(Bloomberg)—U.S. President Donald Trump’s vow to impose tariffs on all goods made in Mexico will be a blow to major hardware technology companies already reeling from the U.S.-China trade war.
Dell Technologies Inc. (No. 4 in the Internet Retailer 2019 Top 1000), HP Inc. (No. 62) and Hewlett Packard Enterprise Co. are among the U.S. technology companies that manufacture products in Mexico. Computers and printers made by these companies and imported into the U.S. from Mexico would face a 5% levy starting June 10, according to Trump’s decree. The White House said the tariffs would rise as high as 25% in October if Mexico doesn’t stop the flow of migrants and asylum-seekers across the U.S. southern border.
The U.S. imported $25 billion worth of computers from Mexico in 2018, according to the U.S. Census Bureau, and $2.5 billion in computer accessories. Hardware giants that have relied more on Mexican production the past two decades to take advantage of the North American Free Trade Agreement are now facing whiplash. They have already been forced to reconfigure their supply chains to contend with American duties imposed by Trump on products made in China.
For Dell, Mexico was a safe harbor to escape from the worst impacts of the U.S.-China trade conflict. The Round Rock, Texas-based company reallocated some desktop computer production to Mexico from China months ago in response to U.S. levies. The company also makes servers in Mexico. Now, it’s trying to figure out how to deal with the potential new tariffs.
“We are big believers in free trade,” Dell spokesman Steve Gilmore said in a statement. “One possibility, if this tariff goes through, is that we’ll have to raise prices. The good news is we have a global, flexible supply chain with more than 25 production facilities. This is an advantage for us that allows us to pivot very quickly and minimize impact to customers the best we can.”
HP manufactures some personal computers and printers in Mexico. The company didn’t immediately respond to a request for comment.
Hewlett Packard Enterprise, a server maker that split from HP Inc. in 2015, also is girding itself for the new U.S. import duties. A tariff on goods made in Mexico would have a worse financial effect on HPE than the levies on goods made in China, according to a person familiar with the matter who asked not to be identified. HPE also assembles some products in the U.S. and depends on a unified North American supply chain, the person said.
HPE felt blindsided by the tariffs, according to the person, who wasn’t authorized to speak publicly about the issue. The company expects the duties to be detrimental to the computer industry and the U.S. economy, the person said. The current trade environment is untenable for global companies, which may have to allocate fewer resources to research-and-development and other investments that fuel U.S. innovation, the person said.
Many major technology firms rely heavily on other companies to manufacture their products, including Florida-based Jabil Inc. and Flex Ltd., based in San Jose, California. Both of these contract manufacturers have operations in Mexico.
Those companies make products from mobile phones to servers and have extensive customers lists, including Apple Inc., Cisco Systems Inc., Microsoft Corp. and the personal computer makers. Jabil’s Guadalajara facility operates 363,000 square feet of manufacturing space and makes networking infrastructure, wireless and telecommunications gear.
Jabil is Cisco’s biggest supplier, according to supply chain data compiled by Bloomberg. Earlier this month, Cisco CEO Chuck Robbins said his company has done extensive work to mitigate the impact of U.S. tariffs on gear made in the China by shifting production elsewhere.
Apple (No. 2), one of the world’s largest sellers of technology products, lists three suppliers with ties to Mexico on its list of top component sources: KEMET Corp., Skyworks Solutions Inc., and CCL Design. All three companies make components for Apple that go inside its devices, with Skyworks having long been a key supplier of wireless components.
The companies also have manufacturing outside of Mexico, including in Asia, and it’s unclear if Apple actually sources any of their components directly from Mexico.
Other World Computing Inc., a maker of computer storage components, is another company that shifted production from Asia to Mexico. Now the closely held firm, which has annual sales of $125 million, is longing for a predictable business environment. Founder and CEO Larry O’Connor said Trump’s announcement was a “kick in the gut.”
“China I get, but I don’t know what the endgame of this is,” O’Connor said in an interview. “These trade issues are great sound bites for a certain base, but damaging for the folks who have to deal with it. It has the high risk of pushing jobs away from the U.S. and North America.”
O’Connor said the new duties could fray trade relationships that support jobs on both sides of the U.S-Mexico border, and the U.S. supply chain isn’t yet robust enough to make his products domestically. The company may have to boost prices for individuals and companies that want to upgrade the storage or speed of their Mac computers. In the long term, Other World Computing will look for production locations that aren’t vulnerable to tariffs, he said.
Lenovo Group Ltd. (No. 27), a Chinese PC and server company, has multiple production lines in Mexico. The company has gained enough market share to become the world’s largest PC maker in part by offering low prices — a strategy that will be tested when Trump’s new duties go into effect.
Denim could lose in the trade war
If disappointing earnings weren’t bad enough, retail investors now have to worry about the potential impact of new U.S. duties on all Mexican goods.
“This is unfathomable,” said Rick Helfenbein, president of the American Apparel & Footwear Association, in a statement. “Because of President Trump’s tax increase, Americans will pay more for everything from jeans to cars to computers to machinery.”
The S&P 500 Retailing Index fell 1.4% on track to close at its lowest level in more than two months. Retail stocks are poised for a fifth consecutive week of declines as apparel earnings have mostly disappointed. Gap Inc., famous for its denim jeans, was the worst performer Friday after weak results.
“Additional levies on U.S. companies for imports would result in higher inflation hurting consumer spend,” Bloomberg Intelligence senior retail analyst Poonam Goyal said. “That could hurt sales for key denim makers like Levi Strauss & Co. (No. 222), American Eagle Outfitters Inc. (No. 70), Wrangler, and Lee if they manufacture denim there.”
According to trade group, Mexico is the eighth largest supplier of apparel to the U.S. market and seventh largest supplier of footwear. It is the largest supplier of men’s and boy’s jeans to the U.S., accounting for more than a third of imports.
To be sure, retail exposure to Mexico is smaller than China, but food, upholstery products and consumer electronics are also likely to be affected, Telsey Advisory analyst Cristina Fernandez said in an email. Investors also see alcohol makers caught in the cross hairs, as shares of Modelo and Corona owner Constellation Brands Inc. fell the most since January.Favorite