As the US increases tariffs on numerous industries and products, what is the impact on tech and telecom businesses? Which business models are best positioned to withstand these changes? How could this trend change investment strategies and business plans?
Current Status of US Import Tariffs
According to the Office of the US Trade Representative, total imports in 2017 were approximately $2.3 trillion. China is the largest supplier of goods to the US at 22% of the total or $506 billion. Of that amount, tariffs issued in three rounds in July ($34bn), August ($16bn), and September ($200bn) now target $250 billion or 48% of total imports from China. The tariff amounts range from 10-25%. While most of the US tariffs are focused on imports from China, smaller amounts of goods imported from Canada, the European Union and Mexico are also subject to tariffs.
Technology supply chains are exposed to the rising trade tariffs. According to The Economist, China installs two-fifths of the world’s semiconductors, almost all of the circuit boards, and about half of the mobile phones. Vendors of key network and telecommunications components export equipment from China to the US that runs a significant amount of technology and telecom infrastructure.
Risks to Specific Industries and Business Models
The higher costs associated with routers, servers, and other telecommunications equipment could impact the rollout of the next generation 5G networks. More expensive equipment can also impact network providers, cloud services, and businesses that are built on these types of infrastructure providers. Circuit boards, semiconductors and other electronic components are also subject to import tariffs and will drive higher costs and lower margins for US tech companies. Businesses that operate overseas subsidiaries that manufacture and assemble parts and components are subject to the tariffs in the same way as foreign operated third-party manufacturers and suppliers.
Tariff Trends
While we saw progress with Canada and Mexico and the USMCA agreement that replaces NAFTA, expect tariffs and trade issues with China to continue or to increase. Currently, the US is indicating that it could place tariffs on the remaining 50% of imports from China at a tariff rate of up to 25%. Tariffs impact a number of groups by increasing costs for US companies and US consumers.
Best Tech Business Models in a Trade War
The vast majority of tech companies use the internet, transport, storage, and computing ecosystem in some form. Companies that are not directly in the business of operating global supply chains for telecom and technology equipment will experience less of a valuation impact in an escalating trade war. Businesses that utilize domestic supply chains or that operate in the services category (software, security, system integration, maintenance, web applications) are better positioned to withstand these changes. Capital intensive tech and telecommunications equipment providers with global supply chains will continue to face valuation pressure due to slowing growth and narrowing margins.
About the Author: Jeff O’Brien is President and Founder of Fusion Finance, a business valuation and M&A advisory firm focused on the technology, media and telecommunications sectors. Learn more at fusionfinance.com.