Tariffs the U.S. federal government imposed on certain products shipping from China in July and added to in August and September have left many wondering what this means for pricing of the myriad of PC components that ship to the U.S. from China. While there are hopes for a deal between the two countries, some in the IT industry, including custom hardware-maker MBX Systems, are already seeing an impact and preparing for even more fallout.
MBX is an international firm that makes hardware for a number of enterprise tech companies. It offers design engineering, manufacturing, imaging/testing, inventory management and global fulfillment services that help software companies, content delivery networks and cloud service providers (CSPs) deploy their tech on hardware. Its customers include AlienVault, Agilence, CA Technologies, FireEye, Masergy, ShoreTel, Unitrends and Vubiquity and others in cybersecurity, surveillance and storage, broadcast media streaming, flight simulation, medical equipment and more.
In October, MBX sent a letter to its ISV, OEM and CSP customers informing them of upcoming price increases announced by over 30 of MBX’s component suppliers, including Hewlett Packard Enterprise, Intel, Samsung, Seagate and Supermicro. Increases vary from supplier to supplier. But some are charging MBX an additional 10 percent. Others with components built partially in China are boosting prices by an average of six percent, and “some are burning through current inventory before charging us for the tariff,” MBX President Chris Tucker told Tom’s Hardware.
This, in turn, impacts what MBX must charge its own customers.
“A number of factors cause component pricing to fluctuate, for example, when new architecture is released or market conditions affect supply and demand. The tariffs are today’s factor influencing component prices and the main reason prices are increasing,” Tucker said.
While the tariffs relate to various server components including HDDs, SSDs, power supplies, CPU coolers, heat sinks, LED fans and chassis, Tucker told us MBX has seen the biggest impact on cables, video cards and desktop-grade motherboards, for which prices have increased approximately 10 percent.
“Some suppliers are not putting the squeeze on yet, but the proposed January 1 tariffs are wider reaching than the components currently affected. The potential consequences of the additional 15 percent, bumping the total burden of tariffs to 25 percent, will be of greater concern,” Tucker said.
MBX customers aren't just concerned about price increases, but also what this will do to their momentum.
“Renegotiating contracts and resetting pricing with their end users can take the wind out of the sails of their sales teams. In the current tariff situation, many of them are just absorbing the additional cost. However, that may change in January if the additional 15 percent tariff goes into effect,” he explained.
On MBX’s end, dealing with current and potential changes is eating up company time.
“The work has consumed hundreds of hours across many departments, including supply chain, engineering, finance and sales. There is no value-add to this, just lost opportunity where we could be focusing on other areas of the business,” Tucker said.
Managing Expectations
MBX isn’t increasing what it charges customers by a fixed amount. Instead, it is implementing price changes “gradually” and releasing them in batches to help minimize disruption, according to Tucker. In the meantime, it’s absorbing some of the increased costs on its own.
“Most customers knew what to expect and accepted it. Customers can see on their BOMs exactly what components are affected. Some global companies have supply chain policies regarding how price changes are presented and implemented, so those have required more advanced planning,” he said.
Another route MBX has taken is to look at transitioning some customers’ components to alternative products that are less impacted by the tariffs. Of course, that's only if doing so doesn’t take away from hardware or software performance.
In anticipation of the next potential tariff increase, MBX is also encouraging customers to forecast demand into January 2019 to procure inventory at current prices.
“For some of the U.S.-based suppliers we use with manufacturing in China, they can purchase and import their own products and resell them to us, reducing the tariff cost since the tariff is based on the original import cost. The tariff that’s passed through is lower than if we purchased direct,” he said.
Tucker noted that some large manufacturers with facilities in multiple countries, including Intel and Kingston, are shifting production away from China to alternate facilities to avoid the tariffs—and price increases—where they can.
