How Much More Could Your Smartphone Cost?

Summary

Thoughts on the Market: How Much More Could Your Smartphone Cost?

Podcast Episode Summary – Released April 17, 2025

Introduction

In the April 17, 2025 episode of Thoughts on the Market, hosted by Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Public Policy Research, alongside Eric Woodring, Head of the US IT Hardware Team, delve into the ramifications of recent tariff changes on the technology hardware sector. The discussion primarily revolves around how these tariffs are influencing the cost of consumer devices, the strategies companies are adopting to mitigate these impacts, and the broader implications for the IT hardware industry.

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Impact of Tariffs on Tech Hardware

The episode opens with Michael Zezas addressing the tumultuous atmosphere in the tech hardware market following President Trump's reciprocal tariff announcements. These tariffs, initially met with uncertainty and panic buying—especially concerning smartphones—have evolved with a 90-day pause and various exemptions. Zezas emphasizes that these tariffs are not only affecting immediate costs but are also expediting the shift towards a multipolar global economy, a trend already in motion before Trump's second term.

Notable Quote:

"These tariffs are also significantly accelerating the transition to a multipolar world... as trade pressures escalate."
— Michael Zezas [00:09]

The China Plus One Strategy

Eric Woodring elaborates on the "China plus one" strategy, which involves diversifying IT hardware production beyond China to countries like Vietnam, Indonesia, Malaysia, India, and Thailand. Initiated in 2018 during the first Trump administration, this strategy aimed to mitigate the impact of tariffs by distributing manufacturing across multiple nations.

Notable Quote:

"Historically, most IT hardware products have been manufactured in China... this has ultimately helped to protect from some tariffs."
— Eric Woodring [01:04]

However, Woodring notes that despite this diversification, no country is entirely immune to tariffs, especially given the updated tariff announcements on April 2.

Effects on Device Costs and Stocks

The conversation shifts to the direct financial implications of the tariffs. Woodring provides a detailed analysis, stating that the cumulative tariff costs for IT hardware companies initially exceeded $50 billion with a weighted average tariff rate of approximately 25%. Following the April announcements, this burden has been reduced to around $7 billion, lowering the average tariff rate to about 7%.

Notable Quote:

"Device costs are up about 5% on average... some device costs might go up by 20 to 30%."
— Eric Woodring [01:43]

This increase in costs is expected to translate into higher prices for consumers, thereby introducing significant uncertainties for IT hardware stocks.

Consumer Price Implications

To illustrate the tangible impact on consumers, Woodring uses the example of a smartphone. A device typically valued at $1,000, with an import cost of approximately $500, would face an additional $50 due to the tariffs, bringing the total price to $1,050. Similar increases are anticipated for other devices like laptops and enterprise-level equipment, with the latter seeing a more substantial dollar increase due to higher base prices.

Notable Quote:

"A thousand dollar smartphone... would be $1,050."
— Eric Woodring [02:47]

Mitigation Strategies for Companies

Addressing how companies can cope with the increased costs, Woodring outlines both short-term and long-term strategies:

1. Short-Term Strategies:

   • Inventory Management: Accelerating inventory purchases and imports before tariffs take full effect.
   • Cost Sharing: Distributing the tariff burdens across hundreds of suppliers to dilute the financial impact.

2. Long-Term Strategies:

   • Production Relocation: Shifting manufacturing facilities to countries like Mexico, which benefit from USMCA exemptions.
   • Price Adjustments: Increasing product prices while offering extended installment plans to ease consumer burden.
   • Supply Chain Reconfiguration: Considering onshoring or further diversification to reduce dependency on regions susceptible to tariffs.

Notable Quote:

"The medium term strategy that's going to be most popular is raising prices... extend this installment plan to three years."
— Eric Woodring [04:02]

Feasibility of Onshoring

When discussing the possibility of onshoring—relocating production facilities to the United States—Woodring expresses skepticism regarding its practicality for IT hardware companies. He highlights several challenges, including:

• Skilled Labor Shortage: The concentration of skilled workers in China facilitates efficient manufacturing processes that are hard to replicate domestically.
• Economic Considerations: The high costs associated with building new facilities in the U.S., including labor and resources.
• Technological and Logistical Hurdles: The complexity of establishing large-scale manufacturing operations comparable to those in China.

