How Will Tariffs Affect the Next Generation of Video Game Consoles?

Stephen Lovely, The Motley Fool

Updated Wed, Sep 4, 2019, 6:50 PM

There's no bigger story in finance right now than the ongoing trade war between the United States and China. Kicked off by President Donald Trump, who has taken a hard line on Chinese trade, the conflict has at turns inspired and battered the market, including when the Chinese government allowed its currency, the renminbi, to devalue (the market swooned to the tune of nearly 3%) and then backed off a bit (the market bounced back).

Chief among the tactics used in the trade war has been tariffs. First came the United States' tariff on washing machines and solar panels (though not just those made in China) in March of 2018; then a second set of new tariffs (on steel and aluminum); then retaliatory tariffs from the Chinese on 128 U.S. goods; and then several more back-and-forth tariff announcements and rate hikes.

Image source: Getty Images.

That's been rough on a lot of companies, but tech giants Microsoft (NASDAQ: MSFT), Sony (NYSE: SNE), and Nintendo (OTC: NTDOY) have not seen their gaming segments targeted directly -- until now. Despite coming together to issue a joint statement over the summer warning of the impact of tariffs on the video game industry, the console makers are getting hit with an upcoming round of tariffs, which will take effect on December 15.

Made in China

The video game giants' joint statement came in response to a proposed (and now official) list of goods to be made subject to tariffs if imported from China. Among them: "Video game consoles and machines." That was bad news for the big three of console gaming, each of which makes its video game consoles in China.

The joint statement wasn't the only time the video game giants have spoken out. Sony recently told The Wall Street Journal that PlayStation price hikes would likely follow the proposed tariffs, should they be finalized.

And finalized they have been. Despite Sony's protestations, the president took to Twitter the very next day to announce that the proposed tariffs would go into effect on Sept. 1. That has since been changed to December 15.

Other options

There's no doubt these tariffs will hit video game consoles hard -- unless the manufacturers can get out of China. And that's what Nintendo has started to do. At least some of the company's new Switch models are now manufactured in Southeast Asia, reportedly with the goal of manufacturing enough to meet U.S. demand (Nintendo can still supply other countries with Chinese-made devices without worrying about U.S. tariffs, of course).

Will Sony and Microsoft follow suit? The companies would clearly prefer not to. Neither has made any move out of China yet (Microsoft has even refuted a report that it was contemplating such a move). Both companies seemed focused on defeating the tariffs instead, but now that they've lost that battle, it's not clear what comes next.

Next-gen concerns

Sony and Microsoft are still selling new units of consoles that are now more than half a decade old -- Sony recently passed the 100 million mark with sales of its PlayStation 4. But this fight isn't just about the immediate future. It's also about where Sony and Microsoft will build the next generation of hardware.

These upcoming versions of the PlayStation and Xbox are likely to debut in late 2020, and their manufacturers don't want tariffs on consoles to become the new normal. That's especially true given that Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is moving into the market with a light-on-hardware cloud gaming approach. No manufacturing location for the as-yet-unreleased Stadia has been announced, but Google has already made moves to shift manufacturing out of China. Even if Stadia is made in China, the device is cheaper (and the tariffs, calculated as a percentage, will be proportionately smaller).

What it all means

In the short term, new tariffs could mean pricier consoles -- and such a price hike might well be passed on to consumers, just as Sony predicted. On the other hand, Sony and Microsoft may be reluctant to raise prices on their existing offerings, given their age -- but if that's the case, price hikes to the next generation of systems could well pick up the slack. The good news for Sony and Microsoft is that the delayed effective date of the tariffs gives them more time to lobby against the planned tariffs, and in the meantime, consider Nintendo's strategy of moving at least some of their manufacturing elsewhere in Asia.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Stephen Lovely has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Microsoft, and Twitter. The Motley Fool has the following options: long January 2021 $85 calls on Microsoft. The Motley Fool recommends Nintendo. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com

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