There has been turmoil across global financial markets following the introduction of the new US tariffs, and datacentre equipment providers that source parts and electronic components and manufacture their products globally are facing hikes in costs that may end up being passed onto IT buyers.
In January, analyst IDC reported that the server market grew by 100.8% in spending in the third quarter of 2024, driven by the continued mass deployment of artificial intelligence (AI) servers by hyperscalers and other large IT buyers. There was also fairly strong demand for traditional datacentre servers, which it said experienced a strong unit growth of 18.7% year over year.
The growth in server sales, according to IDC, had occurred in spite of high inflation, a slowdown in economic activity, supply chain disruption and geopolitical conflict. This was before the US administration’s policy to impose tariffs on almost every country it trades with.
A complex, intertwined global supply chain is involved in the manufacture of datacentre equipment such as servers, networking and storage products.
Servers that run datacentres for governments and major businesses, and provide cloud computing for hyperscalers, rely on sourcing key semiconductor components, which are soldered on printed circuit boards and slotted into server chassis and cases in a manufacturing process that is spread across the world.
The Trump tariffs will impact every US business that trades either directly or indirectly with a country outside of the US. If they are based outside of the US, original equipment manufacturers (OEMs) and manufacturers of parts used by an OEM will face a tariff on those products and materials.
Beyond retaliatory counter-measures being taken by other countries, individual businesses, wherever they are located, may realign their sourcing and manufacturing capabilities to limit the effect of the new US tariffs.
Worldwide manufacturing in datacentre equipment
As part of their sustainability reporting, the leading server companies list all of their suppliers and the countries these are based in. For instance, HPE’s list of final assembly suppliers include businesses in China, Mexico, Singapore, Germany, Czechia, the Netherlands, Taiwan and the US.
Storage supplied by Hitachi may come from the Netherlands or the US; it also uses a Foxconn company for storage, which puts together servers for HPE in its facilities in China, Mexico and Czechia. HPE’s networking products are manufactured in various locations including the Philippines, Vietnam and China.
Meanwhile, Dell’s supplier list includes American-Canadian multinational Celistica for final assembly, which has plants in China, Laos and Mexico. Like HPE, its servers require components from a multitude of companies.
Well-known parts makers listed by Dell include IBM for storage, Intel, LG, Samsung and Seagate, among others. The list also shows which facilities these firms are using to supply Dell. For instance, while IBM is a US incorporated business, Dell gets its IBM storage products from IBM facilities in China, Japan and Mexico – which, at the time of writing, are countries that are being hit hard by the new US tariffs.
Server maker Lenovo, which is regarded as a Chinese manufacturer, is set to see a significant rise in the cost of its products imported into the US as a result of a trade war now brewing between the US and China.
While no one knows how these tariffs will play out, what is clear is that every economy is striving to become more digital, and this requires hardware such as servers, which need parts from all over the world.
Component manufacturing
For instance, looking at the server processor, which is seeing an evolution as demand for AI workloads increases, Intel recently announced it would be expanding its portfolio of semiconductor technology development and sustainable manufacturing capabilities through what it calls the Intel Foundry. Intel CEO Pat Gelsinger said: “Our supplier ecosystem is essential to collectively deliver these capabilities sustainably, at scale.”
In the US, Intel said it has been expanding existing operations in Arizona, New Mexico and Oregon, and building a new manufacturing campus in Ohio. It also announced expansion plans in Ireland, Israel, Germany and Poland.
Publicly listed companies are required to state the risks to the business that could impact their performance. Looking at Intel rival AMD’s January 10K filing with the US Securities and Exchange Commission (SEC), where it posts its quarterly results, the company said: “We rely on third parties to manufacture our products, and if they are unable to do so on a timely basis in sufficient quantities and using competitive technologies, our business could be materially adversely affected.”
Just as the server manufacturers leverage a global supply chain of parts manufacturers and final assembly companies, the processors at the heart of every server rely on an intricate set of relationships with global semiconductor partners.
Like many chipmakers, AMD relies on Taiwan Semiconductor Manufacturing Company Limited (TSMC) for the production of all wafers for microprocessor and graphics processor unit (GPU) products at 7 nanometer (nm) or smaller nodes. For the remainder of its chips, AMD uses GlobalFoundries, a company with joint head offices in Malta and New York, which claims its global manufacturing facilities are located in areas that have a low risk of natural disasters. TSMC, along with another Tawanise manufacturer, United Microelectronics, and South Korea’s Samsung Electronics, provide AMD with programmable logic devices for its integrated circuits.
In its 10K SEC filing, AMD stated: “Our third-party package assembly partners are responsible for packaging technology used to fabricate our products. It is important to have reliable relationships with all of these third-party manufacturing suppliers to ensure adequate product supply to respond to customer demand.”
Nvidia is a fabless semiconductor firm, which means it also relies on TSMC and Samsung Electronics for the manufacturing of the GPUs that power many modern AI applications. According to CSI Market.com, it uses memory chips from US-based Micron Technology, as well as South Korea’s SK Hynix and Samsung.
Who ultimately pays?
It’s unclear whether datacentre equipment manufacturers will be able to swallow the price hike in components sourced from countries with high US tariffs. If they pass on these costs, IT buyers will have to spend significantly more than they have budgeted for.
Lenovo, however, illustrated a potential way to limit the effects. As of March 2024, it had over 12,000 people working at its various Chinese manufacturing sites. However, the site in Hungary has 1,000 workers. While smaller than the China-based workforce, it’s not insignificant.
No one expects every company across the global server manufacturing supply chain to become US-incorporated, but there are a number of Chinese ecommerce businesses that locate warehouses in Europe to avoid import duties.
They say a week in politics is a long time, but for datacentre equipment manufacturer and its supply chain partners, strategically moving production to facilities located in countries with lower tariffs could reduce the impact of Trump’s decision.
