Warehouse staffing, consumer expectations for delivery and the Trade Act Section 301 tariffs on Chinese goods are among challenges Sonos is juggling as the company ratchets up e-commerce amid the novel coronavirus, said John Hills, senior manager-logistics, America. Hills told a webinar hosted by freight logistics company Flexport that during the pandemic, which slammed brick-and-mortar sales worldwide, Sonos is “not only dealing with the impact of COVID, we’re still navigating some of the waters with these 301 tariffs” imposed last year by the Trump administration on goods imported from China. Higher tariffs led Sonos to steer production of most U.S.-bound goods to Malaysia. Sonos CEO Patrick Spence highlighted a spike in direct-to-consumer sales (D2C) in April when consumers turned to e-commerce to buy goods they couldn’t get when stores temporarily closed. More people are required to move 1,500 units in a D2C model vs. a “handful” of pallets destined for one retailer, Hills said Wednesday. Forecasting D2C sales fluctuations can be unpredictable, said the executive: “It’s much more challenging to capture spikes in demand for D2C than it is for B2B.” An online article or blog can drive a surge, or a successful promotion can produce an unexpected order spike, he said. Sonos is also competing with big box retailers that have bigger warehouse staffing needs due to the pandemic-fueled jump in e-commerce business. FedEx also is getting more e-commerce consumer interest (see 2007010052).
Section 301 Tariffs
Section 301 Tariffs are levied under the Trade Act of 1974 which grants the Office of the United States Trade Representative (USTR) authority to investigate and take action to protect U.S. rights from trade agreements and respond to foreign trade practices. Section 301 of the Trade Act of 1974 provides statutory means allowing the United States to impose sanctions on foreign countries violating U.S. trade agreements or engaging in acts that are “unjustifiable” or “unreasonable” and burdensome to U.S. commerce. Prior to 1995, the U.S. frequently used Section 301 to eliminate trade barriers and pressure other countries to open markets to U.S. goods.
The founding of the World Trade Organization in 1995 created an enforceable dispute settlement mechanism, reducing U.S. use of Section 301. The Trump Administration began using Section 301 in 2018 to unilaterally enforce tariffs on countries and industries it deemed unfair to U.S. industries. The Trump Administration adopted the policy shift to close what it deemed a persistent "trade gap" between the U.S. and foreign governments that it said disadvantaged U.S. firms. Additionally, it pointed to alleged weaknesses in the WTO trade dispute settlement process to justify many of its tariff actions—particularly against China. The administration also cited failures in previous trade agreements to enhance foreign market access for U.S. firms and workers.
The Trump Administration launched a Section 301 investigation into Chinese trade policies in August 2017. Following the investigation, President Trump ordered the USTR to take five tariff actions between 2018 and 2019. Almost three quarters of U.S. imports from China were subject to Section 301 tariffs, which ranged from 15% to 25%. The U.S. and China engaged in negotiations resulting in the “U.S.-China Phase One Trade Agreement”, signed in January 2020.
The Biden Administration took steps in 2021 to eliminate foreign policies subject to Section 301 investigations. The administration has extended and reinstated many of the tariffs enacted during the Trump administration but is conducting a review of all Section 301 actions against China.
The Office of the U.S. Trade Representative seeks comment on whether all exclusions granted to Chinese imports on Section 301 List 4 that are to expire Sept. 1 should be extended for up to another year, says Friday's Federal Register. USTR will accept comments July 1-30. Each exclusion will be evaluated independently, based on whether a product remains available only from China, it said: Companies are required to post a rationale publicly for extending the exclusions for another year.
Inconsistencies abound in the List 4A Section 301 tariff exclusions that the Office of the U.S. Trade Representative granted to Chinese smartwatch imports classified under the 8517.62.00.90 product code. The exclusions are retroactive to Sept. 1 when the tariffs took effect and expire after one year, said a USTR notice Thursday. The exemptions apply to devices “suitable for wearing on the wrist” with “time-display functions” and the ability to link to a “network." USTR granted exclusions to the Apple Watch and a range of Fitbit smartwatches and fitness trackers, but also to Tile for a Bluetooth tracking device that has no wrist-worn or time-display component. The Tile device links to a smartphone app for finding misplaced items like keys or glasses. Sonos also landed exemptions for the wireless mesh network speakers and audio components it imports from China under the same 8517.62.00.90 classification as smartwatches. But exclusion requests for wireless speakers from Bose, Sound United and others remain in a Stage 2 administrative review at USTR, as do smartwatches from Fossil. A wide range of additional 8517.62.00.90 goods also remain in a Stage 2 hold, including Apple AirPods and JLab Bluetooth headphones. USTR didn’t comment Friday.
Logitech scaled back its profit outlook for fiscal 2020 ending March 31 to $365 million-$375 million due to “short-term coronavirus impacts,” said the company Tuesday. Previous guidance was $375 million-$385 million. The company reaffirmed its outlook of mid-high single-digit percentage sales growth in constant currency but expects a $30 million hit to revenue for the year. The impact on operating income from the coronavirus plus Section 301 tariffs on goods produced in China is expected to be about $60 million, it said. Though the company sees “continued strong demand” for products, “we are slightly adjusting our operating income outlook to account for supply chain uncertainties related to the trajectory of the coronavirus,” said CEO Bracken Darrell.
