US Tariffs Announced For China Video Surveillance

By: John Honovich, Published on Jul 13, 2018

Chinese video surveillance products avoided tariffs for the first two rounds. Now, in the third round, many video surveillance products will be impacted.

Inside this note, we examine:

  • The relationship between products and tariff codes
  • What tariff codes are hit and how this will hit video surveillance products
  • Ways that the tariff impact could be minimized
  • What potential impact the tariffs take

Executive *******

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Potential ****** ********

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Comments (55)

Does anyone have Jeffrey He's home address? I'd like to send him a sympathy card, some TUMS, and some anti-stress medication.

You can buy import and export data to see what codes the different manufacturers are using. As I understand you can buy China export data as well as USA import data

I bet you are right. We bought some last year and earlier this year (e.g., Dahua US Imports - Here Is Their #1 Customer By Far). I did not see it then and just re-checked but I could be missing it.

Btw, related, here is an export of Hikvision imports to the USA for 2 years until March 2018. We'll likely do some future report but that's been on the back burner. Anyone who cares to scan through, feel free to share comments.

I like trumps policies for the most part but his tariff strategy is dumb in my opinion. What is his ultimate goal that he hopes to see come out of this other than simply pissing off China. I can see why he would want to piss off China but why make the consumer suffer by paying higher prices? I doubt this would spark US manufacturing growth, and if it did, it would take many years.

I am hoping its just one of his temporary muscle flexing negotiating manuvers. I guess it could be much worse. Could be 25%. 

I can see why he would want to piss off China but why make the consumer suffer by paying higher prices?

That is the short term. The longer-term benefit is to shift manufacturing, if not to the US, to countries that are less unfair and hostile to the US.

Sean, I get it, you are on the Hikvision train to the very last stop, but I think quite a lot of larger companies (e.g., OEMs) are getting nervous and this will motivate an increasing number to shift their supply chains outside of China.

I dont think 10% will cause a major shift of manufacturing to the USA nor will it cause suppliers to buy other countries. Do you? I think it would atleast have to be 25%. Most other countries, ours most definetely included are still more than 10% than what you can get out of China. I buy more stuff out of China that is not Hikvision but this gives me absolutely 0 motivation to look elsewhere because:
a) its still gonna be cheaper to buy out of China
b) less manufacturing choices from other countries for SMB and consumer grade products. 

Hey I hope we get some more manufacturers in the USA. Especially ones that can make stuff made for the SMB market, but I dont see it happening anywhere close in the near future.

And yes I am a passenger on the Hikvision trade but moreso I am a believer in free trade. We are not sticking it to China on this one, we are sticking it to the USA consumer.

I am a believer in free trade

But you are happy to look the other way when China effectively blocks out American and European and Korean video surveillance manufacturers.

The point is: it's not free trade, China wants countries to let their products in 'free' while crippling foreign companies that want to sell inside of China.

But you are happy to look the other way when China effectively blocks out American and European and Korean video surveillance manufacturers.

Good point.

We will see how this goes. Again, I dont think it will affect buying behaivor from suppliers regardless of fear of going higher or being banned fears. I think trump should have went out of the gate at 25% like he did other goods. He didnt, because he knew that would have an adverse effect on the economy. Therefore I think its just a temporary negotiating tool, if so, i hope it works.

We need fair trade policies not one sided free trade that benefits everyone but the USA !

I dont think 10% will cause a major shift of manufacturing to the USA nor will it cause suppliers to buy other countries. Do you?

It's not just the 10%. 

It's the fear that it could go higher.

It's the fear that the products could be banned.

I don't know what Honeywell and UTC are thinking, but I would think with all that uncertainty, prudence dictates that this pushes them to look harder for alternate country suppliers.

You have to remember this tariff/duty rate is on transfer prices. Setting transfer prices is complex especially since tax strategy plays into it. 

Larry, thanks. Any insights into how Chinese manufacturers set transfer pricing?

On the one hand, the lower they set their transfer pricing, the lower the tariff will be. But can they reduce their transfer pricing without creating an issue with the IRS? And even if they could would it not risk increasing the potential for paying more US corporate taxes?

