I am fortunate to have a unique perspective on tariffs from three angles: as a manufacturer through my role at Origin Acoustics; from a business strategy standpoint via my partnership with Matt Bernath at VITAL where we work with integrators every day; and from a policy and advocacy perspective by serving on the CEDIA government affairs committee. And I can tell you it’s painful from every direction.
No matter which way you look at it, the only guarantee is that no one knows what is going to happen next, and uncertainty is what we have to prepare for.
Understanding the Current Tariff Scenario
Currently, we see tariffs as high as 145% on most goods from China, with an additional 10% tariff broadly applied elsewhere, although much of this is currently on hold except for products originating from China. These tariffs are the responsibility of U.S. companies importing goods and are applied when products reach American ports, calculated based on the departure date from their ports of origin. With Liberation Day on April 2, we are just now seeing the first goods arrive in port to which the new tariff rate will apply, and vendors have to find the cash to cover them.
For example, consider a vendor generating $100 million in annual sales, with over 70% of their goods from China (very common). They typically need to have about $10-$15 million in inventory on hand. It is real cash needed to pay for the product in their warehouse. With the new tariffs on Chinese goods, the cash required to pay for inventory is going to pop, potentially requiring up to $40-$50 million in cash immediately — that is more than $30 million that they have to find somewhere. Most likely their pockets.
So, what are they going to do? That inventory will take months to sell, so even if they raise prices (which we are seeing now — 5%, 10%, 25%) they are still in a cash crunch. Marketing and promotion will dry up, layoffs may happen, and stockouts will become more frequent as they reduce inventory to conserve cash.
Chinese manufacturers typically operate on tight margins of about 5%, severely limiting their ability to absorb these cost increases. But there is good news: Chinese businesspeople are great and resourceful engineers. They are moving as quickly as possible to build supply chains outside of China. However, it will still take a year to get up and going in Malaysia, Vietnam, Mexico, or elsewhere. In the meantime, we will feel the tariff pinch.
Impact on Integrators
For integrators, the question becomes: What do I do about my bids? Most integrators want to honor pricing, but if parts and equipment pricing go up 25%, profits evaporate.
To navigate these challenges effectively, integrators need to engage their customers proactively. Clearly explain the impact of tariffs to clients and give them the option of buying their goods now at current prices. Let them know if they don’t, you can’t guarantee the prices in the bid.
Related: Thriving Through Uncertainty
Customers will fight this. Be ready for it, but be kind and understanding. They are probably suffering as a result of tariffs, too. Stay firm, and do not keep a project that loses money due to tariffs.
Also, right away, add language to your contract that explicitly allows you to change prices due to tariffs or contingencies out of your control. CEDIA drafted a great clause that you can add today (check with your attorney to be sure). Call your CEDIA rep and get it, or email me and I will send it to you.
When you think of this situation, there’s a fear. You’re dealing with someone who’s typically a wealthy person who has a high level of perceived power, who wants to get a good deal, and who wants to be treated well. And you want to treat them well, and you should, but you also can’t lose money. Let this be an opportunity for you to reframe and change that conversation to make sure you can work together to get this job done to the best of your ability.
Survive and Grow
As an integrator, the key thing through all this is going to be managing the transition and staying resilient. There’s going to be an inflection point throughout this industry where the people who survive will grow. Those companies are the ones that build the most resiliency in their business. Resiliency is having a foundation that allows you to survive the turmoil and the unknown.
You need to make sure that you have cash coverage — meaning, don’t use deposits to pay old bills — to cover what you’re doing day to day. You have to make sure that your team understands that their labor efficiency is critical to survival. Get rid of downtime. If, for example, a truck has to be gassed up, there should be only one tech in that truck. If there are two techs in that truck, you just doubled the time that you wasted gassing up. Think about switching to four 10-hour days a week — suddenly, you’ve got rid of two drive times going to a job, and you just increased labor efficiency by at least an hour a week. Little things like that make a huge difference.
Related: Leveraging FUD For the Win
Make sure that you have a line of credit from the bank that you can access, but that you don’t abuse. It should be that rainy day fund to get you through this because nobody knows what’s going to happen. We’re going to be in a situation for at least the next six months where uncertainty is going to reign. Tariffs could go up, they can go down, or they can reverse. We’re going to see stock markets go up and down.
In the meantime, your competitors may end up going away. There are going to be bankruptcies over the next six months to a year, both integrators and vendors. We’re already seeing some people hang up the shingle and go away. So, when you survive this period of uncertainty, you establish your resiliency, you get a higher level of cash management, and you achieve better labor-utilization management.
Final Thoughts
When you come out of this, you’re going to have one of those periods where you’re growing, making more money than you have in the past, and you’re going to be in a great spot. All you have to do is survive the darkness to get there. Take this opportunity to set yourself up for years of success.
