Part two of our series about the new tariffs.
This blog post serves as the next step in SparkFun’s conversation with its customers and business partners to answer additional questions about the impact of tariffs.
On July 6th, Section 301, list one, of President Trump’s tariffs took effect valued at $35B with a duty rate of 25 percent. This date marks the beginning of a series of decisions that SparkFun, our business partners and ultimately our customers will need to make as a result of these tariffs. In this blog post, I’d like to address additional questions related to the tariff impact on our business and the industry at large.
If companies cannot find a solution to the components impacted, such as alternative sourcing or offshore manufacturing, those additional costs (if material) will ultimately trickle down to the consumer no matter where that additional cost is incurred in the supply chain.
Some conversation in the media suggests that tariff costs will get lost in the wash by the time they reach the consumer, but it would be irresponsible for any business to fail to quantify the increase in their cost of goods as a result of the new tariffs. Since many of our customers and business partners purchase at the component level, they will likely feel the impact, as we explained in last week’s blog post.
We received our first imposed tariff charge less than one month after the effective date. For this order, we are the importer of record so we can easily identify the tariff charge. In cases where we are not the importer of record, this will vary from partner to partner.
Captured under HTSUS Subheading 8536.50.90, this particular tariff applies to switches making connections to or in electrical circuits for voltage not exceeding 1,000V. If you are curious and want to get a sense of the scope of the first list, feel free to review the document from the USTR. You can clearly see what the tariff charge is here:
Will a 25 percent tariff be material on a single switch purchase costing a few dollars? Of course not. But this helps illustrate that once you start entering into the hundreds and thousands of dollars, these tariffs begin having an impact.
Switching suppliers presents risk to manufacturers because of the benefits of these longstanding and reliable relationships. Any possibility of reduced communication from our suppliers or decreased predictability can have consequences that are amplified through each phase of bringing a product to the storefront.
A single shipment of a single small part from a supplier could affect dozens of our storefront SKUs and prevent us from keeping essential products in stock for our customers that need them. Additionally, changing suppliers would inevitably force many product redesigns.
In the short term, we are not looking to change supply chain partners for many of the reasons mentioned. But as time goes on, alternate sourcing will become a bigger priority for our supply chain team.
SparkFun has always been committed to making goods here in America. In fact, 100 percent of our SparkFun products are manufactured in the U.S. We manufacture well over 400 SKUs in-house, many of which represent products with the highest run rates. In a fast-paced business like ours where we have new products introduced every week, there is a strategic advantage to having our talent in R&D, Product Development and Manufacturing all under one roof.
Over the long term, these tariffs put SparkFun at a disadvantage from a manufacturing standpoint. If tariffs continue to expand and stay intact, it will benefit our business to move a portion of our manufacturing to other countries that provide a cost advantage and where components are not impacted by the tariff. But we are way too early to even consider this at this stage. Even if this Tariff situation turns into a long game and forces a decision like this, we will always be committed to manufacturing our new products in the U.S. for all the strategic reasons stated above.
For companies that currently have manufacturing capabilities (or partners for that matter) both in Mexico and the U.S., I suspect you’ll start seeing shifts to manufacturing in Mexico. Beyond avoiding the tariff charges, companies will not want to risk their supply chain relationships that are dependable and likely provide value beyond the parts.
This will vary from product to product. We are so early in this process that suppliers haven’t completely communicated how this will impact things on their end. This, unfortunately, is a wait and see, but don't assume a 25 percent increase across all set of products impacted by the tariff. We suspect the range of increases for the products affected will be anywhere between two and 25 percent.
The most impacted will be the resale items in our catalog. Resale items are a component or product that we resell without any alteration. Our boards manufactured in the U.S. will see less of a hit, but this can change very quickly if the administration begins including IC’s as part of the tariff.
The short answer is no. The team will continue to bring products to market that we believe our customers want. If there’s a scenario where a unique part is only manufactured in China, we will continue to make it available and see if the market tolerates the price changes. If the product does not sell well, we will discontinue as we normally would.
Connectors, switches, resistors, sensors, assembled PCBs from China and LEDs will be most impacted.
SparkFun will manage through the changing market conditions as it always has. I am not worried about the short term challenges this is creating.
What will become challenging is if trade policies continue to change and create a long-term uncertainty in the markets impacted. Companies will not make commitments in terms of time, money or other resources in an environment of uncertainty. Until regulatory changes settle down and some measure of predictability and steadiness characterizes our market again, our pursuit of alternative sourcing, increasing or decreasing manufacturing the U.S., or exploring new markets or technologies will be somewhat diminished in scope and prioritization.
