Just follow India and stop trading with China completely

U.S.-China Decoupling in Electronics Supply Chains

Foxconn, the world’s largest contract manufacturer, says it plans to move more of its production outside China under the impact of the trade war between the world’s two largest economies...

The announcement last week by the company that employs more than a million people in China assembling iPhones for Apple, servers for Dell and electronic games for Nintendo reflects a trend that’s been gaining pace this year.

At an event called MIC Forum Spring in June, Foxconn Chairman Young Liu predicted in his speech that the pandemic, even after it’s over, is likely to continue to affect the supply chains. A phenomenon generally known as “‘the world’s factory’ no longer exists,” he explained at that time.

During a Q&A session at the company’s quarterly results on August 12, he made similar observations. “No matter whether it’s India, Southeast Asia or the Americas, there will be a manufacturing ecosystem in each.”

Taiwanese electronics manufacturers such as Foxconn, Quanta and Pegatron are leading a migration of production from China to new factories in Taiwan, Vietnam and India to cut costs and avoid U.S. tariffs while also addressing concerns surrounding security and intellectual property.

Foxconn plans to invest up to $1 billion to expand a factory in southern India, where the Taiwanese contract manufacturer assembles Apple iPhones, Reuters reported on July 11. Apple wants to move iPhone production out of China, the report said.

Protection of the global supply chain is important for companies such as Apple, Google and a range of high-tech companies, according to Richard Thurston, the former chief counsel for Taiwan Semiconductor Manufacturing Co. (TSMC). Taiwanese companies need to avoid U.S. criticism and potential U.S. penalties, fines, and trade restrictions related to possible export control violations, Thurston says.

Production of laptop PCs, which previously was all in China, will drop by half in the next three years, according to Digitimes Chairman Colley Huang, speaking at a July 29 event.

After three years, Vietnam will account for about 30 percent of total laptop production, followed by Taiwan with 20 percent and Thailand with about 15 percent, said Huang. He called the migration a “megatrend”.

Digitimes, which includes TSMC and other leading electronics companies in Taiwan among its founding members, provides information to clients on global supply chains and tech trends.

As multinational manufacturers shift away from China, the world’s most populous nation is backing the creation of its own integrated supply chain, according to Huang.

“China will try to build their own industry by themselves,” Huang said. “Over the past two decades, China welcomed multinational companies. But now in the coming years and decades, China will say no, it must be produced by Chinese.”

Some people say China and the U.S. may split their supply chains completely with both nations eventually making their own production equipment, software, semiconductors and systems.

“There will be two standards, now more so than ever,” says a fund manager with one of Asia’s largest sovereign wealth funds, speaking on the condition of anonymity. “China and the U.S. have lost trust in each other.”

Recommended
U.S. CHIPS Act Takes Center Stage in Post-Globalized Industry

“The U.S. can slow China down, but that’s futile in the long run unless the U.S. undergoes a major reboot,” according to the investor, who holds shares in major Asian tech companies such as TSMC.

With Digitimes, Huang is playing the role of an electronics ambassador for Taiwanese companies that are evaluating Asian nations for new production sites. He says he’s been meeting top-level government officials in the region to discuss potential investments.

One area of potential investment is automobiles. China makes about a third of the world’s automobiles for domestic and multinational companies such as Volkswagen and General Motors.

China makes about half of the world’s electric vehicles, and it will very likely continue to play a key role in the future, according to Huang. Six of the top-ten battery makers for electric cars are in China, Huang says.

“GM will to move to India, Vietnam and other countries, especially in Asia,” Huang says. He thinks Taiwanese companies should be able to help carmakers expand in Asia in the same way they built computer and smartphone supply chains in China.

Flat-Panel Displays

There’s one part of the electronics supply chain that shows few signs of breaking up.

Flat-panel displays (FPDs) are made in China, South Korea and Taiwan. China became the world’s largest maker nearly a decade ago after the Chinese government poured billions of dollars into companies such as BOE Technology that rapidly expanded production and caused a supply glut which impacted profitability for many of the incumbent producers such as Samsung Displays.

There are few signs that China will relinquish its hold on FPDs, which are used in military and consumer devices ranging from smartphones to air traffic control monitors.

“It is still just China expanding display capacity at the expense of other countries,” says Ross Young, the CEO at Display Supply Chain Consultants. “We get rumors of potential projects in India from time to time, but they haven’t panned out yet.”

The multi-billion dollar cost of building an FPD facility is almost as daunting as that for a state-of-the-art semiconductor plant.

Building a new FPD manufacturing facility costs one to four billion dollars depending on the size of the display, motherglass, and technology.

“There is so little margin in building TV-sized liquid crystal displays that virtually all manufacturing is migrating from South Korea to China, and LG Display’s new AM-OLED factory has just begun volume manufacturing in Guangzhou, China,” says Kenneth Werner, principal with Nutmeg Consultants.

There’s little hope for a Foxconn FPD plant in the U.S. state of Wisconsin that President Donald Trump once said would be the “eighth wonder of the world”.

“Foxconn was going to build a Gen 10.5 fab in Racine County, Wisconsin,” says Werner. “That was always a strange idea and is not going anywhere.”

Exporting Science Parks

Huang says Taiwan may export its science parks that have helped incubate companies such as TSMC, United Microelectronics Corp. (UMC) and a host of other chipmakers and semiconductor design houses. Taiwan’s two largest science parks are near the cities of Hsinchu and Tainan.

“The Hsinchu Science Park can go to India or Vietnam,” he said. “Taiwan has to help emerging countries build their own industries.”

The Taiwanese electronics companies that are present in every part of the global electronics supply chain ranging from semiconductors to finished systems are trying to reduce their exposure to the geopolitical struggle between the U.S and China that continues to escalate. Multinational companies that depend on the Taiwanese suppliers are concerned about the political risks they face, according to Stratfor Executive Vice President Rodger Baker.

“There are risks to the supply chain because the Chinese have the ability to use economic leverage to challenge companies in other countries that deal with or expand their behavior with Taiwan,” he said.

China considers Taiwan, which has governed itself independently for more than 70 years, a renegade province. China has not ruled out the possibility of taking Taiwan by military force.

Chinese military jets have been entering Taiwan’s airspace on an almost daily basis in recent weeks. When United States Secretary of Health and Human Services Alex Azar made the highest-level visit in 40 years by a U.S. government official on August 3, Chinese jets again crossed into Taiwanese airspace in response.

China’s navy has recently held maneuvers in the South China Sea, which it claims as part of its territory. The exercises are seen as a threat to Taiwan’s security.

“They (the Chinese) have the ability to continue these large-scale military exercises and expanded types of military exercises that can add a sense of uncertainty,” Baker said. “That sense of uncertainty can increase reinsurance costs. It can also make countries or companies start to rethink how much they want to be involved in Taiwan.”

The world’s splitting supply chains also have implications for TSMC’s plan to invest in a new chip plant in the U.S. state of Arizona. The administration of U.S. President Donald Trump has been working for several years to close a deal with the world’s biggest chip foundry. In the background are concerns that perhaps years from now, China will take over Taiwan.

“It’s going to be a critical thing. If you want to continue to do business with the United States, you’re going to have to make sure that the chips that you’re using are not from the Chinese,” Baker says. “And so TSMC becomes a really critical piece of that potential supply chain.”

— Additional reporting by Judith Cheng, AspenCore Chief Editor, EETimes & EDN Tai

Just don't buy anything from China