200 billion tariff levy, LED industry chain influence geometry?

In September 17th, US President Trump announced that ten percent tariffs on Chinese products valued at $200 billion were added to the customs duties from September 24th until the end of the year. This tariff will increase to twenty-five percent in the new year. The Chinese side decided earlier that the Chinese side would have to make counterplans. However, Trump warned at the same time that if China was counteracted, it would immediately increase its lesson by $267 billion.

The trade conflict triggered by Trump intensified, and the LED industry was unfortunately affected and deeply affected.

The tax on products up to $200 billion, including the lighting industry, is about $8 billion. Thus, 8 billion will indirectly affect the LED industry chain of the upper reaches of the lighting industry, and cause the pessimism and disappointment of the practitioners and capital markets to the LED industry.

But if the scope and scale of the impact can not be quantified, pessimism or optimism can only be regarded as a catharsis of emotions, which is of no use in making the right judgments and decisions.

This paper briefly reviews the development process of trade war, and tries to clarify and quantify the scale of Sino US trade war's impact on LED industry. It is hoped that readers can be more objective about the impact of trade wars on the industry and make the right decisions at difficult times.

1. a brief review of the development of Sino US trade war

A brief review of the development process of trade war between China and the United States has begun to disagree with the trade war. Until April, 50 billion tariff list was listed. At this point, people began to understand that Trump was playing the game.

Source: LEDinside "2019 lighting market outlook report"

1.1 LED items included in the first round of tariff list

When the first tariff list came out, the main LED related code was mainly 3 items, which were all industrial intermediates in the LED industry, not the consumers, and the downstream customers were mainly application manufacturers of lighting manufacturers.

This is because the lighting industry in the United States is very rare. CREE is a family. Some of the lighting products are still produced in the United States. However, most of the lighting brands are produced in Chinese factories and then sold to the United States as finished products.

Source: LEDinside "2019 lighting market outlook report"

Generally speaking, although the tariff of this batch is very high, the impact on LED industry is very limited. The annual trade volume between China and the United States is not more than 200 million dollars.

1.2 the second round 2000 tariff contains LED related projects.

Source: LEDinside "2019 lighting market outlook report"

The current tariff covers a very wide range. With the LED related lighting industry, the number of products entering the catalogue is as high as 30, and the trade volume between China and the United States is about 8 billion dollars. Whether it is 10% or 25% tariffs, will have a huge impact on the Sino US trade in the lighting industry, the specific impact of LEDinside tried to do the following calculations.

220 million dollar tariff effect and sensitivity to LED industry

2.1 measurement of tariff effect

Source: Trump customs pit LED lighting industry how much money?

According to LEDinside estimates, in the short term, the exporters' Chinese manufacturers will adjust their production difficulties and bear about 1 billion 500 million US dollars in tariffs.

In the medium term, since the Chinese suppliers who act as suppliers have the ability to flexibly adjust the amount and quantity of exports to the US, tariffs will be shared by Chinese exporters and American consumers.

In the long run, because manufacturers have complete elasticity of supply, they can completely avoid tariffs by way of third party production or withdrawal from the US market, so the result is that the price of products in the US market is higher than that in international market.

Therefore, from the perspective of manufacturers, the losses in the long run are very limited.

222 million sensitivity analysis of tariff to scale loss caused by LED lighting industry chain

Based on the share of losses taken by Chinese exporters, we can make sensitive analysis of the relevant LED suppliers according to the different time frames, and quantify the actual impact of the LED industry chain.

Source: LEDinside "2019 lighting market outlook report"

Each column represents a different market share situation. Each row represents the situation of different industrial chains under different periods and tariff levels. The figures in the table represent the impact of the industry chain enterprises under the current 200 billion US tariff quota under different scenarios.

Source: LEDinside "2019 lighting market outlook report"

The three dimensional map can be seen more clearly, the impact is relatively large at 25% of the tariff level of the packaging plant. The overall impact of chip links is smaller than that of packaging.

For example, the market size of LED chips for lighting is about 11 billion, assuming that a company's sales amount to 1 billion yuan, and its market share of lighting LED chips is 10%. In the short term, the order of marginal reduction is about 3 million 600 thousand dollars at 10% tariff level, and it is only 8 million dollars at 25% duty level, relative to 1 billion RMB. Sales revenue is not significant.

The encapsulation link has a higher proportion in the cost structure of the lighting industry chain, and the impact is relatively greater. However, the market share of packaging manufacturers is generally not high. Even if the market share is 10%, the marginal decline of orders in the short term under the 10% tariff level is only 11 million US dollars, which is only 23 million US dollars at 25% tariff level.

And other cities with smaller market share will be less affected.

In the medium and long term, the actual impact of manufacturers through production adjustment and other evasion will be even less obvious.

3. summary

Although the conclusion of our analysis is that tariff has little effect on the upstream industry of LED, the pressure of LED industry chain is very small. Where are the differences?

The imbalance between supply and demand in the industrial chain is a very important internal factor, but the psychological impact of trade war is also an important factor.

Terminal brands often take advantage of the trade war machine to lower prices, and then enlarge the cost pressure to the upstream supply chain. For fear of trade war, all aspects of the supply chain have become more conservative. They have reduced the stock water level, or even sold the inventory at a low price, resulting in the shrinkage of demand far exceeding the actual impact of tariff shocks.

But this also means that after the actual effect of the tariff is settled, the psychological impact will be abdicated, and the basic consumer demand has not disappeared. The demand rebound in the future and supply chain replenishment may be very strong.

A great man has said that confidence is more important than gold. This is especially applicable. (text: LEDinside chief analyst Wang Fei)

For more LED related information, please click LED net or pay attention to WeChat public account (cnledw2013).