Given the recent announcement of two 10% tariffs on imports to the U.S. from China, the games industry is looking at 20% minimum price increases on the items we import from China as well as components; this is a whole lot of products! The idea, as the administration has said multiple times, is that foreign governments pay the tariffs, billions of dollars flow into the U.S. treasury and to avoid tariffs, companies flock to move their operations to the United States. None of which is likely to happen.
Here is what the games industry can expect to see in terms of price changes this year as a result of the tariffs. Publishers will continue to manufacture games in China because it takes two to four years to create a new supply chain; companies cannot shift their manufacturing within a month or so. Ergo, publishers bringing the product into the U.S. have to pay a tax of 20% on the imported products and components.
Suddenly, a game that used to cost $10 to manufacture and ship will now cost $12, with $2 of that going to the US government. Distributors will have to sell the game to retailers for about $18, depending on their current margins. If retailers want to keystone the game’s price to make a 50% margin, the price goes to about $36 when sold to the consumer, about $6 more than the game would sell for without any tariffs.
Another problem is the general uncertainty regarding the imposition of the tariffs. The Trump administration has said it will impose tariffs on Canada, the European Union and Mexico, then changed its mind almost the next day, pushing back the start day. Although we probably won’t see any rollback, absent negotiations, of tariffs on Chinese imports, it could happen. What do manufacturers do; absorb the cost of the tariff in the hope that the Trump administration will roll them back, or figure them into the cost of goods sold as a fact of doing business, keeping higher prices which could reduce the number of price sensitive customers buying? If the tariffs get negotiated away and manufacturers increased prices, do they roll back the price and leave other members of the channel holding products with tariff-inflated prices?
From what I have read, expecting increased tariffs after Trump won the presidency, a significant number of manufacturers chose to ramp up production runs during the last quarter, opting to warehouse product brought into the U.S. under the previous tariff structure, and have enough inventory on hand to avoid tariff-fueled price increases through the end of Q2 or beginning of Q3, with the hope that the Chinese tariffs get negotiated away and the 25% tariffs on steel and aluminum imports never get imposed, but it does not look promising.
Comments? Send them to castleperilousgames@gmail.com.
The opinions expressed in this column are solely those of the writer, and do not necessarily reflect the views of the editorial staff of ICv2.com.
