(Editor's Note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts and reassess our guidance accordingly (see our research here: spglobal.com/ratings).)

On Jan. 31, 2025, President Trump announced the U.S. will impose a 25% tariff on goods imported from Mexico and Canada (with the exception of Canada energy at a lower rate of 10%) and 10% on goods imported from China (on top of existing levies). On Feb. 3, 2025, President Trump announced a pause of the 25% tariffs on Mexico and Canada imports for one month after reaching agreements on border control with Mexican President Claudia Shienbaum and Canadian Prime Minister Justin Trudeau.

The 10% U.S. tariffs on China imports (on top of existing levies) went into effect Feb. 4, 2025. China immediately announced a 15% tariff on coal and liquefied natural gas and a 10% tariff on crude oil, agricultural machinery, certain cars and trucks, and imposed export controls on certain critical minerals, including tungsten, which is used in many electronics and semiconductors. The China-imposed tariffs will start Feb. 10, 2025. Additionally, China's antitrust regulator announced that it has opened an investigation into Google (a subsidiary of Alphabet Inc.) for alleged anti-trust violations.

Currently, S&P Global Ratings is not aware of any tariffs exemption for major tech products. We estimate the exposure of tech imports from Canada to be low. However, according to U.S. Census Bureau data, more than 70% of desktop personal computers (PCs) and TVs imported into the U.S. are manufactured and assembled in Mexico and represents an increase in exposure since President Trump's first term. Import levels of major tech products such as smartphones, laptops and tablets, and video game consoles from China, while lower than President Trump's first term, still represent more than 75% of U.S. imports globally.

Chart 1

President Trump has also expressed his desire to impose additional tariffs on goods from the EU. Additionally, he expressed that U.S. imports of semiconductors, pharmaceuticals, copper, steel, and aluminum are under consideration.

S&P Global Ratings believes the proposed tariffs on imports from Mexico and China would have a larger impact on the global tech sector than those levied during President Trump's first term. At that time, only a subset of tech products such as routers and switches, hard disk drives, modems, motherboards, and certain computer parts were subject to 25% China import tariffs. He also proposed a 10% tariff on goods imported from China, including smartphones, notebooks, servers, storage devices, printers, wearables, tablets, and videogame consoles. These tariffs were never implemented.

Without any product exemptions, the newly proposed tariffs will cover a broader scope of tech products, representing a higher proportion of overall global IT spending, and will include more finished goods, which are more expensive than intermediate goods and therefore subject to higher tariffs.

The global tech supply chain has been proactive in reallocating certain manufacturing activities to countries outside of China, such as India, Taiwan, Thailand, Malaysia, Vietnam, Indonesia, the Philippines, and other Southeast Asian countries. These countries have lower operating costs, a growing population, a strong skilled labor base, access to government incentives, and are in close proximity to the China tech hub, making them attractive candidates as tech companies increasingly look to diversify their supply chain risk given rising geopolitical tension. Further away, but also attractive manufacturing destinations, are Mexico, other parts of Latin America, and eastern European countries, which are close in proximity to end consumers, and have access to more advanced transportation and logistics operations, as well as skilled labor.

We estimated that it takes at least six months or more to build and complete a final assembly plant ready for production. It may take longer depending on availability of workers and obstacles from government regulations.

Chart 2

During 2018-2020, some tech firms were able to pass along most of the higher costs to customers without significantly affecting demand. For example, Cisco Systems Inc. and Juniper Networks Inc. increased prices on their networking equipment to offset a portion of the higher costs due to tariffs. We expect many tech companies will use the same playbook to mitigate the higher costs from tariffs, especially those with lower margins such as tech distributors, contract manufacturers, parts suppliers, or value-added resellers. How it affects demand this time around will be more difficult to assess. We believe end products that are currently in high demand, such as AI-related data center infrastructure and semiconductor chips, and those that have high brand loyalty will be less affected. However, products that have close substitutes such as general servers and computer parts and accessories will likely see more elastic customer demand behavior, which could lead to decreased consumption or delayed purchases. Ultimately, we expect some of the higher costs from tariffs, which are unlikely to be passed along in their entirety to customers, would have to be shared among the supply chain members.

The revenue and margin impact on global tech firms is difficult to assess because most companies don't disclose how much of their products are manufactured or assembled in Mexico and China before being imported directly to the U.S. However, we believe most original equipment manufacturers (OEMs) still have a significant manufacturing and final assembly presence in China due to their supply chain efficiencies and in Mexico due to its proximity to the large U.S. consumer base.

It is also difficult to tell whether the proposed tariffs are the beginning of a deteriorating geopolitical environment or a potential action that could resolve with dissipating tension.

