Caught in the crossfire of an escalating U.S. - China Trade War are gadget and automakers. Slapped with yet another tariff of USD$200 billion worth of Chinese goods, China-based manufacturers and U.S. clients are being forced to reevaluate their extensive, interconnected supply chains. This report looks to shed light on the supply chains of the U.S. Consumer Electronics sector as compared to the Automakers and the current impact tit-for-tat tariffs will have on these hard hit sectors.
"China took up only about 10% of the revenue generated by the global supply chain."
Trump’s tariffs are part of a long term strategy to untangle the U.S. manufacturing supply chain from China, which we have found to be the second largest supplier to the U.S. Consumer Electronics market and Automakers. But as we take a deep dive into Apple and Ford Motor respectively, we found that China took up only about 10% of the revenue generated by the global supply chain.
Source: The Conversation, CC-BY-ND
Taking Apple for example, according to CBS News, of the factory cost of USD$237.45 for an iPhone 7, all that China earns in return is USD$8.46 or 3.6% of the total. Major supply chains include the U.S. and Japan that makes about USD$68, Taiwan that profits about USD$48 and South Korea that takes in about USD$17. Apple pockets the rest.
"The net income margin of Chinese suppliers to Ford Motor massively deteriorated from 2015 to 2017."
According to our analysis, the net income margin of Chinese suppliers to Ford Motor massively deteriorated from 2015 to 2017 due to steep competition, hikes in cost of raw materials and labor. This will be further exacerbated if Trump’s potential auto tariffs of 20% to 25% is to be imposed.
Coupled with low global supply chain revenue and a decreasing net margin, China is suggested to end up with the bulk of low value-added production jobs, the group most vulnerable to the current pressures caused by the tariff spat.
Companies are now left with a choice of either upgrading their products or relocating production to other regions from China to diversify risk. But while there’s a rush to hedge against political and economic risk, to shift productions is a difficult task. To enter into a new developing market like Vietnam, Cambodia or Indonesia, companies will have to deal with the often uncertain nature of investment, labor and environmental laws.
"China is continually increasing efforts to invest and upgrade locally, citing an uptrend in the range of 70% to 85%."
But according to AMI’s analysis of investment flow, China still remains a dominant player in the global supply chain. China’s high concentration of manufacturers has driven the country into developing a reliable ecosystem both logistically and infrastructurally. Armed with an army of workers and a large domestic market, it’s unlikely that China will face a mass exodus of manufacturers. On the contrary, according to our investigation, China is continually increasing efforts to invest and upgrade locally, citing an uptrend in the range of 70% to 85%.
This proves that China is taking active steps to safeguard the strong position manufacturers in the Consumer Electronics and Automakers have during this period of trade wars.