Partners: Trump China Tariffs To Hit Customers As Cisco Prices Increase 10%

Cisco Systems is jacking up prices on nearly 3,000 individual SKUs in response to new U.S. tariffs on goods made in China, and partners are preparing to hit customers with increases as a result, according to solution providers.

Effective last Saturday, Cisco added a 10 percent pass-through on every SKU manufactured in China, according to a senior executive at one large U.S. solution provider that works with Cisco. The executive shared the contents of a Cisco email regarding the increases with CRN.

The executive said the solution provider is expecting the final list of 2,850 affected SKUs to arrive by Wednesday afternoon. The tariffs went into effect Monday.

"If you're increasing the cost, someone's going to take it on, and it's not going to be the OEM," said the top executive, who did not wish to be named. "We're just passing along the fees, but these are pretty significant fees. It's a big swing in price increase that if the customer didn't account for, they're going to be surprised."

The executive said the price increases could affect profitability for Cisco’s channel community in the U.S.

"If it slows down buying because of the price increase, ultimately that could affect both our top line revenue and margin," he said. "It seems like spending would slow and top line revenue and margins would slow, but we don't know enough yet about what is going to be the impact. Hopefully, this isn't the start of some sort of cascading economic trouble."

Partners said if Cisco builds and ships more networking components from China into the U.S. compared to competitors, solution providers will face tougher competition in the future.

"If HyperFlex has a 7 percent increase, but Dell EMC [hyper-converged infrastructure] VxRail doesn't, or another hyper-converged product doesn't – that's a big story," he said. "It sounds like there's enough components in these Cisco products that are impacted to move the needle pretty high."

In terms of partner price protection, partners said some customers were lucky to get a quote in before the Sept. 22 official price increase date. Depending on the deal, a typical price protection lock-in lasts between 30 days to 45 days, meaning Cisco partners must work hard over the next few weeks to make sure purchase orders are in on time or customers will get requoted with the higher prices.

"If they were lucky to get quoted in before Sept. 22, we can't fiddle around because we're going to need a purchase order before this date expires or you're going to have to requote that customer and it's going to go up pretty significantly," said the executive.

The executive confirmed that the increases already cover a wide range of Cisco gear, including several Catalyst switches; the HyperFlex HX series; 3900, 4300 and 4400 series integrated services routers; ASR 900, 920, 1000 and 9000 series routers and several other lines.

Cisco is also warning partners that additional price increases are expected to be implemented in January when additional China tariffs are expected to take place.

Cisco acknowledged the pricing changes in a statement to CRN Tuesday, saying the tariffs "include networking equipment across the industry, and the associated costs are being addressed through pricing changes."

"Cisco will continue engaging with the administration on this topic," the Cisco statement continued, "and we are hopeful the U.S. and China can come together to find a negotiated solution."

Cisco and other global networking leaders have already expressed their concerns to the U.S. government regarding customers being negatively impacted by the tariffs. Earlier this month, Cisco, Hewlett Packard Enterprise, Dell and Juniper Networks wrote a letter to U.S. Trade Representative Robert Lighthizer urging him to hold off on imposing the tariffs saying it would increase the costs of their networking equipment.

"If USTR were to impose a 10-25% additional duty on networking products and accessories, it would cause broad, disproportionate economic harm to US interests, including our companies and US workers, our customers, US consumers, and broader US economic and strategic priorities," said the letter to Lighthizer.

A senior executive at another large U.S. regional solution provider that works extensively with Cisco said he's heard nothing official from the San Jose, Calif., networking giant even though he met with top Cisco channel executives only about two weeks ago.

"This was not a major topic of discussion, all the way to the director level," the executive said. "I would think that if it's top of mind for them, they'd say something at a partner meeting. All the people from the partner community, the director of the region, and none of this came up."

Still, the executive said customers will shoulder any increases. "From an economy perspective, it's the customers who end up paying more," the executive said. "If Cisco raise prices, we still sell at a percentage off list. The consumers will have to foot the bill. If the prices go up, if the list price goes up, if the transfer price from distribution goes up, we're not going to make any less margin. We're going to pass it on to the client."

The executive said he expects the increases to be a political concern rather than a financial concern among customers. "There is a financial impact, but there's a political will behind the things that are happening," the executive said. "A pro-Trump customer is going to say, 'This is what we have to do and Cisco should bring manufacturing in-house to avoid this. Those in the other camp will say we have to look for newer emerging economies to do manufacturing. The reaction is going to depend on political affiliation."

A top executive at another U.S. solution provider that works closely with Cisco took a more cynical view, suggesting that Cisco is taking advantage of the tariff situation.

"The challenge with price pressure, upward or downward, is that it allows for cavalier changes to take advantage of fluctuation, as well as legitimate needs to do so," the executive said. "The market is expecting the changes should this move forward with China. I feel like calling all the smaller guys up and saying do yourself a favor and put out a statement saying you're not raising prices until 2019. Cisco has had time to plan. The smaller guys don't have that ability. If I was Aerohive or Riverbed, I would announce right now that I'm not raising pricing until 2019, it would take all the jitter out of clients while Cisco tries to figure out how to make an extra 14 cents."

Matt Brown contributed to this story