Small Tech Faces Tariffs Squeeze

Summary

WSJ Tech News Briefing: Small Tech Faces Tariffs Squeeze
Released April 29, 2025

The latest episode of WSJ Tech News Briefing delves into the challenges small tech companies are encountering due to evolving tariff policies. Hosted by Victoria Craig, the episode navigates through significant developments, including IBM's substantial investment in the U.S., the repercussions of tariff adjustments on small tech enterprises, and the strategic maneuvers these companies are adopting to sustain their operations.

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1. IBM’s Strategic Investment and AI Ambitions

The episode opens with a discussion about IBM's announcement to invest $150 billion over the next five years to enhance its manufacturing and research and development (R&D) capabilities in the United States. This move comes at a pivotal time as IBM strives to solidify its position in the competitive artificial intelligence (AI) landscape, especially in the face of President Trump's tariffs that threaten to escalate the costs of international manufacturing.

Asa Fitch, WSJ’s "Heard on the Street" columnist, provides an in-depth analysis of IBM's historical and current stance on AI:

“When I hear the name IBM, I don't necessarily think of artificial intelligence. It's not a company we hear often listed amongst the likes of OpenAI and Nvidia.”
[02:14]

He further explores IBM's foundational work in AI, referencing landmark achievements like Watson's victory on Jeopardy and Deep Blue's win against Garret Kasparov. However, Fitch notes that IBM hasn't been in the limelight during the recent AI boom, primarily because the company's AI efforts have been more behind-the-scenes, focusing on corporate applications rather than consumer-facing technologies.

Under the leadership of CEO Arvind Krishna, who took the helm in 2020, IBM has pivoted its AI strategy to be more agnostic and facilitative. As Fitch explains:

“IBM under Krishna has become more of a facilitator of what companies want to do and a lot more agnostic about which company they choose or which service they choose.”
[03:43]

This strategic shift aims to align IBM more closely with diverse corporate IT needs, offering consulting services that help businesses integrate AI in a manner that best suits their unique requirements. However, Fitch raises a critical concern about the sustainability of IBM's AI consulting business:

“There's a possibility that AI evolves in such a way that companies don't need quite as much help doing it. And if companies don't need as much help doing it in the Future, that limits IBM's ability to keep growing that business.”
[04:48]

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2. Tariff Exemptions and Their Fallout for Small Tech Firms

Switching gears, the episode examines the impact of tariff policies on the tech industry, particularly focusing on how recent changes are squeezing small tech companies. While big players like Apple and Nvidia have secured exemptions from the Trump administration's tariffs on Chinese imports—keeping products like laptops, cell phones, and smartwatches free from higher import taxes—the expiration of the de minimis provision (which exempted items sold for $800 or less) on May 2 poses significant challenges for smaller companies.

Nicole Nguyen, a WSJ personal tech columnist, breaks down the implications:

“A lot of what consumers are purchasing today, that's inventory that was purchased pre tariff so consumers won't see rising prices immediately.”
[06:51]

She elaborates on the strategies small companies are employing to navigate the impending tariff increases:

“Companies are going to have to face emptier shelves or ingest that inventory from abroad and pay tariffs. Should it be after the 90 day pause if it's outside of China? Or pay the 145% tariff levied on Chinese goods and raise prices for consumers if they can't absorb that themselves.”
[07:31]

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3. Strategic Responses: Subscription Models and Supply Chain Adjustments

To mitigate the financial strain from increased tariffs and supply chain disruptions, small tech firms are adopting various strategies:

• Bonded Warehousing: Companies like Flaus, which manufactures electric flossers with intricate components assembled in China, are considering storing finished goods in the U.S. through bonded warehousing. This approach allows them to defer customs payments, providing temporary relief while hoping for potential tariff reductions.