You certainly have a lot more experience here than I. I am curious about your thoughts. Thanks

Foreign companies can't set there transfer pricing to subsidiaries wherever they like. The guideline is normally that subsidiary pricing is in line with what a third party would receive. Transfer pricing is regulated mainly to ensure income taxes aren't avoided.

I disagree because their are many factors allowed by the IRS in setting transfer prices what a third party gets  is only one of the yard sticks. Manufacturing costs and overhead all plays into this plus management overhead etc. Then of course their has to be an audit which I have not seen.

i have seen transfer prices where the subsidiaries got 3 to 5 percent on parts. 

its even harder to justify when there are no third parties. The Asian companies are notorious on how to set transfer prices to suit their tax strategy. 

I have had many discussion with the big 7 acct firms over transfer pricing strategys. It's very complex. 

Larry, good feedback. Can you clarify this?

i have seen transfer prices where the subsidiaries got 3 to 5 percent on parts.

3 to 5 percent markup over what they paid? 3 to 5 percent of MSRP? Sorry, trying to understand.

3 to 5 % margin for the US subsidiary based in ASP.

on ASP!

 

Larry, I'm not sure we disagree.  I'm not an expert on the topic but I have been involved in several international subsidiary operations and what I stated was a guideline conveyed to me by international tax accountants I have worked with. Of course it is much more complex than this and a manufacturer can come up with justifications for using other criteria for their own transfer pricing policies. I'm sure there are several thousand pages of tax code addressing the issue.  My point was really meant to convey that transfer pricing is not  supposed to be arbitrary and a manufacturer would have to come up with a rational justification for their policy should they be audited.

You have to look at the whole picture of your worldwide business with the main goal of minimizing taxes paid globally. So you choose where to make the money with the law. The old adage "of what you keep versus what you make"

For many years there was a tax holiday if the goods were made in China, so you paid no local tax hence you tried to shift the profit to China in those days, versus paying 35% tax or even higher in some European countries. The problem becomes if you make too much profit in China, you can't bring( repatriate)  the money back to the US without paying high taxes on those transactions. But we found a strategy to deal with that as well. Its take a lot of study worldwide and very good accounting/tax law advice to keep taxes paid as low as possible. One year at one company I had 15 million in profit worldwide and paid a worldwide tax rate of 4%.

So there is no black and white answer and you really have to know so many parameters inside the company to begin to understand why they are doing what they are. Only insiders know this you wont read it in annual report, you only see the results.

 

Sean we are in the same position here in Canada and I agree tariffs do no good. We have a supply Chain management system that requires us to buy dairy and other farm products favoring Canadian suppliers over others- cheese is an example. All this does is restrict a whole variety of world cheeses from coming in because simply put they are too damn expensive. As a consumer I will pay more for a local cheese if its better or has some other value but I want more choices at the best prices without government putting tariffs on them. I then can choose my cheese based on value not price. Protecting an un-competitive local producer is crazy.  If China makes a lousy contaminated cheese i ain't gonna buy it no matter how inexpensive it is its about what health issues the future brings. 

I believe his focus is in eliminating tariffs in both directions and eliminating trade restrictions designed to protect markets from external suppliers.  

China has rules of engagement about foreign entities that make entering some markets near impossible.

To manage the soy tariffs they are awarding farmers additional subsidies to grow soy.  The US may increase its subsidies to its farmers to reduce this tariff impact as well.  Both sides lose at the government level, not the farmers.

One thing for sure, the world is focused on tariffs now and restrictive trade techniques.  Every government will have to evaluate its positions.  

Who would have thought 25 years ago the US would lead in oil exports?

To import a camera into the EU the added fee is 4,9%. For any recording device it’s 14,9%.

So not paying anything must have been nice but it’s a game we’ve never played.

Who knows in a few years you might even see a GDPR over there!

Is that to import from China or to import from any country?

Any Country (outside the EU). Right now there are some exceptions as Korea has negotiated it's own special deal in places.

History has a way of repeating itself.

40 years ago it was Japanese junk that was flooding our markets.

Over time Japanese products became high quality. (Fujitsu, Nakamichi, Sony).

