Buyers should expect higher prices, longer lead times through the end of the year as demand remains strong and the threat of tariffs looms
Supply chain pressures continued into the fall, as businesses grappled with the ongoing global trade wars and impending tariff-related activity. Price increases are among the greatest concerns in the North American manufacturing sector, where raw material and component prices have been steadily increasing. As of August, the Institute for Supply Management’s Prices Index had increased for the 30th straight month, for example. Although the increase had slowed somewhat compared with July, buyers across a range of industries reported paying more for a wide range of materials, including electronic components. And while pricing pressures continued to varying degrees elsewhere in the world, many organisations continue to blame tariffs—or the threat of them—for the growing cost of keeping up with business demands.
In an early September report on the manufacturing outlook in the Eurozone, economist at IHS Markit, Chris Williamson, said: “Worries about trade wars and the damaging impact of tariffs, as well as Brexit and other political worries, all contributed to a dampening of business optimism about the year ahead. On the price front, input cost pressures remained elevated, despite the rate of inflation easing to a three-month low.”
IHS pointed to similar concerns in the United States, with tariffs and trade wars commonly cited as factors behind companies building safety stocks of inputs to ensure supply or lock-in lower prices, exacerbating supply shortages and also driving prices even higher. In a separate September report on the US manufacturing outlook, Williamson added: “Almost two-thirds (64 per cent) of companies reporting higher input prices explicitly blamed tariffs as the cause of increased costs. Almost one-in-three went on to cite tariffs as the cause of having to hike prices to customers.”
The situation remained fluid in the electronic components industry heading into the fall. Digi-Key’s president and chief operating officer, Dave Doherty, said the tariffs have not had as direct an impact on the company as he would have expected by now and that Digi-Key will only pass along costs that touch it directly. He says he is more concerned about the growing list of end products affected by the tariffs and how that will play out among Digi-Key’s customer base.
Doherty said: The full impact [of the tariffs] is yet to come, but it’s clearly building. If there’s a warning sign on the horizon, it is the tariffs on end products. Could [the tariffs] dampen the demand for our customers’ products, then dampen the need for the electronic components required to produce their products? That’s something I’m keeping an eye on.”
As of early September, the United States had threatened to impose another round of tariffs on $200 billion worth of Chinese goods, with China threatening reciprocal moves.
Avnet’s global president, electronic components, Phil Gallagher, agrees that the tariff situation remains a moving target. Over the summer Phil said: “We’re deciphering a lot right now,” adding that, like others, Avnet will pass the cost of tariffs through to the customer. Phil added: “So far, the industry is navigating through it. We’ll get through it. We always do.”
Despite pricing concerns, buyers in the manufacturing community agree that business remains strong and is likely to continue on that path into 2019. Buyers surveyed for ISM’s monthly Report on Business, for instance, continued to cite an increase in new orders and production levels throughout the summer, and also noted low unemployment levels across the industry. Such strong demand is affecting the channel’s ability to keep supply lines flowing—another situation suppliers and distributors say they expect will continue into 2019.
Doherty said: “We’re still seeing [that] lead times are not coming back in at all. Our suppliers are saying it will be [the first or second quarter of 2019]. Our customers should be cautious that there’s still strong demand in the market overall.”