Tariffs Are Imposed, How To Lay Out The Production Capacity of Household Appliances?

Since the second half of the year, the United States has frequently taken anti-dumping and anti-subsidy investigation actions against China's export categories, and the probability of global trade friction is increasing under the background of global macroeconomic weakness and local protectionism. In addition to United States, there may also be additional tariffs in other regions.

Key question: How do tariffs affect the global production capacity layout of home appliance companies?

In a nutshell: tariffs may continue to be levied, and the trend of capacity relocation has been established.

The higher the dependence on the 

household appliance category, the later the levy

The less dependent the United States is on China, the more likely it is that related categories will be taxed. The essence of the United States tariffs is to reduce the dependence on production capacity outside the United States, and if there is a capacity substitute in other regions, the United States can impose higher tariffs on China without having a greater impact on the domestic market of the United States. If other regional production capacity cannot be replaced, United States may impose lower tax rates or exemptions for this category out of protection of the United States trade market. In the sub-categories of household appliances, there are also differences in the rhythm and proportion of taxes in different categories:

• 1. Dryers, filters and other categories with a low proportion of United States imports to China were first levied in the first batch, and there is no exemption after the direct tax of 25%;

• 2. The second batch of air conditioners, refrigerators, TVs, vacuum cleaners and other commodities were levied, and the proportion of United States imports was significantly higher, among which vacuum cleaners and air fryers were also exempted in the future;

• 3. The third batch of products subject to the levy, such as coffee machines and microwave ovens, are obviously more dependent on United States. In other words, the more dependent the United States is on China, the later it will be taxed, and the more likely it is to be exempted.

The transfer of production capacity

 will further promote the implementation of tariffs

Tariffs do have an impact on the global supply layout of some categories, and the epidemic stage has been repeated, but the final direction of production capacity layout remains unchanged, not only foreign manufacturers, but also Chinese manufacturers are adapting and responding to this trend. Even if China still has a strong production capacity advantage in some categories, once the production capacity begins to be transferred out, and the overseas production capacity gradually adapts and the supply is stable, the probability of this part of the reversal will be reduced, which will further promote the implementation of tariffs. In addition, we have also noticed that products that have not developed domestic demand are moving overseas very quickly.

• 1. Major appliances (white & black) have begun to go overseas before the start of the trade war in 2018, and the essence of production capacity going overseas is that independent brands go to sea. The trade war is not the fuse for major appliances to go overseas, but it has become a catalyst to accelerate the export of major appliances in 2018~2023.

• 2. Most of the production capacity of small household appliances (cleaning appliances & kitchen appliances) before 2018 was mainly concentrated in China, and United States also had a high degree of dependence on Chinese supply, which is why small household appliances were exempted several times during the trade war. In the past 18~23 years, there have been tariff exemptions that have led to the return of some production capacity to China, but more of them are forced to choose because of the weak stability of the global supply chain under the epidemic.

Tariffs on household 

appliances may continue to be imposed

The trend of capacity transfer has been established, and there is the possibility of continuing to increase tariffs in the future: Previously, due to China's high dependence, some categories of household appliances were not used as the main tariff objects of the United States, but after the relocation of production capacity in 2018~2024, there is currently enough alternative production capacity for overseas categories, so it is not ruled out that follow-up tariffs will continue to be imposed.

The trade war may be the starting gun for China's home appliance companies to be forced to accelerate their global layout. Since the start of the trade war in 2018, the tariffs have been raised from 10% to 25%. Although from the perspective of industrial clusters, China's household air conditioning production capacity accounts for more than 8% of the global production capacity, under the scale effect, overseas industrial competitors have extremely high difficulty in substituting production capacity. However, the leading domestic white appliance companies are still actively accelerating the integration of overseas production, research and marketing, on the one hand, to avoid tariff risks, and on the other hand, to lay the foundation for their own brands to go overseas.

There are three major trends in the 

overseas layout of household appliances

At present, through interviews and research on home appliance companies, the general trend of overseas layout is summarized as follows:

• 1. The main layout base for overseas capacity transfer is still in Southeast Asia: Considering the business environment, industrial chain support and labor costs, the current overseas layout plan of home appliance foundries is still mainly in Southeast Asia, and Viet Nam has the largest proportion. The overseas production capacity of independent brands is more diversified.

• 2. Increase the warehousing layout in United States and surrounding areas: In order to avoid terminal shortages caused by geopolitical emergencies and affect sales, some companies have adopted the form of self-built or rented warehouses in United States or Mexico to increase local inventory capacity and strive for more time to respond to emergencies.

• 3. In extreme cases, there is also the possibility of United States local factories: if the subsequent requirements for product origin and upstream parts traceability are stricter, some companies have the possibility of United States to build factories. However, considering the uncertainty of manufacturing costs and business environment, most companies still take a wait-and-see attitude towards United States and construction of factories, and make further judgments when extreme conditions occur.