The information factories for the cloud computing age are about to get caught in the crossfire of the US-China trade war.
Two rounds of US tariffs on Chinese imports totalling $50bn, one of which has already come into effect, have targeted some of the key components that keep data centres humming.
But the tech industry is facing up to a third, $200bn list that takes full aim at key digital infrastructure — from the routers, switches and servers that redirect and process data, to components such as motherboards and memory modules used by bigger cloud companies to assemble their own equipment, all the way to the miles of cabling needed to wire the gear together.
The complexity — and invisibility — of what happens inside today’s data centres has left the sector struggling to draw attention to the seriousness of any rise in its costs.
“When you have a tariff list that has TVs and dishwashers on it, the argument is very straightforward,” said Josh Kallmer, head of policy at the Information Technology Industry Council. “One of the challenges we have is explaining why this matters to ordinary people and companies.”
Data centres have been dragged into the trade war at just the moment some of the biggest internet and cloud computing companies are in the midst of a capital spending boom to build more and kit them out. Much of the investment is earmarked for overseas markets. But they are also making massive upgrades to existing facilities at home to meet demand for extra capacity and new services.
Google, for instance, nearly doubled its capital spending in the first half of this year, to $10.4bn, excluding the $2.4bn it spent on a new building in New York. Besides adding capacity for YouTube videos and its fast-growing cloud computing business, Ruth Porat, chief financial officer, said the company was buying more equipment to meet the demands of machine learning— a “compute intensive” task that is becoming central to many of its services.
The cash-rich tech giants can no doubt afford higher costs of data centre gear — to be levied at a 25 per cent rate on the first $50bn, with a similar rate being considered for the next $200bn. That is particularly true after tax reform at the start of this year that freed them to tap into their overseas cash hoards.
But many other, less visible customers and suppliers will be caught in the net, according to Mr Kallmer. That goes all the way down to the producers of the metal racks used to house ranks of servers and routers.
Adding to the tech companies’ frustration is the fact the Trump White House claimed to have launched the trade war to protect their interests. Instead of forcing China to abandon mercantilist policies geared to acquiring US know-how, they now fear it will rebound on them.
The US levies will hit companies such as Dell that import components from China and make servers and laptops in the US, according to Michael Young, the company’s head of government affairs. “Clearly, this will have no impact on the Chinese policies,” he wrote in a submission to the US Trade Representative opposing the tariffs. “Nor would it create the type of leverage needed to force changes in China.”
A further irony, said KC Swanson, head of policy at the Telecommunications Industry Association, was that Washington was burdening US companies with higher costs at just the moment they needed to invest heavily to compete with China. “China is all about trying to build up its industrial internet, and its routing and switching capabilities,” she said.
The complex supply chains of the electronics industry add to the unpredictability and perverse impacts of the US tariffs, making it hard to predict exactly how the pain will be felt across the cloud computing landscape.
Intel, for instance, says 90 per cent of the value of its chips comes in the design and manufacturing stages, which occur “outside of China and largely in the US”. Like many US chip companies, it uses plants in China to do the final assembly and testing on its products. Any chips brought back to the US face a tariff on their entire value.
The first list of tariffs, which went into effect in June, barely touched semiconductors. But the industry is now squarely in the cross-hairs: $6.3bn worth of chips and other products directly related to semiconductors are about to be hit, according to the Semiconductor Industry Association.
The global supply chains of other parts of the tech industry are more opaque. Hewlett Packard Enterprise would not comment on how many servers it imports from China, although it said the “majority” of the machines it sells in the US are made either at home or in Mexico.
To the extent it did face higher costs, the company said it had “a complex global supply chain which gives us the ability to adjust to changes in trade policies”. Few companies, though, have the flexibility to switch their sourcing quickly to suppliers outside China.
“Other countries do have the capability to produce these parts, but the supply chains and capacity just don’t exist,” said Jordan Haas, director of trade policy at the Internet Association, whose members include the biggest web-focused companies.
Even relatively low-value parts of the electronics supply chain could be prohibitively expensive to move. According to Intel’s calculations, moving a chip packaging plant out of China would cost $650m-$875m — a sign of how locked in the industry is to its current production arrangements.
With hearings on the latest tariff list not due until late August, the tech industry is still hoping it can change minds in the White House. But with the Trump administration already warning of extending its levies to a fourth list of imports, many are bracing themselves for worse to come.