This analysis does not constitute legal or regulatory advice; it is based solely on publicly available information. Content is updated as of May 7, 2025.
In 2024, the semiconductor industry created the fourth-largest value by market capitalization after high tech, life sciences (pharmaceuticals and biotech), and media and entertainment (Exhibit 1). Semiconductors underpin critical industries from consumer electronics to automotives to aerospace and defense (A&D), and they form the basis for many national security technologies.
For these reasons, countries have recently been exploring trade measures of double- and even triple-digit tariffs as well as material export restrictions. For example, on April 2, 2025, the United States announced reciprocal tariffs on many nations, including China. During subsequent escalating trade tensions between the United States and China, both nations applied tariffs exceeding 100 percent on imported goods. On export restrictions, China produces about 95 percent of gallium and germanium, raw materials that are critical for certain semiconductors. In December 2024, China announced export restrictions on both materials, increasing supply vulnerabilities.
Geopolitical tensions have led semiconductor companies and downstream players—electronics manufacturing services (EMS) companies, automotive OEMs, consumer electronics product companies, and distributors—to devise strategies aimed at maintaining production volumes and operating margins.
Amid this volatility, the semiconductor industry is well positioned to play a critical role in helping its downstream customers navigate the impact of tariffs on end consumers. Semiconductors constitute a significant portion of the bill of materials (BOM) for many commonly used products. Further, the public and private sectors have prioritized the industry after pandemic-era shortages of chips highlighted their vital role in most products and technologies that much of the world relies upon.
Analysis exploring how proposed tariffs might affect different players along the value chain reveals a general dilemma facing the industry—whether to absorb cost increases from tariffs or pass them along to end consumers. Although much uncertainty persists around the actual implementation of tariffs, companies that focus on fundamentals and conduct a detailed assessment of their (and their customers’) supply chains could increase their resilience and ability to respond.
The current tariff framework
In early April, the United States updated import tariffs for end products from approximately 90 countries before announcing a 90-day pause for implementation. A 10 percent tariff on goods from these countries remains in place during this period. China was the lone exception (Exhibit 2). Further, in March, the United States used its authority under Section 232 of the Trade Expansion Act of 1962 to raise steel and aluminum tariffs to 25 percent (up from 10 percent) for all nations, which could affect companies pursuing major construction projects. In response to tariffs placed on Chinese exports to the United States, the China Semiconductor Industry Association (CSIA) issued a notice stating the country of origin for integrated circuits will be determined by the location of the wafer fabrication plant (or the country where the “last substantial transformation” occurred). China’s change in customs declarations will likely affect integrated device manufacturers (IDMs) with fab production in the United States that are trying to make sales in China, potentially shifting customer demand to regional or local production.
Beyond country-specific tariffs, levies on semiconductor chips have been paused as of April 14, 2025, by the US Department of Commerce Bureau of Industry and Security (BIS). BIS announced an investigation to determine the effects of imports of semiconductors and semiconductor manufacturing equipment on US national security. It is conducting this investigation under Section 232 of the Trade Expansion Act of 1962, which enables the president to limit imports of a product and its derivatives. The president will then make an assessment on the findings of the investigation and can enact trade actions as deemed necessary.
Potential tariff effects
The United States is one of the largest importers of semiconductor end products, with China or Germany taking second place in many categories. Indeed, US imports of smartphones, data center servers, notebook PCs, media tablets, LCD displays, and internal combustion engine (ICE) automobiles are at least two times greater than the second-ranked market for each category. For most of these products, semiconductors make up a high share of overall BOM costs (Exhibit 3).
When assessing the impact of tariffs, companies will need to consider two primary factors: the value-add stage at which the tariff is assessed (for example, chip-level and end device tariffs) and how the product’s exporting country of origin is defined (such as the final value-add step or country of last substantial transformation).
Since Asian markets (such as China, Malaysia, and Taiwan) are where most of the world’s semiconductor chips are manufactured and assembled into components for consumer products, compute equipment, and automobiles, an end device tariff would tax products after the value-add has been incorporated throughout the product life cycle. Therefore, the largest effects may be felt not where chips are manufactured but where EMS providers assemble the end device before it enters an import tariff country (see sidebar, “The first- and second-order effects of a tariff arrangement”).
