With trade talks between the US and China breaking down once again last Friday, the Trump administration announced an increase in tariffs on a range of Chinese imports.
For many in the tech sector, this was just the news they hadn't been waiting for. With the last round of tariffs - a 10 percent levy on a variety of technology, among other things - offering a taste of what might be to come, the channel was hoping the threat of a 25 percent tariff had been all but forgotten.
But "as quick as a tweet", as one MSP put it, the tariff hike came into effect last Friday, sending ripples through the tech sector and American economy as a whole.
For some in the channel, the new tariffs raise anxieties about cost and supply. For others, the impact is "nominal". But for all, the question of what's next is at the forefront of their minds.
With last Friday's news coming as somewhat of a surprise, all eyes are fixed on the tension between the two power nations to see how things unfold.
An obviously concern for MSPs is supply. With modems, networking equipment and semiconductors on the list of imports that will now be subject to the 25 percent tariff increase, MSPs may find that they will have to slow down projects as they wait longer for components to arrive.
"After the last round of tariffs, suddenly we saw a supply problem for electronics. It's causing some downward parts problems, which are causing us delays. By that I mean that we can't sell the parts to our customers because we can't procure them from the distributors, who can't get the parts that go into them in China," Karl Bickmore, CEO of Arizona-based MSP Snap Tech IT, told CPI.
For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars....— Donald J. Trump (@realDonaldTrump) 5 May 2019
The procurement issue will be exacerbated by the latest round of tariffs, he said. Customer migrations and hardware upgrades are expected to be affected, with back orders increasing and manufacturers struggling to have stock available in the usual time frame.
"Suddenly, all these computer systems we need to order were back ordered for months, when usually with a back order - which is rare anyway - it's not for so long. And I think all the manufacturers are feeling now that they can't make stuff fast enough because they can't get their supplies of electronics components, which are commonly manufactured in the Chinese market," Bickmore pointed out.
This will particularly impact MSPs working with customers on Windows 10 migrations, the CEO said. As the channel knows only too well, extended support for Windows 7 ends in January 2020, and as the upgrade generally also involves a hardware refresh, for an MSP's many clients still on Windows 7, the timing of the tariffs is somewhat unfortunate.
"A lot of MSPs are directly looking to do a lot of Windows 10 migrations this year. Those clients that keep putting it off, they're all going to need to do it this year, and we've been seeing problems all year with getting deliveries on computer systems, which our manufacturers are telling us is because of parts in China. I think [the latest tariff increases] are going to make this a lot worse," Bickmore said.
MSPs looking to procure the necessary hardware for the upgrades may start to struggle as the supply chain becomes more exposed to the impact of the tariffs, Bickmore noted, adding that "a lot of what we have planned is becoming a real problem because we can't get the supplies we need."
This is compounded by customers who have left their Windows upgrades to the last minute, according to Chris Bradley, VP of managed services at Memphis, TN-based ProTech Systems Group.
He notes that the shortages on workstations are likely to stem from the high numbers of clients waiting until the last minute to do their Windows 10 upgrades, as opposed to as a direct result of the tariff increases. As such, he "fully expects" to see some supply chain issues in Q4.
Where the tariffs do come into play is cost, Bradley said, meaning customers who wait until Q4 to do their Windows 10 migrations are set to face further annoyances.
"The impact of the tariffs is that the costs are going to go up, so customers are going to like it even less. But it's not like they're going to have a choice," he noted. "The tariffs are going to make it cost more for those that have waited until Q4, making it more painful for them to make that upgrade. And unfortunately for us, in order to maintain the margins we need to, we're going to have to pass the cost along just like our vendors pass it to us."
It's not only clients seeking Windows 10 upgrades that will find themselves exposed to the cost impact of the new tariffs. Vendors are going to have to pay the tariffs on any necessary components they bring into the country from China, and they are going to want to pass those costs on to their partners, who obviously in turn will have to pass those costs on to their customers if they are to maintain stability in their business model.
Elsewhere, the stock market reaction to the tariffs is cause for concern for any business, especially MSPs, who are often the first outsourced element to be cut when budgets are being reconsidered.
As Bickmore points out, "any time there are issues, particularly ones that spook the stock market, it seems like there's almost always a confidence issue that causes people to slow on their IT spending as well".
This means that not only do MSPs face the risk of existing customers slowing down their IT spend owing to lack of confidence, but new business is also affected as decision makers become more cautious about embarking on new projects.
"We are definitely witnessing that. It's very slow right now,' Bickmore said.
While the tariffs are set to expose MSPs to these complications, there are workarounds to be found.
Tim Burke, CEO and president at California-based Quest Technology Management, notes that distributors can offer a workaround for MSPs as they are much more likely to already have product "on shore" before Friday's announcement.
"But with some vendors everything is built to order and their supply chain is directly back to China, which means I place an order here and the tariffs will immediately apply to whatever I place. That's versus going to distribution or to local providers who may buy things from China but already have them in stock. And as a plus, in order to gain my business, they might say, 'hey, I've got something that doesn't have the tariff applied'. So that's a potential alternative," Burke said.
He also notes that after the implementation of the first round of tariffs in June 2018, the firm placed some "significant orders ahead of time" in order to manage cost structure and ensure major upcoming projects wouldn't be impacted by the tariffs or threat of future tariffs.
Another potential workaround for MSPs is a shift into software from hardware, Burke noted. This could minimize supply chain issues in particular and offer an alternative source of revenue for those players who are able to diversify in this way.
According to Mike Ritsema, president and partner at Grand Rapids, MI-based i3 Business Solutions, this holds true.
"We're expecting nominal impact because the majority of our sales and profits come from services," the MSP said. "As for hardware, we basically pass through those costs with a price mark-up."
For those MSPs that are more exposed to issues affecting hardware, the good news is that, ultimately, any of the issues that do arise from the tariffs will hit all those exposed in more or less equal measure. Further, as Ritsema noted, for MSPs, a large chunk of their business is not built around hardware, which is currently where key concerns lie.
"We're not going to have our lunch eaten by our competitors, that's true," Bickmore pointed out. "And it's not like this is the business that drives most of my profitability, but it's just about having a bad customer moment and really putting our customers at risk. It's very hard for us to protect our customers if we can't make the Windows 10 migrations, so it's particularly bad timing as well."
The hope is, of course, that the tariffs will be temporary and merely "a lot of bluster that's going to settle down", Bickmore said.
"Hopefully things will get settled and everybody's going to be happy and we're going to get to swing back to more business as usual, and just have a few months' delay," he added.
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