Notable Quote:

"The headwinds to onshoring would be just the cost of building facilities in the United States... the cost and time of moving your supply chain."
— Eric Woodring [05:19]

Demand Impact and Industry Outlook

Woodring forecasts two primary impacts on demand for tech hardware:

1. Pull-Forward of Purchases: Consumers and enterprises may accelerate purchasing decisions to avoid future price hikes, temporarily boosting demand in the short term.
2. Weakened Second Half Demand: The initial surge could be followed by reduced spending as uncertainty about future policies and economic conditions dampens further investments in hardware.

This pattern suggests a volatile market with potential for weakened demand in the latter half of the year, contingent on ongoing policy developments and broader economic factors.

Notable Quote:

"A pull forward in the second quarter ultimately leads to weaker demand in the second half..."
— Eric Woodring [06:53]

Conclusion

In closing, Michael Zezas and Eric Woodring underscore the significant challenges posed by the current tariff environment on the IT hardware sector. While strategies like the China plus one approach have provided some buffer, the persistent uncertainty and increasing costs necessitate adaptive measures from both companies and consumers. The episode serves as a critical analysis for stakeholders seeking to navigate the shifting landscape of global trade and its impact on technology markets.

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Final Remarks

The episode concludes with Michael Zezas thanking Eric Woodring for his insights and encouraging listeners to engage with the podcast by leaving reviews and sharing their thoughts.

Notable Quote:

"If you enjoy the podcast, please please leave us a review wherever you listen..."
— Michael Zezas [07:41]

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This episode of Thoughts on the Market offers a comprehensive examination of the intersection between international trade policies and the tech hardware industry, providing valuable perspectives for investors, consumers, and industry professionals alike.

Transcript

[A]

Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's global head of fixed income and public policy research.

[B]

And I'm Eric Woodring, head of the US IT Hardware team.

[A]

Today we continue our tariff coverage with a closer look at the impact on tech hardware products such as your smartphone, computers and other personal devices. It's Thursday, April 17th at 10am in New York. President Trump's reciprocal tariffs announcements, followed by a 90 day pause and exemptions have created a lot of turmoil in the tech hardware space. People started panic buying smartphones, worried about rising costs, only to find out that smartphones may or may not be exempted. As I pointed out on this podcast before, these tariffs are also significantly accelerating the transition to a multipolar world. This process was already well underway before President Trump's second term, but it's gathering steam as trade pressures escalate. Which is why I wanted to talk to you, Eric. Given your expertise in the multipolar world, IT hardware has followed a China plus one strategy. What is this strategy and does it help mitigate the impact from tariffs?

[B]

Historically, most IT hardware products have been manufactured in China. Starting in 2018, during the first Trump administration, there was an effort by MyUniverse to diversify production outside of China to countries friendly with China, including Vietnam, Indonesia, Malaysia, India and Thailand. This has ultimately helped to protect from some tariffs, but this does not make really any of these countries immune from tariffs, given what was announced on April 2.

[A]

And what do the current tariffs recognizing, of course, that they could change. What do those current tariffs mean for device costs and the underlying stocks that you cover?

[B]

In short, device costs are going up. And as it relates to my stocks, there's plenty of uncertainty. If I maybe dig one level deeper. When the first round of tariffs were announced on April 2, the cumulative cost that my companies were facing from tariffs was over $50 billion. The weighted average tariff rate was about 25%. Today, after some incremental announcements and some exemptions, the ultimate cumulative tariff cost that my universe faces is about $7 billion. That is equivalent to an average tariff rate of about 7%. And what that means is that device costs on average will go up about 5%. Of course, there are some that won't be raised at all. There are some device costs that might go up by 20 to 30%, but ultimately we do expect prices to go up, and as a result, that creates a lot of uncertainties with IT hardware stocks.