Take the smartphone as an example (Exhibit 4): Most semiconductor chips will be manufactured in East Asia (for example, Taiwan) and then shipped to an outsourced semiconductor assembly and test (OSAT) facility for back-end packaging. These packaged chips are then transported to an EMS provider, often in East Asia (such as China), where they are assembled on printed circuit boards (PCBs) and integrated into the final phone assembly. If the smartphone from China is then sent in its final packaging to a US tech company, it would be taxed at the port of entry by US Customs and Border Protection.
Along with smartphones, two additional product examples—an automotive infotainment system and an aerospace avionics system—highlight how the product manufacturing process may differ based on industry and end product (Exhibit 5). For companies to best determine their product portfolio’s potential tariff exposure, they can further break out each of their main customers’ products into subcomponents, calculate the share of costs that semiconductor content accounts for within each subcomponent, and analyze the chip’s fabrication location. This exercise can also highlight the potential interdependencies between a customer’s other suppliers and the end tariff’s impact on a product’s costs, which may affect demand. For example, a single company’s chips may not increase tariff costs for a product. If other suppliers that would be subject to tariffs account for a substantial share of a product’s BOM, the end customer’s sales could still be affected because of shifting demand.
Tariffs on semiconductor components could raise subtier costs for end devices, and tariffs on end devices could result in higher prices. In addition, if tariffs raise input costs to manufacturers within the country applying these levies, products may become less competitive, overall market prices may go up, and demand for end products could be affected. Similarly, if tariffs were to ultimately result in shortages of necessary materials, supply chain constraints could limit overall manufacturing output.
Industry cost sensitivities to tariff price fluctuations
In each end market (or product category), increases in retail costs may shift consumer demand. For the products we analyzed, demand elasticity plays a large role in determining whether the consumer will absorb the burden of higher prices or the producer and retailer will need to sacrifice margin to maintain the retail price.
If tariffs drive up prices for end products, their impact will vary across categories. Products with more elastic demand, such as budget phones, electric vehicles, solid-state drives, or LCD display monitors, may see consumers either seek cheaper options or delay upgrades if sufficient alternatives (with lower price points due to less tariff impact) are not available. Categories with inelastic demand, such as data center servers, may maintain current demand volumes, as loyal or dependent consumers absorb price increases.
For example, even increases of a few hundred dollars to a smartphone’s retail price (without adding incremental performance benefits) may cause consumers to reconsider or postpone their purchase, leading to reduced revenues for smartphone producers. For high-end smartphones and other premium consumer tech devices, however, brand loyalty and a consumer’s desire for cutting-edge features often outweigh price concerns, potentially leading to sustained demand despite higher costs. Increased prices for products integral to business operations, such as data center servers, could force companies to prioritize performance and reliability despite price fluctuations.
Three potential strategies for product and semiconductor companies
Before determining how to address tariff costs, companies would do well to develop a deep understanding of their own supply chain and those of their customers. With this foundation, companies would be able to analyze the potential impact of tariff cost scenarios. Depending on the competitive dynamics of a particular end market, companies may have a limited set of levers to address the cost impact of tariffs. Most could explore a combination of three strategies: absorb or pass through tariff costs to end consumers, reconfigure supply chain and customer portfolios, and augment government affairs efforts to become a thought partner.
Absorb or pass through tariff costs to end consumers
Product companies could maintain their margins despite additional tariffs by raising retail prices for end consumers. Companies operating in industries with relatively inelastic consumer demand, such as A&D, have more flexibility to follow this strategy, since their pricing power derives from limited competition on product offerings and the structure of their procurement contracts (for example, cost-plus or cost-plus fixed fee). After the United States released its updated tariff schedule on April 2, 2025, for instance, some chip manufacturers stated they would seek to impose a surcharge on products affected by US tariff policies.
Alternatively, companies may look to absorb part of tariff costs to defend their existing market share or retain supply capacity and production with their upstream suppliers. However, double- and triple-digit tariffs may make it economically difficult for product companies and their EMS suppliers to carry the full tariff burden without substantially eroding margins or taking a loss on certain products. Product companies could work with their entire supply chain, including semiconductor companies, to understand which parts of the supply chain could absorb the tariff costs.
