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Arris: Tariffs Add $200M in Broadband Gear Costs, Threaten US 5G Plans

Jeff Baumgartner
10/26/2018
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Arris is asking the US government for more time to make alterations to its supply chain in response to new tariffs that are already adding costs, with the threat of piling on even more soon, to its lineup of broadband modems, access points and core infrastructure equipment.

Likewise, Arris Group Inc. (Nasdaq: ARRS) is also arguing that the Trump Admoinistration's tariffs threaten the nation's ability to take a leadership position in the 5G race. (See 5G in the USA: Fall Edition.)

Arris, which detailed its plea to the Federal Communications Commission (FCC) and others in this filing (PDF), is already making moves to mitigate some of the financial impacts that new US tariffs on Chinese goods will have on its broadband product business. The new tariffs are at 10% today, and are scheduled to rise to 25% in 2019. (See Arris: We're Tackling the Tariffs and Arris Downgraded on Cable Modem Tariff Worries.)

In a perfect world, Arris wants the United States Trade Representative (USTR) to remove broadband equipment from the proposed additional tariffs, indicating that 170 members of Congress recently sent a letter to the USTR suggesting there be an exclusion process.

Short of that, Arris is asking for at least a year to make the necessary changes to its supply chains before the tariffs take effect.

Arris put some numbers to the issue, noting that the current 10% tariffs will impose about $200 million per year in additional costs, creating "serious business implications" for the company even before the larger tariffs kick in next year.

Raymond James Financial Inc. (NYSE: RJF), which spotted the Arris filing, has already lowered its rating on Arris to "Outperform" due to the effects of the tariffs, and worries that the 2019 street estimates on the stock don't reflect the full impact. In a note issued today, Raymond James analyst Simon Leopold estimates that the 2019 step-up in tariffs (assuming no relief or adjustments to Arris's supply chain) could push the additional annual costs for the company to $500 million.

Arris also warned that the tariffs risk slowing down 5G deployment and, more generally, could slow down spending on broadband and related R&D efforts. It also argued that the tariffs will lead to higher prices for consumers and harm small and mid-sized businesses that will have to absorb some of those additional costs.

Arris noted that it has launched efforts to reduce the financial effects of the tariffs. Earlier this month, the company said it had already altered deals with customers to absorb most of the current tariff costs along with a plan to move more of its device production and supply chain out of China.

But it's not an easy task, and, according to Arris, it's not one that can be completed overnight.

"[S]hifting operations for ARRIS’s highly-customized and technical broadband-related products is more complex than for other products covered by the proposed tariffs," Arris said. "Given the nature of ARRIS’s products, there may be no viable supply alternatives for certain ARRIS products on the tariff lists. Even where alternatives may exist or may be developed (potentially with significant expense), if the tariffs went into effect immediately, there would not be adequate time to transition over to these new supply alternatives without substantial disruptions to the broadband supply chain."

— Jeff Baumgartner, Senior Editor, Light Reading

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