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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?"

  • ajr1775
    I'm actually glad they are being forced to pull from Red China. Sucks for the now but once completed it will be best for all.
    Reply
  • southernshark
    Shows that MSI is the better company. Others should have predicted this.
    Reply
  • Ninjawithagun
    I completely agree with you ajr1775. The immediate affect of the trade war with China will be painful, but over time will pay off big time. In fact, some US companies will eventually be forced to move operations back to the US. That means more jobs. Over time, the production costs will go down and the US will become the new China with regards to providing electronic products. We might actually become competitive with Japan ;-) Most folks just don't truly understand the US economy in general, nor do they understand just how much China has been screwing over the world economy (not just the US) over the past decades. They only understand near-term affects and don't know how to look at the bigger picture further into the future. The facts are simple - China does NOT want free trade because that means the end of their profitting tyranny over Europe and the US. Love him or hate him, President Trump is the very first president to actually keep his promise to fix the huge mess with our trade agreements.
    Reply
  • TJ Hooker
    Ninjawithagun said:
    I completely agree with you ajr1775. The immediate affect of the trade war with China will be painful, but over time will pay off big time. In fact, some US companies will eventually be forced to move operations back to the US. That means more jobs. Over time, the production costs will go down and the US will become the new China with regards to providing electronic products.
    I'm not sure manufacturing in the US would be able to compete with China due to factors such as labor costs. Production moved overseas for a reason, and I don't think those reasons have really changed.
    Reply
  • JamesSneed
    Ninjawithagun said:
    I completely agree with you ajr1775. The immediate affect of the trade war with China will be painful, but over time will pay off big time. In fact, some US companies will eventually be forced to move operations back to the US. That means more jobs. Over time, the production costs will go down and the US will become the new China with regards to providing electronic products. We might actually become competitive with Japan ;-) Most folks just don't truly understand the US economy in general, nor do they understand just how much China has been screwing over the world economy (not just the US) over the past decades. They only understand near-term affects and don't know how to look at the bigger picture further into the future. The facts are simple - China does NOT want free trade because that means the end of their profitting tyranny over Europe and the US. Love him or hate him, President Trump is the very first president to actually keep his promise to fix the huge mess with our trade agreements.

    That may be the case but most likely the China jobs will move to Mexico,Taiwan, India, or Vietnam since they have cheaper labor. I don't think we will see a lot of jobs coming back to the US from this trade war as the war itself is ill planned. When the tariffs on steel happened there was a plan to increase steel manufacturing. When these latest round of tariffs occurred there is no plan to offset manufacturing in the US so companies like MSI will be looking for another cheap large labor source.
    Reply
  • mitch074
    Ninjawithagun said:
    I completely agree with you ajr1775. The immediate affect of the trade war with China will be painful, but over time will pay off big time. In fact, some US companies will eventually be forced to move operations back to the US. That means more jobs. Over time, the production costs will go down and the US will become the new China with regards to providing electronic products. We might actually become competitive with Japan ;-) Most folks just don't truly understand the US economy in general, nor do they understand just how much China has been screwing over the world economy (not just the US) over the past decades. They only understand near-term affects and don't know how to look at the bigger picture further into the future. The facts are simple - China does NOT want free trade because that means the end of their profitting tyranny over Europe and the US. Love him or hate him, President Trump is the very first president to actually keep his promise to fix the huge mess with our trade agreements.
    You are being overly optimistic - there's no way these jobs will go back to the US. Not only is the US workforce far too expensive in general, qualified workers simply don't exist in that country! We see it everyday in the car industry: even top grade luxury Tesla cars have quality problems (misaligned body panels, faulty electronics, burnt out screens) that come straight from the factory when even the cheapest Vietnamese power switches have clean soldering and proper assembly. So before these jobs come back to the US, Trump's administration will have tariff-blocked 80% of Asian countries, 60% of Europe (as in, the EU and some other countries like Switzerland) and 30% of Africa (the countries that can actually work in semi-advanced semiconductors)... Meaning that yes, in 10 years this tariff war could still be going on and the US would face global scale retaliation.

    And what would happen then? The rest of the world, blocked from the US market, could really well ask for the US to reimburse their debts...

    China don't really care : their internal market and their resources are both high enough that they could keep running autonomously for the next half century (China is feeding half of Asia already) and as for your thinly veiled "red commies bastards" comment, it's funny how a liberal country like the US are accusing a Communist country of trading too freely - and using a Commie tool (tariffs) to 'defend' themselves. Pot, kettle.

    Results for end user? All this just means that the next iPhone will simply cost over $2000.
    Reply
  • bsdubois_57
    I can remember a time, not that long ago, that a majority of PC components were designed and made in the USA. I remember Gateway, Dell, HP and many other manufacturers who built their computers in the USA. They put Americans to work. I hope the computer manufacturers realize the US has the most productive workforce on the planet. I would gladly pay more for computer components if they were made in the USA of USA components.

    Wall Street may have to live with smaller profits and the alphabet soup thieves might have to learn to live on wages on par with other developed nations. That would be a shock.

    Perhaps the US economy might turn again to a manufacturing based economy rather than the lesser paying service sector economy.

    Time will tell.
    Reply
  • aldaia
    I'm amazed at some of the comments here. US unemployment rate has been steadily declining since 2010 (well before this trade war started) and is now at record lows since 1969.

    Not a single job will return to the US because of this trade war, simply because there is no one to do those jobs (technically unemployment rates below 4% are considered full employment). Other countries will profit from this war, but certainly not the US.
    Reply
  • svan71
    aldaia said:
    I'm amazed at some of the comments here. US unemployment rate has been steadily declining since 2010 (well before this trade war started) and is now at record lows since 1969.

    Not a single job will return to the US because of this trade war, simply because there is no one to do those jobs (technically unemployment rates below 4% are considered full employment). Other countries will profit from this war, but certainly not the US.

    aldaia its just a guess but I belive the people currently running our economy and rewriting our decades old trade policy might be a tad bit wiser than you. Numbers do not lie. "simply because there is no one to do those jobs " Total B.S. Those jobs were lost due to unions, taxes and regulations not because people would not do them.
    Reply