Gadgetory

Honestly, if I knew everything that was involved in making hardware, I wouldn't have started the company. When you start looking at the lists, it's daunting. Did you ever really think about tariffs up until recently? Was this a thing that you tracked closely? No. Not at all. It's been a bit of a wake-up call. Even us, like we were watching it in the news, we weren't really thinking about it until we got the bill, and were just, like, “All right, we have to up our costs because, you know, we can't just eat that stuff.” The US basically wanted to renegotiate the current trading relationship with China, and the tariffs were the mechanism the Trump administration chose to sort of, in effect, force China to the negotiating table. Friday, President Trump slapped a 25 percent tariff on approximately $200 billion worth of Chinese imports. We'll take in well over $100 billion a year. We never took in 10 cents from China, not 10 cents. President says China pays the tariff, but it's US businesses and US consumers who pay, correct? Yeah. I don't disagree with that. Again, both sides, both sides, will suffer on this. Gadget makers are subject to political policy just like everybody else. Over the past year, the United States and China have been in a trade war that involves both countries putting tariffs on various goods. The consequence has been that independent gadget makers who already might have small profit margins are having to rethink how they do business. Unlike some other aspects of their jobs, tariffs are totally outside their control, yet have major implications. Companies are reacting to the tariffs, and consumers might soon see the effects. (bouncy electronic music) So I’m Zolty. We are in Breakfast, which has been around about 10 years, and we are a group of multidiscipline designers, artists, and engineers who make kind of the most high-tech, crazy art installations that are happening in the world right now. We try to actually make one-offs. I'd say that is our specialty. It's just not the most efficient, and it is the most costly. Breakfast creates large-scale installations that can end up in museums, building lobbies, or anywhere that wants to show off inventive art. Their most recent project is Brixels. These are Brixels. Brixels are something we came out with in October, essentially as one of our new mediums. So motor, PCB, all of that just plugs into another PCB back here, and then there's a timing belt that spins this. This is how the new version works. So with importing stuff, what do you get? How does it come in? I mean, you're looking at all of this. This is actually a good setup right over here. How many of these pieces are getting hit with tariffs? I'd have to go check the slips, but at the end of the day, almost everything I'm looking at is steel, aluminum, and PCB, and all of those things get tariffed. Right now, the US puts tariffs on hundreds of billions of dollars worth of Chinese imports. This means that if a company imports a tariffed good into the US from China, they're going to see that tariff cost reflected kind of like a sales tax. Every product that's made is given a very specific tariff code, and these codes form a classification system. Raw materials and parts like steel, aluminum, and computer chips have their own codes that have tariffs placed on them when imported from China. These codes are selected somewhat randomly and are subject to change. Right now, it also means that a code for a fully assembled good that's imported might not be tariffed, even if that complete product contains parts that would be tariffed on their own. This means the cost of production for the companies that use these parts goes up, and they need to figure out a way to make up that extra cost, especially if the situation goes on longer than it already has. Zolty's team has considered getting their supplies from the US, but the raw materials come from China regardless. So whether it's Zolty or the US supplier, someone's always going to end up paying that tariff. I mean, this is a good example of… this was made in Brooklyn, this was made in China, and they're pretty much identical, but one costs half the amount, and that's the one that comes from China. And on top of it, they have to pay the tariff to get this in here. The Brooklyn people. I mean we have to pay it the same way, but this is kind of the situation where if the whole goal is to be creating more jobs in the country, you know, if you put the tariff on this one, it's half the price. So even paying that tariff, if we're trying to keep our costs down it doesn't convince us to go over here. I'll continue to say if we can pay the person here to do it and we can make the business work, then we would do it. But, you know, at the scale and the amounts that we have to pay for this stuff, we wouldn't be able to sell these things. Technology's running our lives. You know, it's obviously our phones and tablets, and it's governing everything around us, our data, our houses, our communication. But most of us don't understand how technology works, and we can't be creative with it. We can't be creative with electronics, and so littleBits was kind of an answer to that. Ayah founded littleBits in 2011. The company makes magnetic modular pieces that help kids learn about engineering. littleBits are a product that could be subject to tariffs so their