Tariff turmoil: IT procurement and the private sector
Private sector buyers of IT and services face higher costs from new tariffs levied by the US. Meanwhile, possible retaliation by other countries and trading blocs, especially China and the European Union (EU), make the outlook even more uncertain.
However, the private sector has opportunities to reduce or delay the impact of tariffs that IT buyers in the public sector lack.
Public sector CIO room for manoeuvre is limited by budget constraints, the need to deliver projects within fixed timescales driven by electoral cycles and the essential nature of their services.
Private sector organisations, meanwhile, can increase prices or even withdraw products and services from the market, if IT costs make them unprofitable. But they also have more flexibility around how they source technology, especially in the cloud.
So far, the direct impact of tariffs announced by the US government has been limited. In part, this is because some proposed tariffs have been paused. This includes the 10% basic tariff on almost all imports into the US. The largest tariffs, such as the 145% to be imposed on China, have also been put on hold.
And so far, business technology has not been targeted for specific tariffs. Some consumer electronics, such as iPhones, have been granted an exemption. Nonetheless, the IT industry expects prices to rise.
Research by consultancy AlixPartners found that computer and server imports into the US could have a tariff impact of 10%, or US$14bn. Semiconductors face a $3bn, or 2%, rise. This, the firm says, comes on top of 9% inflation in hardware prices over the past four years. Combined, this puts manufacturer margins under pressure, and is likely to force them to charge more.
Avoiding higher costs
Already, proposed tariffs have prompted suppliers and end user organisations to bring forward IT hardware purchases to avoid these higher costs.
Although not specific to technology, the UK saw GDP grow by 0.7% in the first quarter, ahead of economists’ expectations.
One reason is believed to be businesses placing orders before the new US tariffs come into effect. IT buyers, for example, have brought forward PC purchases, especially in the US. Sales of desktops, notebooks and workstations grew by just under 10%, according to Canalys.
Bringing purchases forward is, however, only a short-term fix, and although it might be practical for laptops, it’s less likely to be effective for longer lead time equipment, such as networking, servers and storage.
Hardware worries
If the proposed US tariffs do come into effect, firms will face costs in three main areas: enterprise hardware, cloud infrastructure and software as a service (SaaS).
First, direct hardware purchase costs look certain to rise, unless trade negotiations succeed in creating new agreements. In turn, those hardware costs could force cloud computing prices up, too, as cloud platforms face higher equipment prices. Further down the line, SaaS companies could also be forced to raise their subscription charges.
For now, analysts believe this is less likely than price rises for hardware or infrastructure-as-a-service offerings, not least because a large number of SaaS providers run on public cloud infrastructure.
“If the SaaS vendor chooses to build their own infrastructure, then their problems are going to be similar to those of a typical enterprise that has to procure their hardware and absorb the costs,” says Ashish Nadkarni, group vice-president and general manager for worldwide infrastructure research at industry analyst IDC. “At that point, their operating margins are going to be subject to whatever supply chain fluctuations they’re going to have.”
However, hardware, or even cloud fees, only represent part of a SaaS supplier’s costs. And, Nadkarni says, competition is likely to keep subscription charges under control, at least for now.
The picture is more complicated when it comes to complete hardware systems and components, such as random access or flash memory, and hardware-intensive cloud operations such as artificial intelligence (AI).
Many leading PC manufacturers have already moved production, or at least final assembly to either the US or outside China. HP, for example, expects 90% of its products sold in the US to be made outside China by the end of 2025.
At the same time, however, HPE, which makes enterprise and datacentre hardware, expects to make “pricing adjustments”, according to CEO Antonio Neri, even as the firm uses its global supply chain to offset some of the costs.
AlixPartners, for its part, expects suppliers to mitigate some tariff costs through negotiations with suppliers, and “rapid duty engineering”, including moving more of their supply chains to free trade agreement countries and more final assembly in the US. Even so, the firm expects between 20-40% of tariff costs to be passed on to customers.
These figures, and most estimates of tariff impacts, are focused on the US. The picture in Europe is less clear.
Some increased final assembly of IT equipment in the region is likely, but suppliers could also adjust their supply chains so components or finished goods come directly to Europe without going via the US. This would avoid the worst of the tariffs, even at the expense of higher transport or manufacturing costs.
Cloud hopes
In the short term, however, IT buyers are increasingly looking to the cloud to avoid higher hardware costs and long lead times.
Even if cloud pricing does increase once tariffs come into play, CIOs have a number of ways to reduce bills.
Buyers can take advantage of the cloud’s dynamic pricing, and more closely match consumption with demand by spinning down excess capacity. Firms can move less-frequently used data to cheaper storage tiers, and improve their “finops” to make sure they buy the right cloud services at the right price. Signing longer-term deals to lock in current pricing is also an option.
And, in the private sector, at least, unless firms are constrained by data residency rules, they can switch cloud services to non-US instances. These should fall outside the proposed US tariff regime.
“One advantage of cloud is that buyers who have the technical and regulatory freedom to do so can move their data to another region where the tariff burden may be lower,” says Michael Bayer, chief financial officer at cloud data company Wasabi.
“My advice is to work with a cloud provider who has a global footprint as they have the capabilities to manage data storage costs efficiently.”
Source link
