The price of a new “smart home” controller from US start-up Brilliant just went up $50 — even before it went on sale.
The three-year old company joined the race to create intelligent home devices last week, launching a wall panel that combines a light switch with things such as music controls and a microphone to talk to Amazon’s Alexa smart speaker.
The White House’s latest round of threatened tariffs on imports from China — where the device is manufactured — led the company to push the price up to $299 at the last minute, to absorb the expected costs. Brilliant hopes the typical customer will buy five of the panels for their home, says Aaron Emigh, chief executive, adding $250 to the cost of an installation.
In the technology industry, hardware start-ups face some of the longest odds for success. Until they reach high enough volumes to strike better deals with suppliers and support the costs of brand marketing it is hard to make the economics work, and profit margins are notoriously low.
“When you’re in hardware, a 25 per cent tariff can be a death knell to your business,” says Nate Kelly, a supply chain expert who now heads TrackR, a company that makes Bluetooth devices. The lack of a financial cushion or a diversified set of products means many companies will not be able to “ride this out for six months or a year”, he said.
The White House said earlier this summer that it plans to slap US tariffs of up to 25 per cent on a list of $200bn worth of annual imports from China. With the formal comment period over, the new levies could come any day. Many consumer electronic products are on the list, including those in new markets such as smart home devices and “wearable” electronics, like smartwatches.
The impact is not limited to start-ups. At the end of last week, Apple said that it expected to pass on import levies on products such as its AirPod headphones and Home smart speaker to consumers — a warning that brought a tweeted riposte from Donald Trump, who told the company it should shift production to the US instead.
But start-ups are likely to be hit hardest, whether their products are made in China or they import components and do the final assembly work in the US.
“Your resistor or diode is already costing you 10 times what you’d pay if you were Apple,” said Mr Kelly. Slapping a tariff on these higher prices will add to the pain, he said.
Companies such as Brilliant face the extra challenge of trying to price their products in a way that will generate demand in new markets that have yet to establish themselves.
For customers of these new gadgets, “it’s less of an economic decision and more of an emotional one”, said Philip Winter, chief executive of Nebia, a start-up that makes a technologically advanced $400 shower designed to save water. Early adopters may not be especially price sensitive, he said, but breaking into the mass market usually involves cutting the price, something that is now much harder. He estimates his company’s total bill for materials has already increased 5-10 per cent this year because of US tariffs on the aluminium it imports.
Many US hardware makers are investigating whether they can shift assembly of their products out of China, potentially to Mexico.
Brian McGee, chief financial officer of GoPro, said last week that the maker of action cameras does not yet face tariffs on its imports. But in anticipation of more levies ahead, it is working with contract manufacturer Jabil — which handled production for GoPro in China — to look at shifting production to Jabil plants in other countries. “We may want to do that anyway, because it may actually be cheaper to be in some of the other locations versus being in China,” he said at a conference organised by Citi.
The newest start-ups may well lack such flexibility. Brilliant has spent more than $1m working with suppliers to establish a manufacturing base in China, said Mr Emigh. For a company that has raised $21m in venture capital, that amounts to a sizeable commitment and makes it expensive to consider moving manufacturing to a new location.
Timing is also an issue, given how long it takes to build relationships in new locations. “It’s a six to 12-month thing,” said Mr Winter, who said he is considering turning to Mexico to source his company’s products. Given the potential disruption, that is only likely to happen with a future product, not switching an existing one, he said.
With so much riding on their first products, though, that may be a luxury some start-ups will not be able to afford.