We expect the U.S. and China trade tensions to continue given both countries' view that tech supremacy is highly correlated to their economic interests and national security concerns. Key sticking points from President Trump's first term such as China's "unfair trade practices" related to technology transfers, intellectual property, and innovation as well as U.S.-imposed trade restrictions on Chinese entities such as Huawei (not rated) that represent a perceived rising security threats, have since broadened to include U.S. export bans of advanced chips and wafer fabrication equipment. The recent breakthrough by DeepSeek (not rated), a Chinese AI firm, that reportedly developed an AI reasoning model with comparable performance as OpenAI's but at lower cost and with less advanced chips adds another wrinkle to the technological gap between the U.S. and China.

We are also wary of actions by both countries, such as even higher tariffs imposed on each other's imports or nontariff-related retaliatory moves such as customer boycotts of goods made by each country. These additional actions could cause deteriorating business and consumer sentiment and dampen IT spending against a backdrop of an already decelerating global GDP growth.

For 2025, our S&P Global economists' global GDP forecast calls for 3.2% growth (down modestly from 3.3% in 2024) and our S&P Global Ratings tech team forecasts IT spending to grow by 9% in 2025 (accelerating from 8.3% in 2024). Surely, tariffs, or the mere possibility of tariffs, could have chilling effects on macroeconomic growth and IT spending behaviors. While we are not contemplating tariff-related rating changes to any of the global tech companies at this time, we recognize that any escalation would undoubtedly add to global economic uncertainty and downside risk to the tech sector.

How Proposed Tariffs Might Impact Select Tech Issuers By Region

U.S. Issuers

Apple Inc. (AA+/Stable/A-1+)

Exposure:  

• We estimate that about 90% of Apple iPhones are manufactured in China and a very high percentage of laptops are manufactured in China with modest exposure to Brazil and India. Wearables exposure to China is lower as Apple has been investing heavily in expanding its Vietnam presence.

Mitigation strategies:  

• We believe Apple is likely to pass along higher costs to carriers and end consumers through price increases, especially for the iPhone, given its loyal customer base who are generally less price-sensitive than those of Android users.
• We believe the ultimate impact to consumers will be modest because Apple works with the carrier, retailer, and reseller communities to provide compelling financing plans to maintain its customer base.

Impact:  

• We expect there would likely be modest negative impacts on Apple's sales, gross margins, and free cash flows as its large and growing services business continues to offset most of these effects.

U.S. PC And Server Original Equipment Manufacturers

Despite efforts to diversify their supply chain, PC OEMs still have significant manufacturing exposure to China.

Exposure: 

• About 79% of laptop imports to the U.S. still come from China, according to the Consumer Technology Association.
• We believe Dell Technologies Inc.'s (BBB/Stable/--) and HP Inc. (BBB/Stable/A-2) mix of Chinese-manufactured PCs are lower than the industry average due to efforts to diversify their manufacturing activities away from China but they still have a significant presence in the country.
• We also believe a sizeable portion of Dell servers are manufactured in Mexico.

Mitigation:  

• We expect Dell to pass along most of the higher tariffs costs to customers. We expect Dell to continue to shift more of its laptop production to Vietnam and aim to phase out chips made in China.
• We believe HP will continue to work with its electronic manufacturing services (EMS) partners to shift more of its laptop production from China to Thailand and Vietnam, but its significant China presence is likely to remain.
• We believe Dell took actions to speed up production and increase inventory levels ahead of new tariffs.

Impact:  

• Both Dell and HP have similar business and financial risk profiles. Both companies' EBITDA margins are in the high-single digits, which points to a low ability to absorb significant tariff costs. We expect there to be some modest demand loss from price increases to offset higher costs from tariffs. The net effect on sales to enterprise PCs will be at least partially mitigated by the need to upgrade PCs before Microsoft ends its support of Windows 10.
• We do not expect the tariffs to significantly impact our view of both Dell and HP's credit ratings given the existing cushion within the ratings for operating shortfalls. We also believe the shareholder ratings can be moderated as needed.

Hewlett Packard Enterprise Co. (HPE; BBB/Negative/A-2)

Exposure: 

• We believe HPE has moderate exposure to China and minimal exposure to Mexico and Canada. We believe HPE's servers are manufactured in various countries, including the U.S., China, and India.

Mitigation: 

• We expect HPE to gradually increase its server manufacturing in the U.S. but this will take multiple quarters to accomplish, in our opinion.

Impact: 

• We assume the higher cost will be absorbed by all parties, including HPE, its suppliers and ultimately, the customers, although we believe HPE's enterprise customers are more likely to absorb higher costs given the important role HPE plays in their customers' data centers.
• There could be temporary pressures on cash flows due to working capital investments.
• Despite the potential for margin deterioration and cash flow impacts, we don't expect any near-term rating actions given our view the company will attempt to preserve its ratings through other cost-cutting measures and a moderation of shareholder returns.

