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.
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:
-
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.
-
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:
- Pull-Forward of Purchases: Consumers and enterprises may accelerate purchasing decisions to avoid future price hikes, temporarily boosting demand in the short term.
- 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.
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]
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.