Break-ups are hard, especially when it’s two global economic superpowers who don’t want to play ball anymore. Anna Hayes looks at the impact of the China/US Trade War on the Australian market.

When it comes to international markets for technology, the two biggest players are China and the United States with the former, essentially, acting as the assembly workshop of the world.

Australian distributors, for the most part, import the majority of their products from one or both of these countries and enjoy free trade agreements with China and the US. However, these agreements are null and void should any part of the manufacturing or warehousing process take place in one or the other country.

As a small player in the industry, the restrictions and tariffs are giving many distributors cause for concern in what is already a slowing national economy.

Andrew Walter, Professor of International Relations at University of Melbourne says that the first effect of the trade war is deep economic uncertainty, the knock-on of which is a slowdown in Chinese growth and that’s not good for Australia which exports a significant amount of commodities to China.

“Chinese growth is slowing and that’s creating domestic political problems for the government because they don’t want unemployment and people on the streets as we’re seeing in Hong Kong.”

Global downturn (which typically means outright recession in the US and Europe) in 2020 has been mooted by institutions such as the International Monetary Fund as recently as a month ago – factors such as the trade war, coupled with ongoing Brexit uncertainty, have increased the risk of recession.

While Australia hasn’t had an outright recession since the late 1980s, the economy is currently as slow as it’s been for nearly 30 years.

“Typically in global recession, China has kept growing at around five to six percent so the real risk there would be that it would drop below five percent. I think an outright recession in China is deeply unlikely; that’s something the Chinese Communist Party will avoid at all costs and will undertake a massive stimulus to avoid that.”

China is Australia’s major export partner, linking it to the rest of Asia where, generally speaking, there has also been a slowdown in growth and trade, all of which has an impact on the Australian before factoring in the US/China trade war.

Andrew sees two potential scenarios – a further slowdown in the Chinese economy which would amplify reductions in commodity exports; or a truce in the trade war due to the fact that US President Donald Trump will be contesting an election in 2020.

“I think that second scenario is quite unlikely because Trump is too unpredictable. But nevertheless, if we saw that it’s not obvious that Australia would again be a significant beneficiary because we would likely see the Chinese in such a deal agreeing to import more from the United States. So that short-term beneficial effect for Australia is likely to evaporate under either scenario which, in turn, will have knock-on consequences for growth domestically in Australia which is already weak.”

Synergy Audio managing director Phil Sawyer points out that supply chains are more global than ever before, pointing out that any changes in trade relationships can have a significant effect on manufacturers.

In terms of manufacturers in Synergy’s portfolio, he says the impact varies considerably. For example, Audio Research is hand-made in Minnesota with local components or, interestingly, in one instance, components from Russia.

“So their exposure to the China situation is more limited than perhaps other brands like Origin Acoustics or TruAudio that manufactures a portion of its range in the Far East.”

The question, he says, is the extent of Chinese involvement in the manufacture of a product, pointing out that component suppliers are impacted as well.

“It’s basically forcing all the companies to look at their supply chain and reconsider whether an over-dependence on Chinese manufacture is the right thing. For a lot of our companies with Chinese originated products, if we can avoid the US market for warehousing and storage then we can limit the impact of the US tariff situation on the price of the product.”

That said, this still results in additional costs as running a warehouse in the Far East is an additional layer of cost with associated inventory costs.

It’s an unwanted complication for business but, so far, it hasn’t resulted in stock-outs, says Phil.

“It has caused timing questions to come into play so we might have to hold a little more inventory to avoid the possibility of stock-outs.”

Synergy has an added area of interest in that it stocks products from four or five different British companies and the situation with Brexit is equally, if not more, unpredictable than the China/US trade war.

“It’s crystal ball gazing as to what’s going to happen there; it’s changing by the day. A couple of our suppliers have warned us that due to potential for delays at the ports, it might be wise to increase our stock holding while Britain comes to terms a vastly different environment.”

One of the big questions for distributors in Australia is that of pricing because, inevitably, increased costs borne by suppliers, manufacturers, distributors etc, will be passed on to the customer in order for the business to sustain itself.

“That’s as much a question about currency as it is about direct export pricing. It’s a combined impact – the Australian dollar will bounce around I think, depending on how our export markets perform, so that could have a direct impact on costs. Anything coming from the US is going to be more expensive if it contains Chinese components – just look at the cost of an Apple iPhone.”

Meanwhile, Audio Active general manager of sales and marketing Bruce Thierbach says that the tariffs have not had any major effect on the electronics side of the business but pointed out that, last year, orders for Row One theatre chairs was held up for three months as US orders grew considerably in order to beat the tariffs before they came in.

He adds that that in the coming months and years, depending on how long the issue goes on, you will probably see companies moving manufacturing out of China, as well as trying to source components elsewhere.

But the biggest effect Bruce sees is the impact that the whole uncertainty is having on the dollar and, as a result, Australian company’s spending power.

Last year, the dollar was tracking at around 77/78c but at the time of writing, that figure is around 67/68c.

“Everyone generally trades in US dollars or Euros depending on where the products are coming from. But the dollar is costing us more now and that decline puts pressure on what distributors will import.”

He adds that, as distributors, they are seeing prices increases and are trying to minimise the flow through to end users while also being mindful that the costs of running a business are not getting any cheaper.

For Steve Burton, general manager at Convoy, the biggest disruption so far has been changes to shipping conditions from China.

In mid-September 2019, new regulations passed in China which have placed restrictions on loose container (LCL) shipping on products that were not made in China but stored there.

“So anybody who only buys little amounts is penalised because you either have to put it in a full container, or bring it to Hong Kong or Guangzhou which are the only two ports you can send LCL from with non-China manufactured stuff.”

While consolidation – filling a container with products from a couple of different suppliers – is possible, it can be difficult to coordinate and result in unwanted delays.

“One of my suppliers – 90% of its products are manufactured in China, 10% aren’t but they hold it all in China which means that I have to ship by container now – it’s additional costs and pain but what can you do?”

The US retail pricing of a lot of products has already gone up and Steve says that that will eventually come around to the Australian market as well.

“We already have a few manufacturers saying ‘Look, we’re warning you now that there will be an increase but we just don’t know when’.”

The fear, of course, is that any price increases will hit consumer confidence, turning them to cheaper and inferior products.

“The minute the prices go up it then becomes uncompetitive and consumers look at a product and think it’s the same product but $300 or $400 more expensive, depending on the product. Everything else stays the same in Australia pricing wise but imports will go up – wages don’t go up by comparison.”