Cisco Systems Inc. (BBB/Stable/--)

Exposure: 

• We believe Cisco has expanded its supply chain exposure in Mexico since President Trump's first term, to just over half of its revenue, to be closer to the U.S. customers and also decrease manufacturing exposure in China.

Mitigation: 

• We expect Cisco to pass along the vast majority of tariff costs to customers.

Impact: 

• We believe Cisco has flexibility to absorb some of the higher costs from tariffs if it wants to shoulder some of the burden without significant deterioration of its credit metrics and rating profile.

U.S. Contract Manufacturers

Exposure: 

• For Flex Ltd., 26% of revenues came from its sites in Mexico last quarter and 17% from China. A large share of its Mexican production is likely bound for the U.S. given its proximity. A significant share of China revenue isn't likely bound for the U.S.
• For Jabil Inc., 20% of revenue came from Mexico in fiscal 2024 (ended in August) and 17% came from China based on the location where it manages the relationship, which we believe closely reflects the manufacturing site. It maintained 22% of its long-lived assets in China and 19% in Mexico.

Mitigation: 

• Tariffs would generally be passed through to customers. Clients likely shift volume to other locations or other EMS companies not subject to tariffs. We believe this shift has been underway over the past couple of years.
• EMS companies can offer advice to their customers on optimizing their manufacturing sites for tariffs. Customers will make the choice, but moving production from one site to another is a slow process, particularly if many customers do so at the same time. 

Impact: 

• In times of declining sales, cash flow from EMS companies typically increases because of working capital monetization, which will provide some short-term cushion until the industry reaches some equilibrium after new tariffs.
• We currently don't foresee negative rating actions for Jabil, Flex, or Sanmina Corp. as a result of tariffs because they all have some cushion from their downgrade thresholds. Flex and Jabil have leverage in the mid- to high-1x area compared to their downgrade thresholds of 3x. Sanmina has a net cash position and a downgrade threshold of 2x. In addition, EMS companies are likely to become even more important to their customers because of the diversity of operating locations and the advice they can offer in managing impacts from tariff.

U.S. Auto Semiconductors

Exposure: 

• Major semiconductor suppliers to the automotive industry have significant direct exposure to China (10%-30%), but not all production is exported.
• An indirect impact from potentially lower auto sales due to higher prices stemming from the tariffs.

Mitigation: 

• We don't believe semi suppliers have actively decreased their auto end market exposure to China given the strategic importance of the market, which has been a growth driver amid mixed performance in other major markets such as Europe.
• Suppliers have a local production strategy with a mix of local consumption (e.g., China production for China customers) and exports.
• We believe some of the impact from trade restrictions or tariffs may be offset somewhat, given currently higher-than-historical average inventory levels.

Impact: 

• We expect tariffs may affect automotive demand but credit ratings for semiconductor suppliers generally have low debt to EBITDA and good downside cushion.
• We view suppliers have solid business profiles and diversified end markets that anchor our ratings on the companies.

U.S. Software

We expect minimal impact on software companies stemming from the tariff announcements. Any impact will be indirectly due to lower sales of end products stemming from the tariffs.

Canada

Tech exports from Canada to the U.S. are very low. As a result, revenue pressure on Canadian tech issuers we rate (mostly software companies) should be minimal. However, Celestica Inc., a Toronto-based design, manufacturing, and supply chain solution provider, has a portion of its manufacturing operations in China. The company has been expanding its facilities outside of China (e.g., it began operations in Malaysia in 2024 and plans to launch operations in Indonesia in 2025) and currently has significant capacity in its U.S. facilities should the company need to shift manufacturing onshore. Given the company's flexibility, we expect pressure on Celestica will be limited.

Latin America

We don't rate any tech issuers in Mexico; however, Mexico is home to a large volume of hardware and IT equipment manufacturing and tariffs could pressure the profit margins of those operators with U.S. export exposure.

Asia Pacific

The direct effects of U.S. tariffs will be relatively limited for APAC technology issuers. Most APAC technology companies, such as Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) and SK Hynix Inc., are suppliers of key components for U.S. products. The impact to their advanced chip and memory business in particular will likely be relatively limited, due to demand well-exceeding supply for AI chips and high bandwidth memory (HBM). Second-order effects given slowing U.S. technology product sales and macroeconomic slowdown could, however, affect demand for other commoditized components such as dynamic random access memory (DRAM) and mature chips.

Many Japanese issuers and some Chinese issuers such as Xiaomi Corp. already have limited exposure to the U.S. For some Japanese issuers with exposure to China, second-order effects of a China economic slowdown attributed to slowing exports could affect some Japanese issuers. China is the second largest export market for Japan, and the country accounts for 10%-15% of sales collectively for many of the Japanese issuers we rate.

