Geopolitical Issues Roil IT Sector

S. Schuchart

Summary Bullets:

• Cost sharing between vendors/SPs and customers can strengthen relationships in a difficult time.

• Calm and deliberate planning by vendors/SPs and customers is key to minimizing impacts to business.

The new tariffs on imported goods in China and the U.S. will have a significant impact on pending and future deals, both for service providers, vendors, and customers. The technology industry has a complex and deeply international supply chain, with U.S. and Chinese companies both utilizing components and intellectual property. Component price increases will lead to sharp increases in product costs. These increases will slow or stall deals as customers may wait and see if the issues can be resolved in a short time frame.

In the short term, vendors should take a considerate stance when debating what to do with these price increases. There is an opportunity for vendors to forge a stronger bond with their customers. Split the extra costs between margin and the customer. Be open and transparent about splitting the price increases as a gesture of shared unexpected burden and common issue. Vendors *could* pass the entirety of the extra costs on to customers, but that would gain no good will and if anything put a strain on those relationships. By taking a “we’re all in this together” approach, vendors can gain customer goodwill and minimize the amount of deal stalls or outright cancelations. For service providers, this stance is even easier to take, as there is not a strictly direct relationship between the costs of SP equipment and the costs of services provided to customers, other than equipment sales directly to the enterprise. Service providers have more flexibility to help customers during this time.

Customers should continue with their current projects, while locking down prices as quickly as possible. Customers should inquire as to how much increases might be and how soon those increases may happen. Customers should measure the value of their relationships with vendors or service providers based on how much sharing of the incurred extra costs happens. However, customers cannot expect vendors to solely absorb the increased costs and should be prepared to pay increased prices. Customers who have big projects and who cannot lock down current pricing should consider delaying until a clear pricing picture emerges.

If the various tariffs and company sanctions are prolonged, vendors will need to find sources of components that are not part of the overall tariff. In certain situations, actions such as in-house development of chipsets could be initiated by the largest telecom suppliers to shore up their supply chain. However, changing suppliers might not even be possible for some components. Vendors, service providers, and customers should all review project and spending plans for the year and make sure contingencies are in place. The single biggest thing that customers, vendors, and service providers can do is to not take precipitous action. Calm planning and alertness to changes as they occur is the key to navigating this storm happening in the IT sector.

We are taking no stance on the appropriateness of the sanctions and tariffs imposed by the governments of the U.S. and China. We also make no predictions on the length and extent in which tariffs and company sanctions will extend. We will only comment on the impact for vendors, service providers, and customers.

 

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