Despite a temporary reprieve, the growing tumult over technology tariffs has executives and industry observers flummoxed over the impact those changes might have on operations, finances, and demand, with the timing and extent of any change causing many to throw up their hands.
Vendor executives have been particularly peppered with questions over the impact tariffs might have on their operations, with many responses highlighting overall uncertainty underpinned by a dogged level of confidence.
“This is a dynamic environment, but one we have spent a significant amount of time planning for, leveraging the strength of our best-in-class global supply chain team, as well as the flexibility and agility we have built into our operations over the last few years. We are prepared to take actions to mitigate the impact as and when tariffs go into effect,” Cisco CFO Scott Herren said during the vendor’s most recent earnings call. “I think it's such a fluid environment right now. It's very difficult to say what's actually going to happen.”
That sentiment was echoed by Hewlett Packard Enterprise (HPE) CEO Antonio Neri, who told investor’s during the vendor’s most recent earnings call that HPE had been evaluating “numerous scenarios and mitigation strategies since December to assess the potential net impact,” but added that “pending further announcement from the U.S. administration, our outlook for the balance of the year reflects our best estimate of the net impact from this tariff policy.”
Both did point to steps each vendor has taken toward mitigating the impact of tariffs, which include leaning on more diversified supply chains. Analysts have noted that this diversification leads straight back to lessons learned during the COVID-19 pandemic.
“Whoever built more diversification outside of China, assuming that the tariff will now be more pronounced to China, but everyone else will be in a better position,” Sameh Boujelbene, VP at Dell’Oro Group, explained to SDxCentral. “That may put some vendors at an advantage.”
Are enterprises worried? Despite that diversification, both Herren Neri hinted at pricing challenges that might outrun each vendor’s ability to hold their fiscal line. This could require vendors to get more creative on those pricing schemes.
Herren explained that Cisco has “a number of steps we can take to offset the cost. We obviously would have price as a lever, but there's a number of considerations that we have to go through before we got there. Right now, I don't envision that. What we would look to do first is make some of the changes we need to make inside the supply chain mitigate the impact of whatever tariff regime gets put into place. So, not seeing any evidence of any pull-in demand.”
For HPE, Neri noted that, “on the pricing side, no question, we will adjust pricing accordingly while we continue to drive that working capital down … and, therefore create more flexibility in our pricing as we manage discounting more tightly.”
Advisory firm ISG noted the tariff back-and-forth is driving enterprise uncertainty.
“Clients are lengthening decision cycles, holding discretionary budgets, and re-evaluating capital-intensive projects – particularly in industries like manufacturing, retail, automotive and financial services,” explained Steve Hall, president and chief artificial intelligence (AI) officer at ISG, wrote in a report.
Jimmy Yu, VP of optical transport, routing, and microwave transmission at Dell’Oro Group, said that the impact of increased tariffs on the optical market will vary based on the size of the tariffs. Yu explained that something less than a 10% increase can probably be absorbed into the system, but more could have a real impact.
“Everybody will be disgruntled, but I think it could be absorbed,” Yu said. “It's when you go higher than that, I start to get nervous. If we're talking tariffs are greater than 10% and you got to start absorbing 20% then I get nervous because that's tough to digest within a one-year timeframe, and it could cause some pain as they try and negotiate around that.”
Sam Barker, VP of telecom market research at Juniper Research, explained that increased tariffs will be hard for telecom operators to dodge.
“Given the small number of vendors in the market, we don’t expect operators to benefit from switching to new hardware suppliers,” Barker wrote. “Huawei, Ericsson, Nokia, ZTE, and Samsung account for more than 90% of the global market share. Operators have already been banned from using Huawei and ZTE equipment in various regions, and local players often lack the production capacity to meet demand. As a result, operators have little choice but to bear the cost of these tariffs.”
Similar to Yu’s comments, Barker did note that those operator costs could “be passed on to the end user,” a move that will be “driven by the slim profit margins tied to consumer subscriptions.”
Potentially more concerning could be the longer-term impact on telecom operators as they look toward next-generation upgrades. Barker said that operators have so far not been able to monetize their 5G network investments, which has already placed pressure on their investment plans for 6G.
“Given the lessons learned from 5G monetization and the need for more evolved business models in 6G, these tariffs add another challenge for operators striving to maximize telecom service revenue,” Barker wrote.
Tariff impact timing? As for the timing of any potential impact, many point to later this year at the earliest. This is backed by the typical longer buying cycles of technology equipment, though new purchasing decisions could get pushed.
“We don't see yet the full impact of the tariffs in the market,” Neri said. “I think it will take another month or two.”
ISG is taking a two-pronged approach to its tariff-angled forecasting.
The first assumes tariff stabilization by mid-year, which it then assumes will just slightly delay overall market spend and not impact the overall spend.
The second assumes a continued tariff challenge into the third quarter of the year, increased immigration enforcement, growing wage challenges, and further US-EU isolation. This would result in a longer delay on spending that would impact full-year 2025 forecasts.
“We remain cautious in our base case, but not pessimistic,” Hall added. “The signals from Q1 are fundamentally strong. The shift we’re seeing is not one of declining demand, but one of delayed commitment.”