We wouldn’t go so far as to say there is a political storm brewing on set top tariffs in Europe, but there are precious few set tops made in Europe, and all that has happened, some 3 weeks ago, is that the European Union has pointed out that many set tops do not come under an existing deal, to make IT products tax free within Europe.
Quite clearly a set top, even when it offers access to the internet, or when it has a disk drive, is not an IT product, in the strictest sense of the word, and in almost all cases today these products are made in China and owned mostly by US, Japanese or Korea companies such as Motorola, Cisco’s Scientific Atlanta, Sony, Matsushita, Samsung and Humax, with a handful controlled by European companies, such as Thomson and Pace, and many other local companies dealing only with the low margin DVB-T devices.
As a result, devices made outside Europe which fall into this category will now attract an import duty of 13.9% something that not only has US and Asian companies up in arms, but which has now created a legal action from both those parts of the world, through the World Trade Organization. The set tops at issue ‘ especially IPTV set tops which give access to the internet and DVRs with disk drives ‘ don’t attract this duty if they are made in the EU and a number of outside manufacturers have already found local assembly at least and some genuine manufacturing sites, especially in the cheaper Central and Eastern European regimes.
The move, if sustained, should bode well for Pace, which is based in the UK and which has just acquired the Philips set top manufacturing business and for France’s Thomson, but initial coverage of this story suggested that even these locally owned businesses were as much in trouble by this tax change as US and Far East owned companies, because their manufacturing is mostly in China anyway. We believe that enough assembly work goes into these devices locally that it would mitigate, or eliminate most of the new tax, at least for Pace.
Obviously it bodes even less well for Motorola which may find its set top business separated from the dominant handset brand, if initiatives at the company go ahead. Motorola has been trying to build up market share in Europe and the Far East, after years of being dominant in US cable set tops.
Operators like BSkyB in the UK would either have to pay out another $30 million a year or change suppliers in favor of one which manufactures locally or else push some of the tax burden back to their suppliers, thinning their margin. Cable operators would be hardest hit, as currently there is almost no European manufacturer of cable set tops at all.
More and more set tops are being delivered as DVRs when people take HD TV service ‘ an HD set top is going to be expensive, so better make sure it does more, seems to be the logic. Given that around 17 million HD set tops will be delivered over the next few years in Europe (says researcher In-Sat) that’s a considerable amount of tax, up around $350 million between now and 2010 just on HD products. On total European set tops it will be many times more.
The problem is also going to spill over into other devices, for instances the EU now treats multifunctional appliances such as printer-fax machines in the same way but that will just drive higher prices at retail, although it will still amount to a considerable hike in European Commission income.
It’s hard to say whether or not the EU will back down on this one, its hard to see a straight backward step, because increasingly jobs in manufacture are being exported to China and India, when there is a perfectly good chunk of Eastern Europe that has cheap labor and an educated work force, which could house similar operations, and the outcome is likely to be a quid-pro quo with a number of the major CE vendors, we would expect.