“She's hoping very desperately that the tariffs will come down. And that's the bet that she's making. But it's a risky one.”
[07:43]

• Diversifying Supply Chains: The shift away from China to other countries like Vietnam has led to increased shipping costs, with some companies facing a 25% rise in expenses just a week before the episode aired. This surge is attributed to a rush of importers adjusting their supply chains under the 90-day pause.

“That rush has caused shipping prices to increase. One company I spoke to said that their prices from Vietnam went up 25% last week.”
[08:36]

• Adopting Subscription Models: To ensure steady revenue streams amidst fluctuating demand and supply challenges, many small tech companies are leaning towards subscription-based models. Examples include:

  • Nanit's Smart Video Baby Monitor: Subscribers pay for sleep insights, offering parents valuable data-driven assistance.

  • Miele's Smart Air Purifier: Customers are enrolled in automatic filter refills, ensuring consistent product usage and recurring revenue.

“It looks like the companies that will be best positioned to survive this moment are companies that have revenue streams that are padded out by recurring revenue. And by that I mean subscriptions either from services like cloud storage or like this smart video baby monitor that I use called the Nanit.”
[09:54]

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4. Potential Decline in Product Quality

While these strategies offer short-term relief, there are underlying concerns about the long-term implications for product quality:

Nicole Nguyen voices apprehensions about the squeezing of suppliers:

“There's just not enough price elasticity for a higher priced version of that item to compete in the American marketplace. And so these brands will have to squeeze their suppliers. In other words, they'll have to negotiate better terms with their suppliers.”
[11:03]

This chain reaction could compel suppliers to cut corners to maintain profitability, potentially leading to a decline in product quality despite China's recent track record of producing high-quality goods. This scenario poses a significant risk not only for manufacturers but also for consumers who may face less reliable or inferior products in the market.

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Conclusion

The WSJ Tech News Briefing episode titled "Small Tech Faces Tariffs Squeeze" provides a comprehensive overview of the multifaceted challenges small tech companies are grappling with in the current economic climate. From IBM's ambitious investment in AI and U.S. manufacturing to the complex repercussions of tariff adjustments on the supply chain and operational strategies of small enterprises, the episode underscores a period of significant transition and uncertainty in the tech industry. As these companies navigate through increased costs, shifting supply chains, and the necessity to innovate their revenue models, the long-term effects on both the industry and consumers remain to be seen.

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Produced by Julie Chang with supervising producer Melanie Roy and deputy editor Chris Insinsley.

Transcript

[Victoria Craig]

Optimism isn't sunshine and rainbows. It's fixing things, changing the way we fix things. It's running the world on smarter energy. Because if optimism never stops, then change can't either. GE Vernova the Energy of change Hey T and B listeners, before we get started, a heads up, we're going to be asking you a question at the top of each show for the next few weeks. Our goal here at Tech News Briefing is to keep you updated with the latest headlines and trends on all things tech. Now we want to know more about you, what you like about the show, and what more you'd like to be hearing from us this week. Our question is which areas of tech are you most interested in hearing more about AI Crypto tech policy gadgets if you're listening on Spotify, look for our poll under the episode description or you can send us an email to tnbsj.com now onto the show. Welcome to Tech News briefing. It's Tuesday, April 29th. I'm Victoria Craig. For the Wall Street IBM plans to plow billions of dollars into its US Business at a time when the company's trying to prove its mettle in the world of AI. Then big tech companies got a reprieve from the Trump administration's latest tariffs. We'll tell you why small tech is looking for ways to survive. But first, IBM said yesterday that it plans to spend $150 billion over the next five years to bolster its manufacturing and R and D in the U.S. the company said it's all in the name of reaffirming a commitment to American innovation and economic opportunity. It also comes as President Trump's tariffs threaten to make international manufacturing more expensive. My colleague Katie Dayton spoke with WSJ Heard on the street columnist Asa Fitch about how economic uncertainty is posing a challenge for IBM's ambitions and about the role artificial intelligence plays in Big Blue's overall strategy.

