US Tariffs on TVs from China Will Disrupt Display Supply Chain
Last week, I gave an outline of the possible impact that Trump administration actions on US-China trade could have on the display industry, and on Tuesday, April 3rd, the Trump administration released the list of products subject to a new 25% tariff. Of the 1,333 different product categories included in the trade action, the single largest category by value is TVs. The new tariffs on TVs will have companies on both sides of the Pacific scrambling to redirect the display supply chain.
After the US issued a list of products totaling $50 billion in imports from China, China retaliated with its own list of products, including soybeans and airplanes, which seemed targeted at states that supported President Trump in the 2016 election. In response to the China retaliation, President Trump raised the stakes yet again, saying that the US would impose tariffs on an additional $100 billion in China imports, to which the Chinese Commerce Ministry answered “China is fully prepared to hit back forcefully”.
At this point, we have no idea exactly where this will end, and we don’t know what kind of products would comprise the additional $100 billion, but we have very specific and detailed information on the first volley in this trade war, the notice by the US Trade Representative initiating the public comment period on its plan to impose an additional duty of 25% on a list of products from China.
The timeline for public comment on the new tariffs, as outlined in the USTR document, specifies that written comments must be submitted by May 11th, and that a public hearing will be held on May 15th at the US International Trade Commission in Washington, DC. The public comment period closes on May 22nd when the final post-hearing rebuttal comments are due.
The justification described in the USTR document includes four main elements:
- The Chinese government uses tools to pressure US companies with operations in China to transfer technology and intellectual property to Chinese companies.
- The Chinese government’s policies deprive US companies the ability to set market-based terms for licensing and technology-related negotiations.
- The Chinese government directs acquisition of US companies to obtain technology and intellectual property in strategic industries
- The Chinese government supports cyber theft of US intellectual property.
The document then describes the new tariffs as applying under Section 301 of the US Trade Act of 1974, which allows the US administration to take action in retaliation for unreasonable trade activities by other countries.
The list of products affected by the proposed new tariffs was collected from “several US Government agencies” which “identified products that benefit from Chinese industrial policies, including Made in China 2025”. The list was adjusted “by removing specific products … likely to cause disruptions to the US economy”, then “ranked according to the impact on US consumers, based on available trade data involving alternative country sources”, and finally “selecting products from the ranked list with lowest consumer impact”.
The list of 1,333 product categories in the USTR documents runs 44 pages long, of which 16 pages are items in chapter 84 of the Harmonized Tariff Schedule (HTS), machinery and mechanical appliances, and another eight pages are items in chapter 85, electrical machinery and equipment. These two areas have the highest value of imports from China. Some notable items that are not on the list:
- Computers: HTS 84713001, of which there were $37.1 billion in imports from China in 2017, and a total of $2.7 billion from all other countries
- Smartphones: HTS 85171200, of which there were $44.5 billion in China imports in 2017, and a total of $11.2 billion from all other countries, mostly Korea and Vietnam
- Monitors: HTS 85285200, of which there were $4.5 billion in China imports in 2017, and a total of $0.7 billion from all other countries
The list includes many, many items that seem far out of date and irrelevant; many with a reference to CRT, such as:
- HTS 85284950: Non-high definition color video monitors, projection type, with cathode-ray tube, not incorporating VCR or player.
Our readers will likely not be surprised to learn that there were $0 of imports from China for this type of product in 2017.
Out of the 1,333 product categories, the single item accounting for the largest value of imports is HTS 85287264: “Color television reception apparatus w/flat panel screen, video display diagonal over 34.29 cm, incorporating a VCR or player”. This single product category accounted for $3.9 billion in imports from China in 2017, and 18.8 million units, but unlike the categories mentioned above that were not included on the tariff list, Flat Panel TV imports are not dominated by China, as shown in Figure #. At the detailed product level (HTS 10), flat panel TVs are specified in four different screen size groups, with the largest group being over 45”.
Figure 1: US Imports of Flat Panel TVs in 2017
As can be seen in Figure 2, Mexico accounts for the largest value of this flat panel TV category, with 59% of the dollar amount of imports to China’s 35%, but China accounts for the largest unit volume, with 51% of the units compared to 39% for Mexico. Also, most flat panel TVs imported from Mexico are over 45”, while most TVs under 45” come from China.
While the product category 85287264 accounts for a great majority of TV imports to the US, it doesn’t account for all of them, and that has to do with the specification of “incorporating a VCR or player”. If this language about VCR seems strange, it’s because of a quirk in the existing US tariff schedule, dating back to the CRT era. During the 1990s, TV products combined with a VCR or DVD player (“combos”) were given a lower duty rate of 3.9%, compared to the standard TV duty of 5%, to adjust for the added value of the recording player which was not subject to tariff. While the VCR has long since been extinct, the US ITC has determined that any TV with a USB port, which can connect to a USB recording device like a Google Chrome stick or the like, qualifies as a TV with a “player” and therefore receives the lower 3.9% duty. In the cutthroat, low-margin TV business, saving 1.1% on the duty can be the difference between having a profitable product and one that loses money.
In addition to the 37 million TVs imported to the US under the product category HTS 85287264, there were 4.3 million TVs imported under product category HTS 85287272, with a different country mix, as shown in Figure 2. HTS 85287272 is defined as “Color television reception apparatus w/flat panel screen, video display diagonal over 34.29 cm, not incorporating a VCR or player” (emphasis added).