We remain committed to transparency with our community and look forward to working with our customers and partners as we transition to this new regulatory environment. Our next steps as an organization are to responsibly quantify the cost impact of tariffs across our catalog, and balance the needs of our suppliers, customers and employees while continuing to manufacture as much of our catalog as possible in Colorado.
We would like to invite our customers and business partners to reach out to us via our Facebook or Twitter pages, or in the comments below, with any questions or concerns regarding tariffs, product pricing or stock rates.
Changing vendors/manufacturers is a pain and expensive. Sometimes you get to go back through the validation process. Then if it is severe enough of a change and the product has agency labeling requirements, the agency may require that the product is reviewed again by them as a new product.
I do business with A LOT of small businesses and from my own personal experience, they are ALL fearing for their businesses right now. They are ALL saying these tariffs are a nightmare. I have seen businesses actually CLOSE because of it.
It doesn't matter what kind of business it is, they all rely on foreign trade in some form or fashion - for better or for worse.
The reasons are more complicated than cheap labor - which is everyone's favorite punching bag - and way over simplifies the problem. No, they seem to think the united states has every resource needed for everything they buy in insane abundance, you just need to pay more for it or wait for a factory to produce it or whatever... NOT TRUE.
There are materials and items that the united states simply doesn't have or we have so little of it or its so hard to get it isn't economically feasible to extract or make. Not talking about oil, but that is a major problem too - No, the scary thing is that some of these materials are a direct threat to our national security and without trade, we are screwed in that regard. Anyone ever hear of "rare earth metals"? Rare - you might look that word up in a dictionary and think about what it means...
I have seen people on these forums and others start right into the tribalism bullsh*t and defend the trade war as if it's an easy problem and we all need to suck it up and stop being "snowflakes", or " stop hyperventilating" - people that don't understand global trade, national defense when it comes to strategic reserves of certain materials and have zero clue how insanely obvious it is that this administration is also clueless when it comes to those problems - else these new tariffs wouldn't be happening - no - its just hand waving trying to make dumb people think they are getting a good "deal" while the other hand is emptying their wallet .
"We can just mine our own, it gives jobs to miners" - Ok, at what cost? and these materials are FINITE... You want to deplete our reserves at a higher expense now? What happens when we run out tomorrow? If you understood the math on this you would understand why we had perfectly fine trade agreements that benefited US more than you would ever know...
I can only imagine these are the same people that would be fine with an automobile mechanic performing their neurosurgery... Which is pretty much the same thing as letting a real estate agent / reality TV star play global trade expert... A real estate agent who has no problem selling your hats and clothing made in china while waving an American flag in your face, a real estate agent who can't get a loan in the US due to all his business failures, but can get loans from people who you really want to pay back, because their collections departments are not so friendly...
As other have pointed out we have moved from a manufacturing based economy to the design side of the equation. I went to school and got a degree because I used to roof houses with my dad and I actually worked in factory making engine blocks for a while too (robots do that job now, imagine that - do you know what website you're at btw?).
You can do that manual labor shit for 30+ years if you want, but seeing my dad and how broken down he is today from 35+ years of hard labor, I know why I got my education and a job where I use my brain rather than brawn. I want to see America succeed just as much as anyone else, but I know the path we are on right now is not going to make life for Americans better. If anything it gives major advantages to foreign countries that benefit directly from a weakened United States.
And the ones you think are screwing us? Well, if they really wanted to screw us, they would dump our loans and watch our economy fail overnight. No, now they'll just watch us isolate ourselves and crash our own economy and find new trade partners. And if you want a history lesson on how our economy looks right now, look back at 2007... If that doesn't scare you, you just have nothing to lose...
I'm just glad a lot of people are starting to see voting has major consequences and "I just voted that way to see what he'll do, MAYBE it won't be so bad and its only four years..." is pretty f*cking dumb idea.
A true observation on the 1.18 trillion dollars in treasury notes the Chinese hold. in this era of fake news some people will not believe this , so i have included links that confirm what you said to show that it is true
https://www.cnbc.com/2018/04/05/chinas-1-point-2-trillion-weapon-that-could-be-used-in-a-us-trade-war.html https://www.forbes.com/sites/danielkruger/2016/12/13/trump-may-be-turning-chinas-1-16-trillion-of-treasuries-into-a-weapon/#224f8de8759b https://www.thewealthadvisor.com/article/forget-fruit-tariffs-china-mulls-weaponizing-treasury-holdings https://sputniknews.com/us/201806191065559610-us-debt-dollar/ but.... some think they wont https://www.cbsnews.com/news/china-wont-dump-us-treasury-bonds/
Anyway back to the problem at hand, it is whats bad for Spark Fun is bad for us !!!!! They scour the earth for the best value parts and make them available. It's a shame we are all caught up in this mess.