[Asa Fitch]

Asa When I hear the name IBM, I don't necessarily think of artificial intelligence. It's not a company we hear often listed amongst the likes of OpenAI and Nvidia. When did the company first turn its attention to this technology?

[Katie Dayton]

IBM has been around since 1911. It's a very old company and it's been a pioneering company. A lot of technologies, including AI. You may remember that it's Watson Computer beat the champions at Jeopardy a number of years ago. Also, its Deep Blue Chess computer beat then world champion Garret Kasparov a while back. So IBM has been doing AI for a long time. The thing is, it hasn't been a big prominent name in the recent AI boom for many people.

[Asa Fitch]

You mentioned in the story that it's been working on AI quotes without much fanfare. Why hasn't it been a bit fanfare, flashier about the work that it's doing in this space?

[Katie Dayton]

The thing is, for IBM, which is basically a business focused company, is focused on other corporations and how they use AI. You know, it's been a bit below the radar. There's not a lot of popular awareness of what companies are doing with AI, but companies are doing a lot with AI. They're trying to harness AI for chatbots to interact with customers or a lot of internal processes that people just don't see, using their internal corporate data to do things autonomously and all sorts of other projects and applications and things like that. So IBM has been helping a lot of companies do that through its consulting business.

[Asa Fitch]

And stepping back. How has its approach to AI, how does that fit in with what its CEO Arvind Krishna wants to do on a grand scale with the company?

[Katie Dayton]

So Arvind Krishna, since he came on in 2020, has changed the company a lot. There was an old philosophy at IBM where everything IBM did had to be about steering customers toward other IBM products, other IBM services. The these days, you know, the thing is, companies don't want to do that. They don't want to be locked into one company's products. They're much more varied in how they approach their IT setups, which is where IBM really operates. So IBM under Krishna has become more of a facilitator of what companies want to do and a lot more agnostic about which company they choose or which service they choose. And that's helped IBM a lot because as customers appreciate that attitude, that lack of lock in. I mean, I'm not going to say that IBM never tries to lock in customers. They do in some ways, but their approach has been much more, especially on the software side, in the sort of open source philosophy of do whatever you want and we'll help you do it. And that plays into their AI strategy and what's made them succeed in AI. They've basically offered companies consulting, handholding essentially to help them do AI in whatever way they want to do AI.

[Asa Fitch]

And where has IBM signaled it's going to go next with its AI business?

[Katie Dayton]

That's kind of the big question hanging over the company. There's a lot of concern about AI in the long run for corporations and how IBM can play in that market. Clearly they've built up a big business, but there's a possibility that AI evolves in such a way that companies don't need quite as much help doing it. And if companies don't need as much help doing it in the Future, that limits IBM's ability to keep growing that business. So that's Krishna's big challenge. Looking forward.

[Victoria Craig]

That was Katie Dayton speaking with our Hurt on the street columnist Asa Fitch. Coming up, less product availability, more subscriptions, maybe even higher prices. Those are some of the coping strategies that small tech companies are using to deal with tariffs. More after the break.

[Katie Dayton]

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[Victoria Craig]

Earlier this month, big tech companies like Apple and Nvidia got a reprieve from President Trump's tariffs. That means, at least for now, laptops, cell phones and smartwatches are exempt from higher import taxes on goods from China. But starting May 2, small tech companies could see the cost of bringing their China made products to the US Surge. That's because the de minimis provision, a commonly used exemption on items that sell for $800 or less, will expire. WSJ personal tech columnist Nicole Nguyen has been looking into what it means for American gadget makers and consumers like you and me. So Nicole, walk us through how some of those small companies are balancing supply and possible changes in demand.

[Nicole Nguyen]

So a lot of what consumers are purchasing today, that's inventory that was purchased pre tariff so consumers won't see rising prices immediately. But once that stock is depleted and goes out of stock, then companies are going to have to face emptier shelves or ingest that inventory from abroad and pay tariffs. Should it be after the 90 day pause if it's outside of China? Or pay the 145% tariff levied on Chinese goods and raise prices for consumers if they can't absorb that themselves. And there aren't many companies that can absorb that other than the biggest companies in the world.