Next was Korea. Remember Lucky Goldstar junk VCRs, CD players, and TVs?

back then a Hyundai was a piece of junk.

Lucky Goldstar is now LG and Hyundai has become a top tier manufacturer now built in the US.

Who knows how this will shake out. Just food for thought.

Did any of those Guys previously have the backing of the Government to the level we are seeing now? Ironically these tariffs may well shake something new out.

I hear Hikvision wants to move their factories to India or Vietnam. I guess if Made in India/Vietnam even though parent company is China, can you dodge this tariff?

 

 

Hi, Charles here. Good question. The short answer is: yes.

Tariffs are applied according to country of origin, not company of origin - country of origin forms the core of the US' Harmonized System of tariffs. (See CBP document here.)

How do you determine "country of origin" though? The WTO agreement on rules of origin, which the US is party to, says: "for the country to be determined as the origin of a particular good to be either (1) the country where the good has been wholly obtained or, (2) when more than one country is concerned in the production of the good, the country where the last substantial transformation has been carried out".

Therefore, if Hikvision manufactures products in India that are then shipped to the US, those products are considered Indian imports, not Chinese ones. So they would not be affected by tariffs.

However, if it's overwhelmingly clear that Hikvision is only making very cosmetic changes to cameras 'manufactured' in India, and there is no "substantial transformation" taking place in India at all, the US could determine the products to effectively be made in China and still slap tariffs on them, even if they are shipped out of India. (See page 9 of CBP document.)

It's worth noting that non-Chinese companies manufacturing in China are still affected by the tariffs. For example, GM makes some cars in China that it exports to the US, and recently confirmed to USA Today that those cars are subject to the tariffs.

You are correct, there has to be a certain percentage of local content "substantial transformation"to qualify for made in that countries label. I did this once with products, if my memory is correct it was 35% US content for made in USA label versus the PCB made in China. Get this: since the software was made in the US the cost of making the software( and loading it in the CPU) counted towards the US content calculations.

In my view, its not worth shipping sub assemblies to another country and add content in order to sell in that country or re export.

Lots of different ways to skin the cat, always

I can see Hikvision moving there factories to the US to support the North American market. I mean most of the products are built by robots. I know it has been discussed and they do have the resources.

CCTV/Video Suriveillance is relatively small market compared to Consumer Electronics. Because building electronics involves meticulous tasks of small parts, I know for a fact that even today, all of the final assemblies are performed by human. Obviously, the main PCB & SMPS, Housing are automated.

I don't see how Hik can become competitive by building assembly factory here in the US, with high minimum wage, labor laws and taxes compared to China/India/Vietnam?

Any thoughts?

First- they are willing to take a small loss

Second- The workers would be pretty minimal since robots do all of the manufacturing and assembly. All they need to is a few engineers to do quality control. They already have a software engineering location in Canada. 

 

 

 

Yes, but does the added cost make them less appealing?  It’s hard to be the ADI/trunkslammer special when your prices increase to a point where you are evaluated on something besides “cheap”.

Your dead wrong [2] people watch as robotic machines assemble each camera, package it, and watch another robot carry it out for shipping.

Why do they have people watching the robots like that? How often is human intervention necessary?

They are not necessarily watching a 'robot' the machinery is a complex line of automated robotic machinery with many of the components fed into it as the camera is being assembled and tested. It's a very fast operation. Every few seconds another camera is completed, packaged and put in shipping box. Robots are delivering different parts to the line as the assembly progresses, and robots take away filled pallets of cameras. I can completely understand how they produce 250,000 a day. It would not be a surprise if there is 100's or more of these lines operating. I would assume the 'operators' are there in case of issues with part delivery or whatever minor incident could take place but they have no action in how the cameras are actually produced with the exception of stopping and starting the machinery.

For starters it's you're (you are) dead wrong.

Second, the work force in these factories is humongous. Yes many processes are automated but it's far from a factory that pops out cameras without anyone working at it.

 

Try to take a picture next time you are invited to see it before you make claims from guess work. 

I would but sadly no pictures allowed. And yes I've seen the inside numerous times, this is no claim from guess work. If I was guessing I would have used undisclosed :).

