By Jonathan Cassell, Lead Analyst of Supplyframe Commodity IQ
The rapidly changing tariff situation adds new layers of consternation for buyers across all industries as they struggle to navigate country-of-origin (COO) issues intrinsic to the globally connected electronics industry.
In theory, COO is a simple matter, defined as the country where a product was produced, a factor that determines whether or not that product is subject to different tariffs or duties. In practice, however, COO is far harder to determine in the electronics industry, where products are often processed in multiple countries and true national origin can be obfuscated by imprecise identification and inconsistent nomenclature. As a result, companies will likely end up paying tariffs despite their best efforts to avoid them.
The International Organization for Standardization (ISO) officially determines COO, classifying international country codes using the ISO 3166-1 standard. China, for example, is denoted as CN according to the ISO 3166-1 list. However, companies can employ varying names, sometimes identifying the COO as “China” rather than “CN.”
Moreover, country-of-origin designations can be vague. For example, some companies might identify a part as being sourced from several nations, making it unclear what the true COO is for a particular part. As a result, buyers sometimes don’t know which country the part is sourced from until they place an order.
The multinational nature of the electronics supply chain can further complicate matters. For example, if a buyer orders parts from Taiwan’s TSMC, a major question is where those parts go after TSMC, such as outsourced semiconductor assembly and test (OSAT) operations in other countries. The involvement of other nations determines the COO for these parts.
China represented more than a third of the global OSAT business last year., This sizeable and growing share, with five Chinese firms among the top 20 players worldwide, is a significant concern for semiconductor buyers, given the already-levied 10% and potentially more intense U.S. tariffs on chips exported from China.
These complicating factors require buyers to engage in extensive manual interpretation to determine the true COO, requiring much more time and effort than conducting a simple search for country codes. Given the speed of change on the tariff front, buyers will likely have to pay tariffs.
These factors contribute to the rising demand risk for buyers in Q1. According to the Commodity IQ Market Dynamics Forecast, 47% of direct materials categories (electronic components and flash-based storage devices) tracked by Supplyframe are forecast to present high supply chain risk for buyers in Q1, almost double the 24% in Q4.
In reaction to this uncertainty and increase in risk, buyers should strive to improve their agility and adaptability. Companies must adopt a fast-reaction mindset to adjust to the velocity and volatility of change in the era of quickly changing tariffs. Purchasing organizations should develop dashboards to promptly identify emerging country-of-origin risks and develop strategies to accommodate current conditions.