Tariffs will hit smart home devices in the US, their largest market

At the Startup Launchpad conference in April, Brave Soldier Venture Capital founder David Kwik was very bullish on on electronic cigarettes. Expect the market to get much larger in the next couple years, he said. Now that space is threatened by new tariffs from the U.S. on electronics from China. While smartphones and televisions have been spared thanks to lobbying, product categories seeing more growth among younger consumers will be hard hit. Outside of users and investors like Kwik, few may mourn a blow to the e-cigarette market, but the impact of the tariffs will felt in many sectors, including smart homes.

Just a few years ago, e-cigarettes and electric scooters, both expected to be significantly impacted by the tariffs, faced something of a crisis. Low quality lithium-ion batteries in products coming out of China were pinpointed as the cause of multiple fires and explosions. Putting pressure on these industries might seem like vindication for tariff proponents, especially since the two-wheeled scooters known as hoverboards that were so popular were considered a fad and e-cigarettes, which have mostly been seeing growth among younger consumers, are still considered a health risk.

Smart home products are different. The market potential is huge for manufacturers and service providers alike. These products give companies massive amounts of data that can improve service and be used for new revenue streams. The impact of smart home devices became clear when companies started trying to make everything “smart.” Suddenly the market was inundated with smart lights, smart vacuum cleaners, smart refrigerators, smart toasters, smart rice cookers and even smart air purifiers. With a few sensors and Wi-Fi connectivity, what was once old is new again.

Most of these products are manufactured in China, and shifting production would not be easy. The supply chain and important economic clusters for manufacturing these kinds of products give China a huge advantage in this area. Unlike textile manufacturing, which has largely spread out through Southeast Asia, only China currently has the skilled workforce and supply chain necessary to make these types of electronics quickly on a large scale. It’s enough for companies to consider the idea of shifting production a nonstarter.

“To set up [manufacturing] with another company in a new country that can make that specific product is near impossible or will take up a long time to establish,” Consumer Technology Association analyst Rick Kowalski told the Financial Times.

Currently, smart home industry revenue is projected to reach nearly $35 billion in the U.S. by 2022, up from $16 billion in 2017, according to Statista. Global revenues are expected to grow from $35 billion to $119 billion over the same period.

U.S. Smart Home Revenue (Source: Statista)

The U.S. remains the largest consumer market for smart home products, but growth is faster in China. Much of smart home growth is happening in in control and connectivity, home entertainment and smart appliances.

Whether people are buying a smart plug, router or even a TV, chances are it was manufactured in China. Fortunately for U.S. consumers, TVs are spared tariffs for now. Some companies have been pushing TVs as smart home hubs. Even so, all the sensors and assorted connected widgets that make smart homes possible have a supply chain that runs through China.

This makes business complicated for Internet of Things companies, including the startups that are just trying to get off the ground and become viable competitors. Regional differences in revenue won’t be so stark by 2022 if current projections pan out, but the U.S. will still be the largest market by at least several billion dollars.

It remains to be seen whether the Trump’s administration’s tariffs can stunt smart home growth in the U.S. It’s an important industry in which companies are expected to plough ahead largely because businesses are shifting more to subscription-based models that put more emphasis on products as a service.

Subscriptions make the ongoing development of certain products more sustainable, but it also requires giving users more value to justify recurring payments. In the smart home, this means a lot of sensors and often cloud-based intelligence to crunch data and serve back useful information. Smart security cameras, for example, can recognize when a person approaches a home, distinguishing from movements of objects and animals, and send an alert when its deemed important.

For many consumers, that kind of service is worth $10 per month, especially in the age of “porch pirates.” The adoption of new technology has long relied on declining prices, though. A potential trade war jeopardizes that, but it’s just one more reason for startups to weight their options for expanding to new markets and diversifying their revenue streams.

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