[A]

Okay, so let's make this real for our listeners. Suppose they're buying a new device, a smartphone or maybe a new laptop. How would these new tariffs affect the consumer price?

[B]

Sure, let's use the example of a smartphone. A thousand dollar smartphone typically will be imported for a cost of maybe $500. In this current tariff regime that would mean costs would go up about $50. So a thousand dollar smartphone would be $1,050. You could use the same equivalent for a laptop. And then on the enterprise side you could use the equivalent of a server, an AI server or storage. Much more expensive. Meaning while the percentage increase in the cost will be the same, the ultimate dollar expense will go up significantly more.

[A]

And so what are some of the mitigation strategies that companies might be able to use to lessen the impact of tariffs?

[B]

If we start in the short term, there's two primary mitigation strategies. One is pulling forward inventory and imports ahead of the tariff de line to ultimately mitigate those tariff costs. The second one would be to share in the cost of these tariffs with your suppliers. For IT hardware, there's hundreds of suppliers and ultimately billions of dollars of incremental tariff costs can be somewhat shared amongst these hundreds of companies. Longer term, there are a few other mitigation strategies. First, moving your production out of China or out of even some of these China plus one countries to more favorable tariff locations perh, such as Mexico. Many products which come from Mexico in my universe are exempted because of the USMCA compliance. So that is a kind of a medium term strategy that my companies can use. Ultimately, the medium term strategy that's going to be most popular is raising prices as we talked about. But some of my companies will also leverage affordability tools to make the cost ultimately borne out over a longer period of time. Meaning today, if you buy a smartphone over two year of an installment plan, they could extend this installment plan to three years. That means that your monthly cost will go down by 33% even if the price of your smartphone is rising. And then longer term, ultimately the mitigation tool will be whether you decide to go and follow the process of onshoring, or if you decide to continue to follow China plus one or near shoring, but to a greater extent. Right.

[A]

So then what about onshoring that is moving production capacity to the U.S. is this a realistic scenario for IT hardware companies?

[B]

In reality, no. There is some small volume production of IT hardware projects that is done in the United States, but the majority of the IT hardware ecosystem outside of the United States has been done for a specific reason. And that is for decades, my companies have leveraged skilled workers, skilled in tooling expertise, and that has developed over time. That is extremely important. Tech CEOs have said that the reason hardware production has been concentrated in China is not about the cost of labor in the country, but instead about the number of skilled workers and the proximity of those skilled workers in one location. There's also the benefit of having a number of companies that can aggregate tens of thousands, if not hundreds of thousands of workers in a specific factory space. That just makes it much more difficult to do in the United States. So the headwinds to onshoring would be just the cost of building facilities in the United States. It would be finding the skilled labor. It would be finding the resources available for building these facilities. It would also be the decision whether to use skilled labor or humanoids or robots. Longer term. I think the decision most of my companies will have to face is the cost and time of moving your supply chain, which will take longer than three years versus the current presidential term, which will last another. Call it three and a half years.

[A]

Okay, and so how does all of this impact demand for tech hardware and what's your outlook for the industry in the second half of this year?

[B]

There's two impacts that we're seeing right now. In some cases, more mission critical products are being pulled forward, meaning companies or consumers are going and buying their latest and greatest device because they're concerned about a future pricing increase. The other impact is going to be China, generally lower demand. What we're most concerned about is that a pull forward in the second quarter ultimately leads to weaker demand in the second half because generally speaking, uncertainty, whether that's policy or macro more broadly leads to more concerns with hardware spending and ultimately a lower level of spending. So any 2Q pull forward could mean an even weaker second half of the year.

[A]

All right, Eric, thanks for taking the time to talk.

[B]

Great. Thanks for speaking, Mike, and thanks for listening.

[A]

If you enjoy the podcast, please please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.

[C]

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