese imports will jump to 25 percent at the turn of the year.

China is not about to take the tariff war sitting down. In September, the Chinese government said it would impose new tariffs on $60bn in U.S. exports. President Trump promptly threatened to retaliate by raising tariffs on goods worth four times that value.

For electronics and other sectors, the chief questions regarding tariffs are two-fold: Who pays and for how long? Does the manufacturer absorb the cost or pass it along to consumers in higher-priced goods? Does the distributor or contract manufacturer absorb any of the costs. All of these questions require resolution. Judging by industry response thus far, it seems likely that the end consumer will pay higher prices for tariff-affected goods.

From a company management perspective, the uncertainty around the tariff wars — cost, products covered, duration — makes annual budgeting a nightmare. Not to mention gauging and hedging against your supply chain risks. How do you plan and manage budgets and risk when your total cost factors, in part, are unknown?

The Shortage Problem

The second “front” in this perfect storm is the component supply shortage dogging the electronics industry and by extension automotive, aerospace and defense, medical devices, factory and warehouse equipment and other consumers of electronics components. Simply stated, demand is outpacing supply, and has been for a while. 

This demand-supply imbalance issue is a serious today. In coming years, as demand continues to ratchet upwards, it likely will get worse. 

Tariff wars, particularly with China where much of the world’s electronic component production resides, clearly aggravate the situation.

There are two key drivers behind the component shortage. First, the automotive industry is consuming electronics at an increasingly voracious rate — far greater than in the past. Vehicles, in fact, are now rolling technology platforms. The numbers reflect this trend. According to SEMI, research by Luca De Ambroggi of IHS Markit shows that a high-end car will contain more than $6,000 worth of electronics in five years, driving a $160bn automotive electronics market in 2022. The market for automotive semiconductors will rise more than seven percent through 2022, IHS forecasts. By 2030, Statista predicts that electronics will represent 50 percent of a car’s total value.

The second reason for the shortage goes to production capacity. While demand is growing, production is not. Component manufacturers are not increasing their production capacity. They are not building new factories. 

Why? Because adding production lines and building new plants is hugely expensive and takes time. The component manufacturers worry about risk — i.e., that the current high demand may taper off and they will be stuck with underutilized capacity. So they’re taking a wait-and-see attitude on adding capacity.

Thus, whether you are an OEM designing a product or an EMS company building components for an OEM, you are scrambling to put together your bill of material. You have to buy across multiple manufacturers to meet demand, and you have to know what alternatives you have for substituting one component for another.

What Can Companies Do?

With so much uncertainty, companies need to do all they can to leverage the information available to them. Digital transformation can help. Supply chain visibility and analytics platforms can collect and maintain information about inventory, pricing, market pricing, spend history, availability, demand plans, costs and alternate suppliers and products in a single location. Not in siloed systems or individual spreadsheets, which usually is the case in corporations. 

Companies can use such digital visibility and management platforms to make informed sourcing decisions. Tariffs can be loaded into the system, and added to the decision-making base.

Uncertainty Management

Trade wars add yet another layer of complexity to already highly complex global supply chains. Because the tariff situation is a moving target, and companies have no visibility into what the United States or other countries are likely to do in regard to levying tariffs, the only tools in their coping arsenals are data and analytics.

Digital transformation already is underway in leading companies. The investment in these tools is not insignificant. However, these digital platforms help eliminate information black holes and siloes that constrain companies’ ability to make informed, agile decisions. They don’t profess to be the proverbial crystal ball. But they can equip companies with tools to deal with wild-card developments such as trade wars.

Maryliz Burns is senior director of SaaS enterprise solutions for Supplyframe.