Navigating the Impact of Tariffs on the IoT Market

A recent whitepaper by ABI Research delves into the far-reaching impacts of Trump’s trade policies on the tech industry.

The report examines dramatic shifts in cost structures, supply chain strategies, and procurement models, driven by tariff hikes of up to 145% on certain imports. It outlines the consequences across sectors including IoT, automotive, telecom, and manufacturing—while identifying where innovation and resilience are taking root.

“Tariffs are no longer just a trade policy—they’re reshaping global technology strategies in real time,” said Stuart Carlaw, Chief Research Officer at ABI Research. “This whitepaper delivers timely insights into how tech firms are responding, or should be responding, to cost pressures, supply chain shocks, and the accelerated push toward software-defined and domestic solutions.”

Among the topics covered, Dan Shey, Vice President of Enabling Platforms, details how Trump’s tariffs are affecting the IoT market and offers strategies for how the industry can respond.

This article summarizes Shey’s key findings and recommendations for the IoT industry in the face of these evolving trade dynamics.

The Internet of Things (IoT) market is facing new challenges as tariffs imposed by U.S. President Donald Trump continue to affect the global trade landscape. The IoT ecosystem, which relies heavily on international supply chains, is grappling with increased costs and potential disruptions. Here’s a closer look at how these tariffs are impacting the IoT market and what strategies businesses can adopt to mitigate their effects.

IoT Hardware: A Global Commodity

IoT hardware, including devices and connectivity components, is sourced globally. These components are assembled and integrated into final products that are then deployed in various markets. Trump’s tariffs, which primarily target goods rather than services, have significantly increased the cost of IoT devices for the U.S. market. This cost increase mostly affects standalone IoT devices. IoT solutions for devices and machines with integrated sensors and connectivity will be less impacted by tariffs on these components, as they represent a smaller portion of the overall machine cost.

High-turnover IoT devices, such as those used in asset tracking, people/pet tracking, wellbeing wearables, and home monitoring, are particularly vulnerable. For instance, if an asset tracking device is replaced every two years and sourced from China, the cost could more than double under the current tariff rates. This cost increase could slow down the adoption of IoT devices in these segments, which currently represent 22% of the U.S. installed base and are projected to grow to 28% by 2030.

Software and Services: A Local Affair

Unlike hardware, IoT software and services are typically delivered locally. This includes connectivity services via local networks, application development, data analysis, and storage.

The World Trade Organization (WTO) and the United States-Mexico-Canada Agreement (USMCA) exempt software and services from tariffs, providing some relief for this segment of the IoT market. However, the reduced deployment of IoT devices due to higher costs could indirectly affect the demand for software and services.

Tariff Impacts Will Extend Beyond Increased Device Costs

Tariffs on IoT products will have broader implications than just higher device costs, with supplier decisions heavily influenced by the tariff rate. If tariffs remain around 10%, many suppliers may choose to delay major changes, hoping for a policy shift or a change in administration. However, as long as Trump remains in office, IoT suppliers must assess the potential impact on their business and explore strategies to minimize tariff-related costs.

1. China May Be Least Affected: The Chinese IoT market is likely to be less affected by tariffs, as much of the IoT value chain—like MCUs, device-to-cloud services, and hyperscaler infrastructure—can be sourced from Chinese or non-U.S. firms. However, China faces profitability challenges due to intense domestic competition, pushing vendors to expand internationally. Despite having access to markets like Europe and Asia, the U.S. remains critical; for instance, a major Chinese cellular module vendor had over half its sales outside China, yet maintained only a 2.5% profit margin, highlighting the difficulty of giving up the U.S. market.

2. Subscription Fees: Tariffs may prompt U.S. IoT solution providers to rethink their business models, especially those using disposable devices. While reusable models support sustainability, tariffs make them costlier. Companies like Tive and Controlant are already tracking how often devices are reused. To manage costs, providers may also bundle more devices into solutions with extended service contracts, spreading higher device costs across longer-term subscription fees to make them less noticeable.

3. Supply Chain Realignment: Component OEMs are unlikely to move manufacturing to the U.S. unless major or numerous device OEM customers are based there. The automotive and smart home sectors—making up about 40% of the U.S. IoT market—are the most likely to drive such a shift. Distributors may also play a key role in mitigating tariff impacts by helping U.S. device OEMs, especially smaller ones, realign supply chains toward lower-tariff countries or support U.S.-based production more cost-effectively.

4. Transfer Pricing Schemes: To reduce tariff costs, some IoT device OEMs are exploring separating software from hardware. Currently, many ship devices with pre-installed firmware, making the full product subject to tariffs. By decoupling the software, only the lower-cost hardware would be tariffed. One approach is to source the software from the U.S., but this may conflict with IRS regulations. Another strategy is to ship “dumb” devices and install the software domestically after import. However, implementing these methods poses logistical and legal challenges.

5. Reshoring by Chinese Suppliers: Some Chinese IoT suppliers are establishing U.S.-based operations to label their products “Made in the United States,” without facing backlash so far. This raises the possibility of more Chinese OEMs setting up U.S. manufacturing, though several factors complicate it: the political climate in both countries, whether U.S. sales volumes justify higher labor costs (despite potential automation), and the high cost of building or retrofitting factories in the U.S. compared to China, where government subsidies often offset expenses. Additionally, components imported from abroad would still face tariffs, unless U.S. exemptions apply for domestically assembled products.

6. Impact on IoT Software and Services: Tariffs are unlikely to directly impact overseas software and services used in the U.S., so their effect on IoT software and service costs—such as application development and data storage—is minimal. Indirectly, however, tariffs may reduce the need for IoT software and services if fewer devices are deployed, or they may accelerate software adoption in areas like supply chain logistics. While companies are increasingly combining traditional software systems with IoT devices for better cargo tracking and real-time alerts, the high sensitivity of ROI to device costs means tariffs could delay device investments or shift focus toward software-only solutions.

7. Impact on 5G Adoption: The device and MNO community is looking to grow 5G adoption to replace 4G devices and monetize 5G network investments, but higher 5G device costs pose a challenge. While increased deployment could lower costs, U.S. operators are still upgrading to 5G Standalone networks, and much of the necessary equipment comes from tariff-affected regions like Europe and Asia-Pacific. Additionally, with the 4G network expected to remain active for another five years, there’s little urgency to accelerate 5G device rollout. As a result, U.S. 5G adoption in the IoT market will likely be delayed or see significant growth later in the decade.

Conclusion

The IoT market is facing significant challenges due to tariffs, but there are strategies to mitigate these impacts. By reassessing business models, realigning supply chains, exploring transfer pricing schemes, and considering reshoring, IoT businesses can navigate these challenges and continue to thrive. The future of IoT in the U.S. market will depend on how effectively these strategies are implemented and how the global trade landscape evolves.

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