Small Audio Companies Struggling to Navigate Tariffs on Metal, Components From China

The announcement of a phase one U.S.-China trade deal that included halving List 4A tariffs in place since Sept. 1 could do little to change damage done to small audio companies smacked by the previous three tranches of tariffs still in place, they said. Executives said in interviews this month have been hit hard by the duties with little hope other than to wait them out.

Tariffs have had a “tremendous effect” on profits at Emotiva this year, President Dan Laufman said in an interview: “They basically sucked a great part of margin off of our business.” The U.S. Treasury is getting more money, but “no question the Chinese aren’t paying for squat. The brands are paying for it because we get slapped with 25 percent tariffs by Customs before the containers are released to us,” he said. “We here in America are paying for the tariffs, not the Chinese.”

Section 301 duties have cost Emotiva about $600,000 this year, Laufman said. Typically, that money would have gone back into the company for R&D and hiring staff.

Three years ago, Laufman started moving manufacturing back to the U.S. “wherever possible,” with half of Emotiva revenue coming from products designed and assembled in Nashville, he said. “The problem is the component supply is a world market, and China is by far and away the largest maker of components and subassemblies,” he said. That leaves audio companies little option but to buy from the established supply chain.

“The loudspeaker business doesn’t exist in the U.S. anymore,” Laufman said, saying components such as stamped metal, yokes, magnets and backplates are sourced in China. Companies that assemble speakers in the U.S. have to get components from China because “there’s no supply base for the raw materials.” The industrial infrastructure that supported the loudspeaker market 25 years ago “has gone away.” To build in the U.S., “you’re buying parts from all over the world, and China is the place everybody’s gone,” including European and Asian brands, he said.

'Damper on Sales'

Manley Laboratories CEO EveAnna Manley spoke from a hi-fi show in China, where she had gone to help her clients there with a “good show of face.” Her importers have tariffs on that end “so our stuff got 25 percent more expensive for the customers in China, which can put a damper on sales.”

An importer in China asked Manley to develop custom models exclusive to that market “so they cannot suffer any gray-market consequences,” Manley said. “We have to create custom models for them, which is a load and a lot of work in our engineering and purchasing departments, but we have to do it in order to maintain decent business over here.” For Manley, the China market “is too big to just throw away.”

Initially, Manley’s hi-fi importer in China asked her to split the tariff cost, but “we don’t have the margin to be able to do that at all,” she said. Manley Labs makes products including mics, preamplifiers and vacuum tube-based equalizers for recording studios and audiophiles.

Before Manley suffered the tariff blow on electronic components, the business was slammed by price increases on metal, even though it used U.S. suppliers. “We were using American aluminum and steel,” Manley said, and those prices went up in response to tariffs placed on imported metals: “So we got screwed using American material.” A faceplate that cost $24 two years ago is $38 today, she said, referencing one the company sources from Chino, California, using local machining and anodizing.

Manley raised prices in response to higher costs and adjusted dealer margins in some territories “to try to claw back some lost margin,” the executive said. It also eliminated the 10 percent difference between minimum advertised and MSRP pricing, she said, which stripped a few points of profit dealers had been making because “we had to get back some margin.”

Tariffs have also impacted Manley’s dealer programs, including customer financing assistance and “quick pay discounts” to incentivize dealers to pay on time. It also had to curtail commercial dealers’ ability to pay by credit card, she said: “That was another 3 percent of cost to collect. We just can’t leak out 3 percent here or 10 percent there or else we’re out of margin.”

Manley said the “little bits” -- chips and resistors -- aren’t made in the U.S. anymore: “We have to procure those overseas.” In some instances, suppliers have built in the cost of tariffs as a line item, which could be removed in future orders; other times, they’ve raised prices, which is permanent, she said. Most of the cost of a Manley product is sourced locally, she said, but with electronics, “everything in the box, practically, is made of metal,” including the “guts” of vacuum tubes and resistors and capacitors with metal film. All metal prices worldwide have gone up, she said.

'Bunch of Bullshit'

Manley doesn’t source much finished product directly from China: “We’re made in the USA and we’re very proud of that. We do try to source locally as much as we can.” The company gets raw circuit boards from China, due to lower prices and superior quality to what she could get in California, she said. She hasn’t done a cost analysis on losses to date; tariff costs have been spread around to dealers and customers: “When Donald Trump tells people that China is paying the United States tariffs, that’s a bunch of bullshit.”

The story is similar at Santa Monica, California-based Apogee Digital, where the website proudly says its audio recording equipment and high-end headphone amplifiers are designed in California and built in the USA. “We manufacture in the United States, and we always have. We’ve always thought that’s a noble thing,” CEO Betty Bennett said.