VP of operations, Diana Pincus, monitors the situation closely. Luckily for us, in the first round, no impact at all, and only in the second and third did we start having a few parts that we were bringing in really get impacted, and so we don't really know how to predict what's coming. But we have a few components that are impacted that we pay the tariff on. What are those components? One, in particular, is a, we call it a tackle box. It's basically a plastic container that we send with some of our larger collections for people to put their product in. So it's a piece of plastic. In the third round, that was impacted. That's so random, and it's funny because it's maybe like the least technological thing that you guys actually ship. Yes, exactly. In the history of littleBits, we had been buying our bits from China and then doing final assembly in the US. We actually moved that full assembly to China right toward the beginning of my tenure here. So before any of these tariffs, but even with this new scenario, we would still make that same decision because it's still cheaper for us in the long run. Tariffs are complicated, as are the political circumstances that caused them most recently. Brad Setzer is a senior fellow for international economics at the Council on Foreign Relations who has studied and monitored the situation. From what I understand, if you build a phone, let's say, completely in China, it isn't taxed? It doesn't have a tariff. Whereas if I import the chips or the PCBs or whatever into the US and then build my phone here, I'm going to be paying tariffs on those specific parts. That is now basically true. That's a consequence of the decisions that the Trump administration made. In broad terms, the US imports a little over $500 billion from China. In broad terms, we in the US have put, or the Trump administration has put, tariffs now on $250 billion of that trade. The half that was left out without any tariffs, in general, is final consumer goods. So fully, clothes, assembled computers, cellphones. The things which receive tariffs either at the 25 percent rate or the 10 percent rate tend to be intermediate goods, parts. It's a little bit arbitrary, though, and I think that's what you just highlighted. We, in many cases, have tariffs on imported electronic components, but not on the final good. Does that cost eventually get passed down to the customer, or how do companies typically make up for that added cost to them? So a company has a choice. One choice is to raise their prices. They try to pass on the increase in cost entirely to the consumer. They run the risk of seeing their sales fall and the consumer ends up paying a higher price. In some cases, companies may decide, Hey, it isn't in our interest, even though our costs have gone up, to fully pass that on to the consumer. We have competitors. Those competitors aren't producing in China. They're not going to raise their price. Let's absorb some of the increase in our cost through reducing our profit margin. And then there will be companies which say, Hey, I want a better deal from my supplier. I want my supplier to cut their price. Otherwise, I will find another supplier. In which case the tariff is, to some degree, borne by the producer in, say, China. I think the empirical evidence on the last round of tariffs is that the bulk of the cost has been borne by consumers. At this point, the Trump administration is going to pursue tariffs if it thinks it'll advance its goals, and us consumers, we're going to have to deal with the consequences. The gadget makers, however, will keep on doing what they always do: churning out new products and adapting to whatever challenges come their way. For anyone maybe getting into this space or making things, making products, whatever it might be, I think you could look at the tariff situation like any other real business problem. I wouldn't say that it's so different than other things we've experienced in that contingencies is crucial. So like if you're going to go and build a company on something, you can't expect that, you know, we live in this perfect world where you're always going to get the same stuff and it's always going to be the same price and it's always going to show up when it's supposed to show up. So this is kind of just one of the bumps in the road of business, which is you need to make sure you're compensating for the stuff you don't know or don't see coming down the pipe. My advice is: start a company with a mission. It's the most powerful fuel you could have for the kind of business that we're in. I think, in general, but also particularly for the kind of business that we're in because when things are tough and you're having a hard time because of tariffs or because of supply chain issues or because of a copycat or because of all sorts of things, the mission keeps you going. And I think that there's no better thing to advise an entrepreneur to do but to really make sure that you're feeling the mission. Thanks so much for watching In the Making. If you haven't seen all the episodes yet, make sure you go back and watch those. I'm going to be gone for a little while because I'm going to be working on my podcast Why'd You Push that Button? So make sure you check it out. It premieres for our fourth season tomorrow anywhere you normally get your podcasts. All right, I'll see you later. Bye!