$800 tariff sounds like a lot...but you don't say how many switches you bought so you example does little to actually illustrate the impact of the tariff. How much is the switch?
We import from China too (not electronic components). Yes costs will go up. which will need to be passed to the consumer in some cases. People that complain about these tariffs aren't seeing the (much) bigger picture, the long term impact. They just see costs going up and use that as another reason to hate Trump. Yes it's going to "hurt" short term. But in the long term, the economy will adjust and more manufacturing money will stay in the US. This will help the economy.
I'll say 25% is a bit steep. I would have rather seen a tariff that started lower and increased over time to ease into it and give manufactures time to adjust. But it is what it is.
SF takes pride in manufacturing their products in the USA and I respect them for that. They should use this opportunity to take that a step further and start sourcing parts and raw materials from the US too. Yeah sure it won't be easy. Business never is. That's what separates the failures from the successes.
That particular shipment was for 1,700 higher end switches, so the cost went up about $.50 each.
Don't forget your Fellow Americans who slapped with you a Tariff Collection Fee! That's one the government didn't see coming, so the real damage is (Tariff+ Tariff Collection Fee's) . Okay so, it's not a massive amount, but it's by no means free!
As this gets more ugly, expect to see in addition to the dollars lost, delays in customs, 'reinspections', and in general slow walking anything that can be stretched out.
Indeed. We're anticipating the customs process slowing down and increasing lead times. At the same time we're seeing indications that Customs is pushing things through without as much help as they might have offered in the past. We had a shipment last week where the supplier didn't fully complete the paperwork with the HTS code accurately. In the past Customs would have had the shipper ask us for clarification. This shipment ended up grouped into an incorrect classification that got hit with the increased 25% Tariff and now we need to file a dispute against it.
Thank you for this excellent article. One would hope it would illustrate how isolation or protectionism is not the answer. One would hope that most people in the US had enough education in history to know that all the great empires (Greece, Rome, England, add your favorite one) mostly failed not necessarily because of their armies, but because their economies were unsustainable. Because they stopped adapting and decided to close themselves to the outside. One thing that has maintained US as a world economy is not that it has the smartest, richest, or hard working people; it is that it has known how to intermix those type of people at the right times. It has been able to innovate, evolve, change, but always with the mind of making money.
Now we are heading straight down the annals of history; right down to join other have-been empires. I guess we are not as educated as we thought; either that or our history teachers failed and our ego is so big that blinds us from following what made America great.
England here we come, ready to join you as a once-great-empire full of older people and a stagnant economy. Again, great article, and I would hope that true capitalism runs rampant for the next year or two and just swallows these attempts of isolation or protectionism and buries them so deep that they will never ever come out.
China is a human rights nightmare. They literally have concentration camps. SparkFun gives material support to a regime that engages in murder and repression of progressives and vulnerable minorities. Not ethical.
Thank you for the information, and I love the view of your first tariff! I think the cost of checking and rechecking costing is going to be hard on all importers. The cost of a mistake is just too high and then passing on an invalid expense of tariffs to the customer is going to damage your relationship--it is much more ugly than folks understand. Now it will be too easy to send work out of the USA and then import a finished good without tariff--the tariff avoidance process will make the existing value chain more inefficient. That is why we did not have them before, but that should be in a letter to someone else--stepping off the soapbox. Thank you for all you do and know we will be buying for you--even with tariffs! (Commenting as myself and not in anyway for my employer).
SparkFun is quaking with uncertainty. Lack of confidence is a signal to begin searching for alternate retailers. China and Mexico have excellent retail electronics sources, hard workers with a can-do attitude. Buy direct from the source and eliminate wasteful middleman overhead. Why should we care if the marketing manager lives in Boulder, Shanghai or Tampico?
Quaking? You make it sound like Nate and Co. are sobbing in the corner and having a meltdown. Knowing these guys, they aren't happy with it, but will move on in stride. The point of the blog post was to show the effect that tax policies have on businesses, not that they are suddenly going under.
Unless you are doing high volume manufacturing, none of this affects any of Sparkfun's costumer base. A few extra dollars on a typical order is not a big deal.
"Buy[ing] direct from the source [to] eliminate wasteful middleman overhead" is also extremely imbecilic. The reason we have an open source hardware community is because of folks at companies like Sparkfun, Adafruit, and Seeed Studio. Purchasing their designs from companies that don't pay the creators for their designs is a HUGE slap to the face and harms the community - why would Sparkfun (or other companies) continue to put out the designs you love (and Chinese companies copy) if they don't make money from them?
Beyond that, if YOU buy "direct from the source" from outside companies, you'd be paying the same tariff. Surprise! No money saved.
