IT strategy implications of US tariffs
whyframeshot – stock.adobe.com
When is the best time to buy IT equipment? With tariffs in place that are set to increase, tech CEOs have signalled price rises ahead
European Union (EU) president Ursula von der Leyen has said the EU could impose retaliatory tariffs on US digital products, according to a report in the Financial Times – a move that would set a precedent that directly affects the ability of IT leaders to execute their IT, digital and artificial intelligence (AI) strategies.
While she used a levy on digital advertising as an example of the pressure the European Commission (EC) could put on the US, there are numerous digital services that rely heavily on products whose manufacturing is already being affected by changes the US government has made.
As Computer Weekly has previously reported, in spite of a 90-day reprieve from the White House, existing tariffs are now affecting every country where manufacturers export to the US.
Tech industry executives are having to adapt their sourcing strategies on the fly following China’s tit-for-tat tariff hikes and the fact that they source their products across a diverse global supply chain that includes significant manufacturing partnerships in China, Taiwan, South Korea and Southeast Asia.
On-premise and public cloud datacentres face cost rises
The tariffs are set to have a knock-on effect on the price of datacentre equipment and will affect IT buyers, whether they are purchasing wholly for on-premise deployments or are acquiring greater public cloud capacity.
Discussing the implications, Forrester principal analyst Lee Sustar said: “The trade wars will impact the public cloud platform in multiple ways. In the near term, cloud providers face price shocks in their supply lines. As bulk buyers of chips, cables and other materials, they have some near-term flexibility.
“But their ambitious plans – like Microsoft’s proposed $80bn buildout of AI-oriented datacentres – will become significantly more expensive to execute due to price increases for building materials. At the same time, the demand for cloud services, especially pricey AI offerings, will drop at least in the near term due to uncertainty over the wider economy. Cloud providers will face pressure to pull back on big investments and pass costs to customers with price increases.”
Datacentre equipment manufacturers appear to have adopted a wait-and-see approach as they assess the impact of the current and impending tariffs on manufacturing costs. According to the transcript of its latest quarterly earnings call posted on Seeking Alpha, Dell chief operating officer Jeff Clarke said the company had built a globally diverse, industry-leading supply chain that he claimed is agile and resilient to minimise the impacts of trade regulations and tariffs.
In the transcript of the company’s latest quarterly filing posted in March, HPE’s chief financial officer Marie Myers said: “Recent tariff announcements have created uncertainty for our industry, primarily affecting our server business. We are working on plans to mitigate these impacts through supply chain measures and pricing actions. Through these efforts, we expect to mitigate to a significant degree the impact on the second half of the year and to a lesser extent the impact on Q2 as it takes time to implement mitigations.”
HPE CEO Antonio Neri added that HPE intended to leverage its global supply chain to mitigate aspects of the expected impact, warning to expect “pricing adjustments”.
Lenovo claims that when faced with unexpected challenges it has the ability to move customer orders between sites. The company’s supply chain resiliency is based on owning the supply chain end to end. It has also put in place a geodiversity programme to enable sourcing of commodities from locations other than China and Taiwan.
There is no mention of tariffs in the earnings calls of either Alphabet – the owner of Google Cloud – Amazon or Microsoft. However, all public cloud providers are likely to experience greater costs as a result of the White House’s actions, according to Forrester vice-president and research director Mark Moccia.
He points out that the cost of PCs, IT infrastructure, cloud and chips will be affected: “The new US tariffs have set the stage for increasing IT costs. The impacts will evolve over the next two to three quarters as vendors consider, develop and roll out new pricing strategies.”
Moccia warned that IT infrastructure will likely see significant price increases as major manufacturing nations face high tariff rates, especially in the US. “The rising costs could balloon budgets and force CIOs to delay or prioritise the most important projects,” he added. Moccia recommended IT leaders proactively analyse costs, diversify sourcing, optimise inventory and prioritise the projects that do not sacrifice their AI strategy.
Looking at public cloud services, he said: “While not currently subject to tariffs, the cost of cloud, software as a service, and other services could go up as their underlying costs increase and exchange rates fluctuate. More concerning would be if other countries retaliate by directly targeting US services where there is a surplus to many countries.”
Buy now or pay more later
What is interesting about Moccia’s remarks is that IT leaders could use the 90-day reprieve to negotiate new contracts, both with hardware suppliers and public cloud providers, before more tariffs are enforced.
According to analyst Canalys, there has already been an uplift in PC shipments in the past quarter as IT buyers look to refresh PCs ahead of US tariffs. It may well be a good negotiating tactic for IT buyers to rush through orders for datacentre infrastructure now, rather than delay purchases until later in the year. Similarly, purchasing reserved instances on the public cloud now could buffer against potential price rises.
