As news of escalating trade wars has permeated, people everywhere have wondered what higher tariffs would mean for the price of their favorite smartphone and laptops. Those are reasonable concerns.
But there’s another likely casualty of the ongoing trade wars between the Trump Administration and China, and it has to do with the price of data center components and services.
According to a report by DigiTimes, the global demand for cloud and data center servers has dropped consistently since the beginning of 2019. The trend has some expecting Intel’s data center division to post its first revenue decline in a decade.
The difficulties brought on by trade tensions manifest in several ways throughout the data center market.
One of those difficulties was the anticompetitive blacklisting of Huawei by the U.S. government, performed in the name of national security. This was a blow to Intel and NVIDIA, as both companies are reliable customers of the Chinese tech giant. U.S. companies can do business with Huawei until late August 2019.
Although the ban was ostensibly a national security maneuver, Google argues that unless they are allowed to provide products to Huawei, this ban would actually make Android and other products less safe than they were before.
And as far as the U.S. data center market goes, several companies could post huge losses if they can’t maintain ties to the Chinese market. In retaliation for the Huawei ban, China could institute a wholesale boycott on chipmakers based in the U.S., including Intel, Dell, Texas Instruments and other familiar names.
Dell’s server business declined in the first quarter of 2019 as well – the first time it’s done so in 10 quarters.
There are several ways these trends can be expected to impact companies and their customers – including telecommunications, cloud service companies and many others that rely on data hosting services. Raising tariffs on IT equipment and server components will make it harder and more expensive for internet companies of all sizes to operate cloud-based services. Small companies could be priced out entirely.
One company, Brilliant Home, spent three years developing a smart home controller. But at the eleventh hour, when the company had a release window and an MSRP all worked out, new tariffs from China kicked in. The company had to add another $50 to the asking price due to tariffs on some of the key components. Escalating trade tensions further will continue to inflate the prices of electronic devices of all kinds.
If trends continue, this same sequence of events will keep eating into the profitability of cloud service companies, and not just those that create consumer electronics.
Plus, the companies that rely on Huawei technology, or products supplied by any of their subsidiaries, or any of the U.S. companies that rely on any of the above, have limited stockpiles of components. Once that inventory is gone, they’ll have to find new, higher-priced vendors or keep legacy equipment in place for longer than intended or designed.
All of this means a combination of unfavorable factors: a likely chilling effect on IT spending across businesses and organizations, higher prices on existing products and services, and a lack of credible competition from smaller companies that can’t pay the higher prices commanded by U.S.-based companies and those that assemble their components domestically.
There’s an additional wrinkle here – and possibly a silver lining – that concerns broader market forecasts for data center services. According to DRAMeXchange and others, worldwide shipments for servers and server components were set to peak by the year 2020 anyway.
The looming shadow of 5G connectivity is leading businesses, organizations, and internet service providers to look ahead at their data storage, transmission, and analysis needs and gradually ramp up demand for data center components. This race to build 5G-ready infrastructure will likely continue through 2019 before tapering off and normalizing in 2020, says DRAMeXchange.
The tariffs in place today touch on routers, networking switches, computer components, glass, conduit tubing, insulation, and a variety of other items involved in signal processing and telecom activities. Companies without a strong manufacturing presence in China may not feel the pinch as tariffs kick in on the materials required to manufacture 5G-ready hardware.
Others, like Wistron, who serves as a major server component supplier to Dell and others, may need to move out of China and seek new manufacturing partners in Taiwan or elsewhere if they want to stay afloat.
If there’s a bottom line here, it’s that nobody has fully accounted for and quantified the potential fallout of higher tariffs on more technology product families plus the banning of major companies across huge sales territories. Some of the biggest names in cloud computing are reporting flagging demand and falling earnings, and companies may need to put IT spending and new projects on hold.
The near future will tell us more as the Huawei ban kicks in and two of the world’s largest and most important economies in the world continue to battle in this trade war .
Kayla Matthews writes about data centers and big data for several industry publications, including The Data Center Journal, Data Center Frontier and insideBIGDATA. To read more posts from Kayla, you can follower her personal tech blog at ProductivityBytes.com.