Figure 2: US Imports of Flat Panel TVs in 2017, no recording device
Whereas in 2017 there were 18.8 million TVs imported from China with a recording device and subject to the 3.9% duty, there were only 548,000 TVs without a recording device imported from China and subject to the 5% duty on TVs. TVs imported to the US from Mexico are not subject to duty whether they have a recording device or not, so most of these TVs imported as HTS 85287272 are from Mexico. Still, even though there is no difference in duty, 80% of the 18.2 million TVs imported from Mexico in 2017 had a recording device.
As a side note, the green wedge in the charts above allows a window into OLED TV. The category 85287272 includes five subcategories, the first four of which are different screen size groups of the product “LCD-type (direct view)”, and the last of which is “Other, including plasma-type”. This “Other” group, 8528727290, stands out because of the much higher average prices. Whereas LCD TVs with >45” screens imported from Mexico have an average price of $452, and the same size TVs imported from China have an average price of $291, TVs in this “Other” group have an average price of $1348. As these will be wholesale prices, this represents an average retail price of $1800 with a 25% retail margin, and only OLED TV has those high prices.
In order to get a first-hand look at the potential impact of a 25% tariff on TVs imported from China, I took a trip to the local Best Buy to take a look at the TVs for sale and look at their origins. Any TV (or any other product) in its box includes a label saying “Made in Mexico” or “Made in China”. At this time of the year, TVs are not a hot-selling product, so relatively few of the larger size TVs were in boxes on the retail floor, but there were several Samsung and Sony 65” LCD TVs on sale at the front of the store, all made in Mexico. Back in the shopping aisles, I found the following:
- LG 32”, 43” TV – made in China
- Vizio 32”, 39”, 43” – made in China
- Samsung 24”, 28”, 32” - made in Vietnam
- Samsung 40” – made in Mexico
- Insignia 32”, 39”, 43” – made in China
- Sharp 43” – made in China
- Sony 40” – made in Mexico
- Hisense 50” – made in Mexico
There were a few surprises.
First, Samsung brand is not importing any TVs from China, but rather they are importing smaller size TVs from Vietnam, and the larger sizes from Mexico. Per the US ITC data, there were 1.7 million TVs imported from Vietnam in 2017 at a total value of $275 million, for an average price of $161 (these would be subject to the import duty of 3.9%, so would pay an average duty of $161*3.9% = $6.31). This is a plausible estimate of the sales of Samsung TVs up to 32”.
Another item of interest: looking back at the US ITC data for 2016, there were zero imports of TVs from Vietnam. Therefore, it’s clear that Samsung changed their sourcing for smaller size TVs after President Trump was elected, a move that makes them immune to these coming tariffs, whereas their competitors will be subject to them.
Sony also seems to be in a favorable position, if for a slightly different reason. All the Sony TVs I saw were imported from Mexico, but Sony did not have any models smaller than 40”.
The origins of the Sharp and Hisense TVs surprised me. Sharp TVs sold in the US these days are not made by Sharp Corporation; Sharp sold the license to their brand name for the US market to Hisense in 2015, when the company was in severe financial distress prior to its acquisition by Foxconn. So it seems fair to surmise that the Sharp 43” TV on sale is made by Hisense in China, but I was surprised to see the 50” Hisense TV was made in Mexico, until I remembered that Hisense also acquired Sharp’s manufacturing site in Rosarita, Baja California.
Based on all this data, what are the likely implications of this tariff on the US TV market and the wider display industry? Here are a few takeaways:
- Samsung is in a very strong position, with a full line of products from the smallest sizes to the largest sizes, all sourced from countries other than China. Samsung’s competitors will likely be hurt by the tariff, and will need to raise prices, allowing Samsung to capture market share or achieve higher profits with price increases of their own.
- Sony is likely to be unaffected by the tariff, as its products skew to the larger sizes which are mostly imported from Mexico.
- LG faces a decision with its smaller size lineup. If they continue to import from China, they will face the new tariff. LG has a TV manufacturing site in Laredo, Mexico, and will likely work to shift product of smaller size TVs for the US market there.
- Hisense may shift its Sharp brand TV from China production to Mexico production.
- The biggest challenge goes to Vizio and to Best Buy’s Insignia house brand. These brands appear not to have any simple sourcing options.
Aside from the brands currently in the market, we expect one new entrant to the US TV market later this year. As the initial stage of its massive project to build a Gen 10.5 LCD manufacturing complex in Wisconsin, Foxconn is expected to start production of TVs in that state this summer, to be sold under the InFocus brand and a new “Flying Eagle” brand. Given the potential of a larger trade war and continuing threats by President Trump to scrap NAFTA, the Foxconn plan for full production of displays and TVs for the US market in the US may be the strongest position in the industry.
For companies that rely on TV imports from China, there remains one possible path to avert the tariffs, at least based on the current list of products subject to the new tariff. For whatever reason, TVs without a recording device, imported under HTS 85287272, are not included in the USTR’s list of products subject to the tariff. Therefore, a company that makes a small change in their product, to remove the USB port, can have their product imported under 85287272. While the standard duty of these products will now be 5.0% instead of 3.9%, they will not be subject to the additional 25% duty from the section 301 action. Such a strategy carries risks, though, as the USTR could potentially close that loophole with a change in its list, or alternately these products might be included on the next list of $100 billion in imports subject to penalties by the Trump administration.
Responding to this issue on Monday, April 9th, TCL issued a statement saying that the USTR List “has a limited impact on it and TCL Group will take all effective measures to safeguard corporate interests”. Among the actions mentioned in the note, TCL “has started planning to increase the production capacity of the Mexican factory and to take other measures to reduce the impact on the Company’s operation in the USA”.