The Implications of U.S. Tariffs on the Competitive Landscape for Cellular Modules, and IoT Components

The United States is one of the world’s biggest markets for the consumption of Internet of Things (IoT) hardware and services. According to ABI Research’s IoT Market Tracker, 18% of all cellular IoT connections are situated in the United States; and according to ABI Research’s M2M Embedded Cellular Modems market data (MD-M2MM-176), 16% of all cellular modules shipped each year are destined for use in the United States. The IoT is all about predictability, and the assurance of business outcomes through performance guarantees, especially when it comes to Operational Expenditure (OPEX). Uncertainty in, or increases in the cost of, essential components will be an active concern for IoT device Original Equipment Manufacturers (OEMs), and their downstream enterprise and municipal customers.

The majority of cellular modules shipped are manufactured by Chinese vendors—80%, in fact. There are 35 Chinese module vendors currently known to be competing in a market of some 60+ vendors worldwide. Not all Chinese module vendors serve the international market, but the handful that do are considered power players. Quectel is the dominant cellular module supplier in many countries, and is the global market leader with a massive 42% share. More Chinese vendors are seeking to follow its lead, and break out of their domestic market. But wherever tariffing gamesmanship ultimately takes the United States, it is undeniable that China is its principal target for retribution.

As a result of the need to diversify sourcing to reinforce supply chains, following the global disruption to business caused by the COVID-19 pandemic, and the following “chipset crisis,” module vendors have already started spreading their manufacturing between factories in different countries. Not every cellular module sold by Chinese vendors is made in China. And due to the increased attempts to restrict the use of Chinese modules, by the United States’ Secure and Trusted Communications Networks Act, and the U.S. Department of Defense, large vendors are already employing tactics that would also prove useful in circumventing tariffs; namely, licensed, U.S.-based manufacturing of their original module designs.

Any IoT device OEMs that already have concerns about the security of Chinese modules, or of Chinese vendors’ longevity in the United States, already deliberately buy from other vendors. But many OEMs’ only concerns are cost, quality, and customer service. Cost is not the most important factor per se, but as Chinese vendors have actively sought to excel in both quality and customer service, cost often ends up being the deciding factor between vendors. Of further concern for all Chinese module vendors with a market presence in the United States is extra potential expense from a tit-for-tat response by the Chinese government. Chinese vendors build modules based upon all baseband modem chipset platforms, but it is the products with Qualcomm chips that sell best for them in Western markets, especially in the United States.

If China imposes retaliatory tariffs on U.S. products, Chinese vendors risk paying more to import the components they need. As well as having to pay again when their U.S.-registered entities, or customers, import the finished products to the United States. Chinese modules risk costing 2.5X as much, creating a greater still incentive to accelerate U.S.-based manufacturing plans. An unfortunate necessity for the supply-side of the IoT is that products and services need to be highly commoditized to be affordable enough for purchase en masse. The IoT market has grown organically for decades, and is the biggest it has ever been, even with the stagnation of the last few years, with global shipment revenue of around US$5.6 million since 2022. Ergo, all new costs are problematic for all participants when profitability has been static for years.

All other cellular module vendors stand to benefit from the exclusion of their Chinese competitors from the U.S. market. Even if other vendors’ products also face increased tariffs, it will be less so than for Chinese vendors, and the opportunity to take such a significant market opportunity away from them will be too great to resist; such that international vendors may be willing to absorb any extra tariff costs, and not pass it on to their customers. U.S.-based vendors, however, should theoretically gain the most, with no new costs to contend with related to their U.S. sales. But should U.S. vendors also manufacture products based on imported chips, for export and sale in other regions of the world, then they will incur extra expense. But this, too, should be palatable considering the potential increase in overall turnover from their domestic business.

Conversely, even modest tariffs could affect some imminent new entrants to the U.S. market. India is becoming a breakout region for low-cost manufacturing outside of China. There are module vendors relying 100% on Indian manufacturing, with products currently waiting for certification by the Federal Communications Commission (FCC). Their fortunes will be especially sensitive to sudden price volatility, and may even cancel any U.S. product launches. But Chinese module vendors will not give up and retreat to their domestic market without a fight, as there is too much value at stake. The companies already employ a wealth of Western talent corralled from the cream of the crop of their competition. They have the local knowledge, and the necessary funding, to understand how to weather a tariff storm; as well as still having the rest of the world outside the United States to serve.

Chinese manufacturers have a longstanding ability to undercut their international competition on pricing. And they have often been blamed for tanking the value of hardware markets, placing international competitors in an impossible position. All the while, Chinese companies have still made greater margins on those products sold abroad than they do domestically. If Chinese module vendors’ products were excluded from specific geographic markets, or should be forced to increase in price, it would please the parties looking to reestablish the intrinsic value of cellular modules. But waiting for Chinese vendors to be forced out remains a hope, rather than a certainty, and hope is not a reliable business strategy.

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