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MSI CEO Talks Tariffs: 'We Need to Prepare for the Worst'

(Image credit: Shutterstock/Tom's Hardware)

The escalating U.S.-China trade war is making a huge impact on the global PC market and dominated our conversations with PC vendors at Computex 2019. In fact, several vendors told us that, due to the tariff uncertainties, they aren't setting final pricing for new products until the impact becomes clearer.

PC component makers like MSI are on the front lines of this trade war, so when we interviewed MSI CEO Charles Chiang, the topic quickly turned to the impact of the recent wave of tariffs.

"I've been very, very busy lately; you always need to prepare for the worst, right? Right now, the $200 billion [in trade] is already at 25% [tariff], and then we are worried the next wave will be $325 billion in goods will be at 25% tariff. That's why we need to prepare for the worst," Chiang said. "So what I'm doing right now, we will move more and more capacity back to Taiwan. It is our short- and mid-term strategy. In the long term we will go to Vietnam or somewhere, but Taiwan is the short-term solution. That is the only way we can do it right now." 

MSI CEO Charles Chiang (Image Credit MSI)

But moving out of China to avoid tariffs will still lead to higher pricing for consumers. "Because the ASP (average selling price) is higher, so no matter what if you move back to Taiwan, the cost is higher than in China without a doubt. Because we spent decades to improve the efficiency in China and build up the best supply chain, so if you move back to Taiwan, definitely the prices will be higher," Chiang said.

Most companies have absorbed the initial wave of 10% tariffs without significant price increases, though Chiang noted that came at the cost of fewer promotions, as companies didn't have the money to spend on them. Chiang says that the increase to a 25% tariff will undoubtedly end with higher prices for customers for laptops, monitors, and TVs, but the extent of the price hikes will depend on the company's competition.

Chiang said that the move to Taiwan creates a wide range of challenges, particularly due to the lack of available labor. For example, China's Guangdong province has 100 million people alone, while Taiwan only has 23 million people. Due to labor shortages, particularly during seasonal production peaks where the number of employees could need to jump from 5,000 to 100,000 quickly, Chiang said that no one country could offer the entire solution. Those problems also extend to other types of infrastructure, with access to power (there have been brownouts in Taiwan due to increased demand from manufacturing) and water also posing concerns.

These fundamental problems won't be solved quickly and are beyond the control of the manufacturers, so Chiang thinks the long-term fix will require a mix of new facilities in countries like the Philippines, Vietnam, and Indonesia. A move towards expanding automated production will also help mitigate some of the labor concerns.

But the labor situation in China isn't all rosy, either. Labor costs have been rising in China, even before the trade war began, and the outflow of business from China isn't necessarily helping to reduce those labor costs. "It's a train. Everything in China gets more and more costly. Frankly speaking, right now, if we want to have an R&D engineer in Taiwan, the cost is similar to our engineer in China. The costs were getting higher and higher and higher. How can you deal with that? You need more automation, so you rely on labor less and less, to lower the impact."

But even if the trade war ended tomorrow, Chiang doesn't foresee the company moving its production facilities back to China, saying, "Oh no. If you're moving out under these circumstances, I don't think we're going move 100% back from Taiwan to China, and I have to tell [you] that it's dependent on the product line. The server business, data center services, got hurt [in] the first wave. You can see that the infrastructure has been moved back to Taiwan. They calculate that maybe 50% of the servers for data centers will be produced in Taiwan at the end of this year. And next year, we'll move back more and more. So I would like to say that the ecosystem of the server should be okay here in Taiwan." Chiang predicts that,  eventually, 100% of server production will end up in Taiwan.

The U.S. represents 25% of MSI's sales, with laptops, motherboards, graphics cards, and PC systems all contributing, but Chiang says that MSI's graphics card market share has grown in the U.S., courtesy of the tariffs. "We are also the number-one graphics card supplier in North America. You know what, sometimes good and bad. Because of the tariffs, we become number one in the U.S. EVGA used to be number one in the U.S., but they cannot solve the tariffs issue quickly. So that's why we become the number one. So, good and bad, right? If we can keep our price competitive, definitely we can grab some market share."

Chiang said that uncertainty is also affecting shoppers. Consumers are willing to wait until the uncertainty subsides, which has an impact on sales, but Chiang doesn't see the situation improving in the near term. "This uncertainty will be there for years. You know...the worst case...I read a report in China. They said this tariff war could go until 2030. Can you imagine that?"