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10th September 2019

Impact of Tariffs

Tariffs and other considerations for where to manufacture products

There are numerous factors to consider when deciding where to set up production for a new product or indeed whether to move production from one country to another.

The key areas to consider are:
  • Product and supply chain maturity, sales volumes and timescales
  • Your ability to support and monitor manufacturing in that country
  • Tariffs and barriers to trade
  • Intellectual property protection

Product maturity and sales volumes

If your product is just leaving the prototype stage and has the first paying customers it would probably be better to manufacture in your own country.  This avoids language, time zone and cultural difference. It also allows your engineers to readily support and troubleshoot the product through the NPI (New product introduction) phase and to keep a tight rein on production quality.

If, however, either your design or your manufacturing supply chain is already well-proven i.e. you have previous good experience of using your off-shore supplier or your product has been manufactured reliably for a period of time then offshoring may be beneficial. It is likely that annual volumes of at least the tens of thousands of units will be needed for this to be effective.

Timescales for moving or setting up production are often underestimated. It can take months to set up the component supply chain, especially with electronics component lead times.  Printed circuit boards can be available cost-effectively in volume within 6 weeks of order.

A low volume 100-200 piece initial manufacturing run is frequently required to ensure units can be made, tested, and packaged correctly and the documentation and quality checks are correct.

Changes to the PCB at this stage for identified manufacturing issues can require a second low volume production cycle before the volume product can be reliably manufactured.

Your ability to support and monitor manufacturing in that country

Consider your internal team’s capabilities and capacity to provide support for technical and commercial issues that arise during production setup and ongoing afterwards.  Travel to any offshore production line adds hours or days to each visit. The costs for airfares can also increase substantially.  Queries that with a local manufacturer could be resolved within an hour are often extended to at least a day. This is due to time zone differences and a potential language barrier which increases the risk of miscommunication.

Tariffs and barriers to trade

What are tariffs?

Tariffs are designed to give price advantages to locally produced goods.  Imported good are subjected to customs duties which raise revenues for governments and helps home-produced goods to be more competitive.

Who pays the tariffs?

A tariff is a tax paid on imports.  These are paid to the government by the importing companies and are frequently passed on to the customer.  Imported goods are artificially made more expensive by the tariff, this, in turn, can reduce demand, especially in a competitive market.

What happens when(if) the UK leaves the EU?

The European Union single market brings its member states together and acts as a single territory without internal borders.  This gives free movement to goods and services within the single market and in theory, removes regulatory and financial obstacles to trade.  There are no tariffs between members of the EU although there are still some non-tariff barriers.

We still don’t know the details of the trading agreements between the EU and the UK after Brexit. If there is no specific trade agreement in place then trade is still permitted, this would take place under World Trade Organisation Rules.

Under these rules the UK can’t be specifically targeted for discrimination, we would be subject to the same tariffs applicable to any other country without a trade agreement with the EU. This is known as most-favoured-nation (MFN) treatment. If a country is granted a special lower customs duty for a product this must then be done for all other WTO members.

Specific agreements or disagreements between the country of manufacture and importing country

Research the trade agreements between your target market countries and your country of manufacture.  These are not static and so an understanding of the political background between these countries is vital.

For example, China has traditionally been seen as the go-to place to manufacture electronics.  Recently President Trump ramped up import tariffs for products manufactured in China.  If your main market is the US, manufacturing in China quickly become far less attractive.  You still have the time-zone, language and cultural barriers of manufacturing in China but the cost benefits have largely been eroded.

Intellectual property protection

Is your product IP protected from being copied in the country of manufacture? Even if you have patents and design registrations some countries choose not to respect these.

Do you need to limit the information provided to the manufacturer so that the product is useless without some knowledge that is kept away from them?

If the product value is high then the risk of IP theft is also proportionally higher.  You can take some defensive actions such as code protecting the microprocessors and supplying them only programmed devices or only whitelisting products on your system that have been manufactured with your knowledge.  With enough resource and enthusiasm, most barriers can be circumvented and could result in your sales number being compromised by copycat products or in your brand being damaged by low-quality copies of your product being sold.