Since tariffs increase an end product’s overall cost, product companies may also seek to reduce their own costs to regain margin and maintain price stability for end consumers. In the near term, companies could consider operational excellence best practices such as rethinking product development and procurement strategies with their suppliers. One example would be taking a design-to-X (DtX) approach to remove high-tariff components from products or reduce other high-cost components to offset other increased costs.
Semiconductor companies, with their excellence in operations and manufacturing, are uniquely positioned to potentially reshape the future state of partnerships across end markets. They could help their supply chain partners and downstream customers navigate procurement negotiations by identifying solutions to distribute tariff costs across the value chain. Semiconductor companies could consider categorizing spending by supplier, category, and location to help determine where and how much of the tariff is assessed. Further, they can calculate their current and potential tariff exposure and test procurement volume-shifting scenarios to identify where cost savings could be achieved.
Reconfigure supply chain and customer portfolios
Since tariffs apply to specific import markets along a product’s value chain, companies could redesign their supply chain accordingly. They could even pursue growing opportunities with non-tariffed countries by shifting their core suppliers, manufacturing capacity, and customer portfolios away from tariffed regions.
Any imposed tariffs would most immediately affect product companies and their manufacturing and assembly partners. At high tariff rates, some observers might suggest that EMS providers could reshore manufacturing operations to tariffed countries—for example, the United States. Since these providers already operate with razor-thin margins, especially for high-volume products such as smartphones and PCs (an annual gross margin of 6 to 11 percent), shifting operations to non-tariffed countries on their own may not be economically feasible, given the capital requirements. However, other semiconductor companies—fabless, IDMs, and foundry companies—and end product companies have the financial capacity to potentially help EMS players relocate their assembly operations.
Separately, most equipment suppliers have localized final-assembly sites, such as Singapore for Asia and California and Texas for North America. To qualify for lower-rate tariff categories, equipment suppliers could look to a different set of supply chain redesigns to optimize their existing product portfolios (including after-sales) and product specifications.
Looking further down the semiconductor value chain, chip and module distributors may also experience pressure from product companies to decrease margins in the face of high tariffs. If the full value chain sees tighter margins and lower consumer demand, a product company may seek to claw back margin from distributors that are strictly providing sales channels and fulfilling logistics. This dynamic offers distributors an opening to support the overall industry by collaborating closely with field application engineers and product development teams at fabless companies and IDMs to improve the manufacturing process. This support could include, for example, helping teams design their products to be more easily manufactured within the United States.
Beyond their manufacturing supply chain and footprints, semiconductor companies could build a suite of strategic actions to adjust their global presence more broadly. Most immediately, they could begin rethinking their logistics operations, warehouse footprints, and trade routes to optimize tariff costs. Over the longer term, companies can examine the location of their R&D centers and how to best optimize their intellectual property (IP) strategies.
Augment government affairs efforts to become a thought partner
Semiconductor companies could rethink their role with public and private sector partners. Instead of being reactive to policies, they could become thought partners to the public sector and collaborate across two areas.
First, semiconductor companies could help educate stakeholders and the general public about the complexities throughout the semiconductor value chain, the sensitivity of raw materials, and the role of semiconductors in national security. Further, explaining how this diverse supply chain would be affected by different tariffs at specific points and quantifying the ultimate impact on semiconductor companies and the industry as a whole could help highlight first- and second-order effects of new trade policy. Companies can also help bridge the gap between policy aims and instruments, perhaps working with government to identify different trade policies (for example, tariffs, content rules, export controls, and tax incentives) that may produce the same general policy aim and the best outcome broadly for industry.
Second, semiconductor executives could form strategic partnerships with public and private sector entities to share expert perspectives on trade, workforce development, and R&D. Such engagement could help boost semiconductor manufacturing and accelerate innovation within the United States.
We are living in a very dynamic environment, and tariffs are likely to continue evolving. While we may expect to see results in six to 12 months, executives should consider how to navigate this dynamic landscape in the meantime. Further, other players may hold out on large strategic decisions until the environment becomes more stable. In times of uncertainty, proactive planning exercises can be
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