Tariffs on electronic components -- capacitors, resistors, fuses, transistors, connectors, LEDs, printed circuit boards, power supplies, cable assemblies, mechanical material and accessories -- were taxed at 10 percent and 15 percent in the Trump administration’s tit-for-tat trade war with China, beginning in September 2018; all materials were bumped up to 25 percent in May, Bennett told us. Apogee tried to mitigate incoming tariffs by buying material ahead of the effective date, leading to larger inventories and “tied” cash, she said.

Apogee can’t buy parts it needs in the U.S., Bennett said, saying some semiconductors are only made in China. Apogee was also hit by tariffs on its products sold in China, its fastest growing market, putting the company at a disadvantage against competitors with high-volume international business that wasn’t subject to tariffs, Bennett said. “We’re a tiny company, and we’re getting hit left, right and center from this.”

Apogee’s revenue from China plummeted 62 percent this year, Bennett said. Those were the measurable losses; it also gave up market share and customer awareness, which will have their own costs as the company plays “catch-up,” she said. The operations team forfeited time to researching and understanding tariffs, “filing for exclusions that never went through,” disputing charges, and searching for alternative suppliers. The company also lost “valuable relations with vetted supply chain partners,” she said.

The tiny company missed deadlines for exclusion applications early on because it didn’t know how to navigate the waters, Bennett said. Apogee contacted a broker that specializes in duty drawback recovery programs but was told it was too small for it to take on, she said. Apogee has appealed to its components distributors to apply for exclusions but “no luck so far,” she said. Large distributors don't have incentives to file for exclusions because “they simply pass the tariff to their customers,” she said. And Apogee can’t file for exclusions because it isn’t the importer of record.

Apogee is studying taking manufacturing outside of the country -- and possibly to its fastest growing market. “I can export from China to everywhere else, and it’s actually cheaper for me to go to China,” Bennett said wistfully, citing 34 years “of being proud of making things in America.”

Charlotte, North Carolina-based Peachtree Audio decided not to bring its three sub-$500 powered speaker products -- on the lower end of its product line -- to the U.S. market this holiday season because it would have had to raise prices to compensate for tariffs, Jim Spainhour, vice president-product development, told us.

Christmas Plans Dashed

“Christmas would have been a great time to bring them in,” Spainhour said, but Peachtree would have been at a competitive disadvantage because its Canadian and other competitors -- which aren’t affected by tariffs -- would be able to “beat my price,” he said. “Fighting a price war with my competitors is one thing, but having the tariffs come in and add 25 percent to my cost of goods … forget it.”

Another product in development at Peachtree was pushed back while the company waits to see if tariffs drop, Spainhour said. First orders of the product should have been in January, he said, but now the company is shooting for June, “hoping tariffs will drop.” Tariffs on Peachtree goods used to be 1.5 percent, he said; now they’re 25.

That’s despite Peachtree having moved about 80 percent of manufacturing to Canada and the U.S. But it still buys some products from China, along with chassis, cabinets and faceplates. The company didn’t expect those parts to be tariffed at a 25 percent rate because they’re brought to the U.S. for assembly. That’s “what we do,” Spainhour said: “Why put a tariff on those?”

If tariffs don’t ease, Peachtree could be forced to look elsewhere for manufacturing, but it won’t be the U.S. because it needs to hit a competitive price point, Spainhour said. Comments he has heard about “everyone being in the same boat” and prices rising across the board don’t fly, he said: “It doesn’t work that way. Internationally, not everyone is dealing with a sudden 25 percent like that. If my price has to go up because of the 25 percent tariffs,” he said, “it hurts our ability to compete in Europe and Asia.”

Like other small audio companies, Peachtree is studying options in the event of long-term tariffs. He has heard of furniture companies getting around levies by setting up an office in another country and having product shipped there from China, Spainhour said. Peachtree doesn’t do enough business “to go to all that trouble,” he said.

Tariffs weren’t too severe for importer Music Hall Audio because they mostly affected electronics -- until recently, President Roy Hall told us. A 25 percent tariff on accessories resulted in a 25 percent price increase “because there was no fat in it to absorb it,” he said. “When your profit margin drops, you don’t make money.”

To date, Music Hall has paid $20,000 to $30,000 for tariffs. Most of his business -- turntables -- has been exempt and escaped 10 percent Section 301 List 4B tariffs that were averted ahead of a Dec. 15 deadline. Music Hall does “a lot of business with some very good turntables made in China,” Hall said.

“In the long run, maybe China will suffer,” Hall said in reference to the punitive tariffs, “because we’ll buy less. But in the short term the American businessman, the American consumer, is paying for it.” Though the U.S. Treasury is getting more money, “it’s coming off the backs of me and ultimately the people who purchase product from me.”