New research from analyst group McKinsey & Co explores US tariffs policy and its likely impact on the semiconductors sector.
In a highly changeable environment – underlined by the US Court of International Trade ruling, and subsequent appeals court ruling allowing tariffs to stay in place for now – the paper advises companies to undertake “proactive planning exercises,” which could be the difference between gaining a competitive advantage or being caught out.
When assessing the impact of tariffs, companies need to consider two primary factors, said McKinsey: the value-add stage at which the tariff is assessed (for example, chip-level and end-device tariffs) and how the product’s exporting country of origin is defined (such as the final value-add step or country of last substantial transformation).
Since Asian markets like China, Malaysia, and Taiwan are where most of the world’s semiconductor chips are manufactured and assembled into components for consumer products, compute equipment, and automobiles, an end-device tariff would tax products after the value-add has been incorporated throughout the product life cycle.
“Therefore, the largest effects may be felt not where chips are manufactured but where [electronics] providers assemble the end device before it enters an import tariff country,” the paper notes.
Latest policy developments
Beyond country-specific tariffs, levies on semiconductor chips have been on pause since 14 April.
The US Department of Commerce Bureau of Industry and Security is undertaking an investigation to determine the effects of imports of semiconductors and semiconductor manufacturing equipment on US national security.
It is conducting this investigation under Section 232 of the Trade Expansion Act of 1962, which enables the president to limit imports of a product and its derivatives. The US President will then make an assessment on the findings of the investigation and can enact trade actions as deemed necessary.
Writing on his Truth Social account last month, President Trump said nobody is “getting off the hook for the unfair trade balances”, and said the administration was looking at semiconductors and the whole electronics supply chain in its next round of tariff investigations.
In response to tariffs placed on Chinese exports to the US, the China Semiconductor Industry Association (CSIA) issued a notice stating the country of origin for integrated circuits would be determined by the location of the wafer fabrication plant (or the country where the “last substantial transformation” occurred).
China’s change in customs declarations will likely affect integrated device manufacturers with fab production in the US that are trying to make sales in China, potentially shifting customer demand to regional or local production.
Redesigning supply chains
Since tariffs apply to specific import markets along a product’s value chain, companies could redesign their supply chain accordingly, the research suggests.
They could even pursue growing opportunities with non-tariffed countries by shifting their core suppliers, manufacturing capacity, and customer portfolios away from tariffed regions.
Any imposed tariffs would most immediately affect product companies and their manufacturing and assembly partners.
Since providers already operate with razor-thin margins, especially for high-volume products such as smartphones and PCs (an annual gross margin of 6% to 11%), shifting operations to non-tariffed countries on their own may not be economically feasible, given the capital requirements.
Taiwanese semiconductor foundry TSMC recently announced it is to invest an additional $100bn in semiconductor manufacturing facilities in Arizona, taking its overall investment in the state to $165bn.
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