It's weird that 2 Hikvision proponents are arguing against each other. You two are on the same team :)

Well not exactly true, in my old china factory I use to build 250K devices a month and there was only one time per device a human touched it. This was 2001 and I am sure things are even more sophisticated today.

Larry, thanks for your input. Just want to make sure that 250k devices a month, were CCTV cameras?

no but there isn't much in there that I think would make it hard to automate including lens adjustment. We use it have to build and microwave oscillator which ain't easy

Back in 2013, I've toured an assembly factory in S Korea who assembles CCTV cameras. My friend in the industry, who imports OEM Hikvision, visited their factory in China back in 2015.

Unless Hikvision radically revamped their assembly line in the past 3 years, I can tell you that all CCTV cameras are hand assembled.

Yes, it's pretty simple. Mount the lens into the main PCB board. Mount the board into the housing. Power up the camera and focus the lens using a focus chart, finally package into the box.

These are all done by humans, no robots. Not that this cannot done by robots, it might be return on investments issue.

On a side note, our industry is small compared to Consumer Electronics. I have many industry friends in S Korea. Samsung sold their security division to Hanwha, LG never had a real security products. According to Samsung/LG, the pie is too small, they would rather invest their R&D into LED Television and Smartphones.

I still remember chuckling over a statement made by Samsung Sales Director. This was like 10 years ago. At the time, I believe that Samsung Security Sales Revenue was like 22 million annually. Well, Samsung Consumer Division did 22 million in 1 day at Black Friday. 

The Chinese manufacturing process engineers are very creative, we automated other than high speed SMT machines for less than 100K usd. 

Yes labor is cheap but housing , feeding, entertainment and security cost money.

I went from building everything by hand at C&K with 3000 people to the same dollar volume at DS with 400 people. Much cheaper and less hassle.

Hikvision builds some crazy number of cameras per day like 40,000. It has to be highly automated. DVRS also.

Hikvision builds some crazy number of cameras per day like 40,000.

According to Hikvision, it is way higher than that. For 2016, they averaged ~150,000 cameras day, source, excerpt:

In 2016 Hikvision manufactured more than 55M cameras, while in 2017 H1 the company produced in excess of 30M camera units. We expect to have a further increase in production in the second half of this year. As a reference, the company’s daily production capacity is around 260,000 camera units.

How manual or not their manufacturing process is, I do not know nor have I seen clear public information on that point. The closest info I have seen is this 2017 Hikvision marketing video (covered here), embedded below:

all the more reason I bet there is a high level of automation

 

tks for the updated info

Good point. I'll ask my industry contacts on why they don't fully automate the assemblies. Not sure if I'll get true reasons behind it, but will share any findings.

From what I hear, Hik has already added 10% to their products, anyone here confirm?

I have not heard that.  My first thought was "that makes no sense, surely they have enough inventory in the US to hold off raising prices for a while".  However, I think in some ways Hik would welcome an excuse to raise prices a bit, especially on existing inventory. Maybe they will try to use the tariff as a way to wean dealers off of expecting constant sales and rock bottom pricing.

Hikvision this week is doing another 'stock up and save' sale at ADI and elsewhere, e.g.

This is the 3rd in the past 30 days or so.

 

Interesting new WSJ article, most notably because it talks about 2 techniques that are relevant to video surveillance as well:

(1) Buy now - "Retailers have a tough choice—order early to beat the penalties, which the White House says won’t take effect for at least two months, and run the risk of ending up with excess inventory. Or they can wait and risk paying the higher costs if the tariffs do go through."

(2) Switch suppliers outside of China - "Many companies have tried to tamp down anxiety by saying they have been reducing their exposure to China anyway."

The WSJ article does emphasize that switching out of China quickly is hard to do. However, the longer the 'trade war' lasts and the worse companies fear it will get, the more shifting to non-Chinese suppliers will occur.

Competing with state run, or partly state run corporations is challenging, to say the least. Governments can pour money into a business for long time, the respective product will simply take out the competition - due to hefty discounts offered. When competition is out, prices are being brought back to reality and the real profit kicks in.   

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