For PC manufacturers, such as Lenovo Group Ltd., and EMS companies such as Hon Hai Precision Industry Co. Ltd., U.S. tariffs could be more problematic. Most of Lenovo's PC exports to the U.S. are from China and the vast majority of iPhones are still assembled in China by Hon Hai. The sudden implementation of the tariffs means that such companies will have little time to adjust their supply chains. Even so, we expect the U.S. tariffs will be manageable for Lenovo and Hon Hai with relatively limited credit implications for now.

Lenovo Group Ltd. (BBB/Stable/--)

Exposure:   Lenovo's U.S. exposure is lower than its competitors Dell and HP with the U.S. accounting for about 20%-25% of Lenovo's revenues compared. However, most of its PCs are produced in China and it's likely a meaningful amount of its U.S.-bound servers are produced in Mexico.

Chart 3

Chart 4

Mitigation:   We believe some of its PC production can be moved outside of China; however, considering the higher tariff rates in Mexico and the production of many PC components still remaining in China, most of its overseas capacity is likely to be more costly than PCs produced in China.

Impact:  The additional tariffs will have a modestly negative impact on Lenovo's EBITDA and cash flows. We believe Lenovo will attempt to pass on some of the additional costs to consumers and enterprises given the low product margin for PCs and servers, similar to Dell and HP. However, the higher prices may hurt demand. We expect the impact to Lenovo to be modest and the resulting EBITDA decline won't likely result in its adjusted debt to EBITDA to exceed the rating threshold of 1.5x.

Hon Hai Precision Industry Co. Ltd. (A-/Stable/--)

Exposure: 

• Hon Hai currently assembles roughly 85% of iPhones as well as the vast majority of its other consumer electronics devices in China.
• However, most security sensitive IT equipment for the U.S. market, such as AI servers and networking equipment, are currently produced outside of China. Mexico has become an increasingly important production site for those products over the past few years.

Mitigation: 

• Hon Hai's extensive global production footprint, including growing capacity in India, Vietnam, and the U.S. could help the company weather global protectionism better than its peers.
• OEM customers are likely to absorb a majority of the incremental tariffs without alternative manufacturing sites immediately available.

Impact: 

• Higher tariffs could slightly erode margins for price pressures and likely lower shipments as higher end prices could dampen market demand.

Europe, Middle East, and Africa

We think the new U.S. tariffs on goods imported from Mexico, Canada, and China could have a negative impact on European tech hardware manufacturers, potentially resulting in lower revenues and profits, although the magnitude is difficult to assess given a complex global supply chain with production and demand in many markets.

As for now, the potential negative impact on European technology firms would be lower demand from the U.S. market for products that are manufactured in China, Mexico, and Canada. We think sales exposure to Mexico and Canada is relatively small, typically in the low-single digits for European companies, whereas sales exposure to China is significantly larger. For instance, China represents about 30% of European semiconductor manufacturers' sales. Additionally, there could also be a negative impact on demand for European technology firms' components produced anywhere; for instance in Europe, if it is part of a finished good manufactured in China, Mexico, or Canada. This could affect European semiconductors revenues in the automotive market, given many auto manufacturers plants are located in Mexico (and China).

If the U.S. administration follows through with its plans to levy tariffs on EU products, we expect a greater impact on many of the European technology hardware issuers we rate as the majority is directly exporting to the U.S. market. For example, for Ericsson (Telefonaktiebolaget L.M.), the U.S. represents 40% of sales. For the semiconductor's companies, the direct U.S. exposure is relatively low (typically between 10% to 20%), but we estimate the share of products eventually shipped to the U.S. (either through distributors or their direct customers) is substantially higher.

In our view, there are a few mitigating factors that could help ease the potential harm from trade tensions. In general, we note that the issuers we rate have developed a flexible approach in recent years and can adjust their production in certain geographic regions to minimize the geopolitical risk. Furthermore, given their global presence, we regard European technology firms as relatively diversified in terms of supply and demand, including some production in the U.S., and with different levels of in-house versus outsourced production. Another mitigating factor is that in some cases when there is little competition from U.S. players (e.g., the mobile telecom equipment market is largely dominated by Ericsson and Nokia) we view products as critical with limited substitution risks.

Related Research

• Industry Credit Outlook 2025: Technology, Jan. 14, 2025
• Solid IT Demand Bodes Well For Technology Credits In 2025, Jan. 8, 2025
• U.S. Tech Sector: Another Attempt At A Cyclical Rebound, Jan. 15, 2025
• Long-Term U.S. Tech Ratings Will Be Tested By Geopolitical And Trade Uncertainties, Sept. 4, 2024