So, do yourself and everyone else a favor - coddle the hand that feeds, don't bite it. Sparkfun has given us an insane amount of great things in the last several years and will continue to unless dumbasses like you stop buying from them.
You can happily go your own way and buy direct from China. I know that all of us do it on occasion, despite buying from SparkFun and loving them.
However, you should seriously consider the other resources that SparkFun brings to the table. They not only sell a product but do a lot of other things. Consider:
They write tutorials and learning guides.
They write libraries and code snippets.
They take returns in a reasonable amount of time and for a reasonable cost.
They winnow out most, if not all, the bad products and suppliers from China. (I worked for a similar company, and I can't tell you how many times we'd order LEDs or resistors or similar and end up with a box of shoes, or women's dresses, etc. because some supplier in China was way more focused on getting a pallet on a ship instead of getting the right product to a customer)
They have forums and comment sections, like this one, and allow civil conversations and networking with similar people.
They provide products not available anywhere else.
They provide competitions and exhibitions where makers can come together and have fun and learn.
They teach classes and provide teachers with learning and teaching materials, thereby fostering a new generation to learn and grow.
I'm sure others can add many other items to this list. I should also note that most of this is free. As in, they don't require that you buy their products to compete, use their code, etc.
I challenge you to find a Chinese company that has all of these things (many for free) that SparkFun does/has for the maker/hacker/educational communities. If you can find that, then maybe I will join you and no longer purchase from SparkFun. Until then, I'm more than happy to pay a couple extra cents, or dollars, for most of my electronics to support good Americans trying to make the communities they love a better place.
There can be a LOT of "hidden costs" when directly doing business with companies outside the U.S. First, of course, is the "reliability" -- although there are some very fine companies, some are very flakey. If you have a problem, there can be little (economically viable) recourse. Second, often times shipping costs can be exhorbitant. (I'm currently looking at ordering something from the U.K., and Her Majesty's Postal Service will likely get more from me than will the vendor.). Third, some credit cards ding you extra for "foreign transactions" -- I found this out the hard way when I ordered something from Canada and had to pay the credit card company roughly 10% of the total cost in "foreign transaction" fees. (The Canadian company in question was wonderful, but I've stopped using that credit card!) And finally, it can often be quicker to purchase something from the likes of SparkFun (or Digi-Key or Adafruit or ...) and pay them a little more than having to wait for shipping (even air mail) and customs clearance from a foreign supplier.
I've been involved with manufacturing electronics for a lot of the past 45 years, working at many different levels, for electronics manufacturing from resistors and capacitors to ICs to multi-million-dollar systems to things vaguely similar to some of the stuff in SparkFun's storefront. I've done everything from manual labor to designing boards for production.
Having good, and consistant, relationships with suppliers is critical to maintaining good, consistant quality for your own customers. I suspect that many other SparkFun customers are not aware of how many things that can go wrong. I recall one time, maybe 25 years ago when a board we were making suddenly started having high failure rates in the field. (We got a fair portion of our income from "fixed-price maintenance contracts", so high field failures had a very direct impact on our "bottom line".). It took a while, but we finally tracked down the "root cause" to the manufacturer of a (supposedly) sealed relay (and thus "washable") had changed the body plastic without having done sufficient testing, and the new plastic wasn't up to what the datasheet claimed and was not impervious to our washing process. (These boards had very critical impedance requirements, and if not washed, the flux remaining would cause them to fail "out of the box".). I wasn't involved in the final solution, but I do know we found one as we re-started manufacturing that board, and any manufactured with the bad relays got "special treatment" when they were returned from customers. (I think that as we "caught up" on manufacturing them, we essentially "recalled" the bad ones that hadn't found their way back to the factory.)
At a very small company I worked at for a while we had a high failure rate with a single-source LCD display that was manufactured in China. We eventually had the manufacturer's U.S. rep come to AZ from Atlanta to go through our stock of the parts, and eventually found that about 80% of them were defective. The manufacturer's response? They dropped the product. We had to redesign our product (hardware, software, and housing!) to use a different display.
The moral of these last two stories is that it's often NOT trivial to switch suppliers, so unless there's a problem actually getting the parts, it's usually best to just "grin and bear it" when there's a relatively small price increase -- the price to switch may be higher.
Off on another tangent: I've heard, within the last 24 hours, that a lot of paper products are going to be going up substantially in price. This will cause "hidden costs" to go up for all companies, since it will affect everything from toilet paper for the employee restrooms (I'll refrain from the tastless jokes) to packing materials such as the beloved and iconic Red Boxes. At least a portion of this cost increase is due to China stopping importation of U.S. recycle materials, and can be seen as part of the "trade war", and thus less recycled content (or at least higher cost for such content).