[Victoria Craig]

And you talk to a couple of those smaller businesses that are doing things like putting US bound shipments from China on hold or potentially raising prices. Just walk us through some of those options.

[Nicole Nguyen]

I talked to one company named Flaus which makes a an electric flosser. And this electric flosser contains lots of tiny components and that precision assembly is really only done in China. So that's why the flouse is made in China. The Owner is considering bringing that inventory that she has just finished manufacturing in China stateside and putting the stock in what's called bonded warehousing. And bonded warehousing allows importers to defer customs payments to a later date. And she's hoping very desperately that the tariffs will come down. And that's the bet that she's making. But it's a risky one.

[Victoria Craig]

Even if US Tariffs on China do come down, there's already a problem brewing there. Because when some companies moved where they're getting their supplies from, that has inherently pushed up the cost because to get them to the United States is now more expensive.

[Nicole Nguyen]

That's right. The 90 day pause has caused a rush for importers to put their stuff on boats from either Vietnam or any of the non China tariff countries to put their stuff on a boat to the US and that that rush has caused shipping prices to increase. One company I spoke to said that their prices from Vietnam went up 25% last week. So even if this tariff situation was fixed tomorrow, we are probably looking at higher shipping cost all around and eventually.

[Victoria Craig]

Potentially a shortage of supplies on the shelves if companies can't get those supplies.

[Nicole Nguyen]

To the U.S. yes, exactly. Most companies have anywhere between one to two months worth of stock left. But there is a big shopping event ahead which is Prime Day. Amazon Prime Day is a very big day for these companies and they are just hoping they have enough stock to make it to that day. And if they don't, then they will be facing loss of revenue and potential putting the jobs of their teams at risk.

[Victoria Craig]

One way that companies have been able to keep revenue flowing despite all of these tariff obstacles is through subscriptions. We can expect to see more companies implementing those kinds of subscription based models.

[Nicole Nguyen]

It looks like the companies that will be best positioned to survive this moment are companies that have revenue streams that are padded out by recurring revenue. And by that I mean subscriptions either from services like cloud storage or like this smart video baby monitor that I use called the Nanit. I pay money for sleep insights because I'm desperate for sleep. And so too many, many other parents or from auto refills of replaceable items. So for example, this smart air purifier company called Miele that I interviewed, most of their customers are signed up for an auto refill for the Purifier's filter, which needs to be replaced about twice a year. And so they feel pretty confident that they're going to weather this moment. And this time is a moment of reckoning for a lot of hardware companies who are looking to diversify their revenue streams. And so they too are considering leaning more heavily on subscriptions, so long as.

[Victoria Craig]

Those things don't ultimately have to come from China or another country with high tariffs long term. Nicole, though, what does this mean for the quality of the products that we're used to buying?

[Nicole Nguyen]

So I talked to someone who works in the States and in China to help develop new products for American brands. And what he's concerned about is that these tariffs can't be absorbed by consumers. There's just not enough price elasticity for a higher priced version of that item to compete in the American marketplace. And so these brands will have to squeeze their suppliers. In other words, they'll have to negotiate better terms with their suppliers. Those suppliers in turn will have to negotiate better terms with their sub suppliers and so on and so forth. And what may happen is that the suppliers, in order to provide that product at a lower price, will have to cut corners. This person is very concerned that we'll see degrading quality coming from China. Even though for the last several years we've seen a lot of high quality goods come from China, we could see a reversion to a lower quality product.

[Victoria Craig]

That was WSJ columnist Nicole Nguyen. And that's it for Tech News Briefing. Today's show was produced by Julie Chang with supervising producer Melanie Roy and deputy editor Chris Insinsley. I'm Victoria Craig for the Wall Street Journal. We'll be back this afternoon with TNB Tech Minute. Thanks for listening.