Universal Electronics, Inc. shares bounced 15.2% Friday to close at $51.80 after the company’s Thursday Q4 earnings report showing 68 percent growth in earnings per share. For full-year 2019, net sales grew to $751.7 million, the highest in company history, up 11% over 2018, said Chief Financial Officer Bryan Hackworth on an earnings call. A rebalancing of the remote control maker’s product line away from low-margin devices to advanced, differentiated high-margin solutions contributed to the company’s strongest year ever, said CEO Paul Arling. Q4 revenue of $174.7 million compared with $170.3 million in the 2018 quarter. Slower top-line growth reflects a “shift away from low margin business, a tradeoff we would gladly take and sets the company up for additional margin expansion,” Dougherty & Co. analyst Steven Frankel wrote investors Friday, issuing a “buy” rating on the stock. UEI’s three China factories have resumed operations after the extended Lunar New Year holiday, but with a reduced labor force, said Hackworth. There are no known cases of the virus among UEI workers, and the company expects to be fully online “within weeks.” UEI’s component suppliers are also coming back online, but with similar labor and logistics issues. Arling reviewed the company’s CES 2020 introductions including the fifth generation of its QuickSet Cloud platform that enables CE devices to discover and control devices and services in the home. He said Nevo Butler, UEI’s digital assistant, can be built into customers’ devices; they don’t have to buy the Nevo Butler hub from the company. UEI's hit from Section 301 tariffs imposed by the Trump administration on electronics imported from China narrowed in 2019 to $530,000 vs. $1.5 million in 2018. The company moved some production from China to its Monterrey, Mexico, facility last year to curb exposure to tariffs for goods sold in the U.S.
Coronavirus-induced travel and transportation restrictions that persist beyond March “are likely to pressure global supply chains and potentially create worldwide economic fallout,” said a Congressional Research Service report Wednesday. “Measures to contain the outbreak have significantly curtailed domestic and global transportation links, preventing the transport of many products and manufacturing inputs,” it said. Production has slowed across China, with “sharp slowdowns in sectors concentrated in Hubei,” including LCD panels, it said. Sourcing that diversified to other parts of Asia after the Section 301 tariffs on Chinese goods “often depends on intermediate inputs from China and thus is not insulated from China’s production slowdown,” it said.
Plug-in devices that connect to Wi-Fi and allow users to operate other devices by controlling whether electrical current flows from the wall outlet differ from wearable smart devices for classification purposes, Customs and Border Protection said in a Jan. 21 ruling, released last week. SDI Technologies argued the “SmartPlugs” deserve a similar classification as Fitbit fitness trackers that connect to mobile phones through Bluetooth. The Fitbit trackers were classified in heading 8517 due to the data transmission functions, but the plugs provide for different functions. “To the extent that data is transmitted from the application to the SmartPlug, it is in service of the primary function of controlling the electrical current to the connected appliance,” the agency said. “The transmission of data is not a function of the SmartPlugs,” it said, concluding the devices “provide electric control of electrical devices connected to them and thus are properly classified under heading 8537.” The applicable subheading, 8537.10.9, includes a 2.7 percent duty rate, and is subject to Section 301 tariffs on China, the agency said.
Though President Donald Trump “initiated these tariff actions, in part, to address the issue of intellectual property rights for American businesses in trade with China,” TCL warned effects may be more widespread. “Rather than be sanctioned under 301 tariffs, TCL’s partnership with Roku should serve as a model for ensuring the proper protection and compensation of American creators and owners of intellectual property for products manufactured in China.” If TCL North America can’t win the exclusions it seeks from 15 percent List 4A Trade Act Section 301 tariffs it has paid since Sept. 1 on flat-panel TV imports from China, it wants the Trump administration to weigh “reallocating” TVs to List 4B where there’s no current tariff exposure. TCL filed exemption requests Thursday at the Office of the U.S. Trade Representative docket on 8528.72.64.30, 8528.72.64.40 and 8528.72.64.60 classifications. The “sole available source of LCD panels and supporting material components is China,” said the applications.
The PowerPic wireless-charging picture frame for mobile phones imported from China under the 8504.40.85.00 subheading was one of 68 exclusions the Office of the U.S. Trade Representative granted from the List 3 Section 301 tariffs, said Monday’s Federal Register. The exclusions are retroactive to Sept. 24, 2018, when the tariffs took effect at 10 percent before being raised to 25 percent months later. “After a great deal of time, effort and expense by our small company, we are 100% convinced that there are no manufacturers anywhere in the world but in China which can produce our products at prices and in quantities needed to allow us to succeed in selling to consumers,” said importer Twelve South in its PowerPic exclusion request.
NakiRadio wants an exclusion from the List 4A Section 301 tariffs for the “kosher Wi-Fi device” it imports from China, it posted Sunday in the Office of the U.S. Trade Representative public docket 2019-0017. The device streams only “pre-approved” Jewish content and is imported under the same 8517.62.00.90 subheading covering a broad swatch of other tech goods, including smart speakers, Bluetooth headphones, fitness trackers and smartwatches. The device has a 2.1-channel stereo speaker/subwoofer with a three-inch screen “used to navigate an electronic interface,” said the application. NakiRadio tried sourcing the product in the U.S., “but has been unable to find a manufacturer” capable of producing the firmware that “limits the accessible channels,” it said. Finding alternative sourcing would incur “punitive capital investment and serious disruption to its supply chain" because the product is of “a highly specific construction and functionality,” it said. “Kosher Wi-Fi devices with limited channels geared for the Orthodox community are not strategically important” to the Made in China 2025 industrial program, it said. NakiRadio pays 15 percent List 4A duties on the imports. The Trump administration announced plans Friday to roll back List 4A to 7.5 percent in the phase one trade deal with China (see 1912130042).