During a late October trip to Taipei meeting with several vendors, one topic consistently came up: tariffs. Discussions on the impact of 10% and potentially 25% tariffs on computer assemblies made in China and imported to the US are everywhere. A unique perspective arose regarding how tariffs impact the Intel Xeon D, Intel Atom, and AMD EPYC 3000 series platforms. Tariffs hurt these platforms to a much greater extent than socketed counterparts. Arm is equally if not more impacted since many of those designs are now BGA instead of socketed. Since that trip, the 25% looks like it will be avoided, but let us take a second to understand the concern.
Why the US Tariffs Impact Embedded Systems
The value used to determine the tariff rate is based upon the value of the imported good made in China. If you are talking about a simple good, such as a power supply itself, it is relatively easy to see the impact of the tariff. When looking at assemblies comprising a larger number of components, the calculus can change.
The HTS Subheading 8471 deals broadly with automatic data processing machines which include computers.
One of the key items listed that we heard cited frequently was under HTS Subheading 8473.30.11, Printed circuit assemblies, not incorporating a cathode ray tube, of the machines of 8471
Although vendors were trying to find ways to interpret the tariffs as not including their parts, it was virtually impossible to do so reading the tariff list, especially in the 8470 to 8473 range.
Some companies have moved assembly of components to places such as Taiwan, Mexico, and elsewhere. Changing production from China to another nation is enough to get around the tariffs, but places like Taiwan do not have enough manufacturing capacity to move all production from the mainland. For assembly, goods can be imported, tariff paid on the China-made parts such as the motherboard and chassis. High-value components such as RAM, drives, and CPUs can then be installed post-importation. Decoupling the components means that tariffs are only paid on portions of the server or embedded device.
For embedded parts, this presents a problem. The Intel Xeon D-2183IT we reviewed is a ~$1750 part. Adding a 10% tariff is $175 to the direct price and a proposed 25% tariff would add almost $440 to the cost of a motherboard assembled in China with an Intel Xeon D-2183IT affixed. In many cases, that will change the calculus of whether to use an embedded part versus a socketed part that can be assembled in the US.
That 10% tariff has a bigger impact down the supply chain. If a vendor imports the good, it may look for say 15% gross margin. A distributor/ reseller may want 5% gross margin. The final system seller may want 20% gross margin as well. Importing a $100 good to a US office, then selling it through distribution can yield a $100*1.15*1.05*1.2 = ~$145 final price if the supply chain looks for its normal margins. Gross margins. and downstream financial metrics are commonly used as covenants in debt obligations. Therefore, some in the supply chain cannot even absorb the price increases and have no choice but to raise prices.
Tariffs are a big deal. Large OEMs/ ODMs can shift production to mitigate a portion of the impact. At the same time, many smaller players who make embedded systems will not be able to shift production easily. Costs for tariffs are being directly passed onto customers. A common practice is to tell customers that a quote is subject to the 10% tariff and blanket raise prices. We have seen this in the channel.