Tag Archives: China

Trade Wars Battlefield Goes Beyond US-China

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The US-China trade war shows no sign of abating. And as predicted, it is wreaking havoc on the electronics supply chain. While OEMs like Huawei get most of the headlines, suppliers of semiconductors are feeling the pain.

Even assemblers are getting caught in the crossfire: When the US government initiated a ban on doing business with Huawei, one of its EMS firms, Flex, withheld a reported $100 million in materials and shipments. According to some Chinese blogs, the OEM now plans to sever its business ties with Flex.

Less publicized, but perhaps just as crucial, is the ongoing spat between Japan and South Korea. The Asian nations are locked in a dispute over a group of uninhabited islands located in the straits between the two countries. Relationships are further frayed over issues of war reparations dating to World War II. Japan has struck first, taking steps to put controls on exports of key semiconductor fabrication materials to South Korea for fear they could be used in military applications. South Korea has not publicly countered, but the nation is home to two of the three largest memory device makers.

The tension between Japan and South Korea further complicates an already cloudy memory market picture. DRAM prices are already threatened by a global inventory glut, leading Gartner to forecast a 4% price drop this year. By choking materials supplies, Japan could inadvertently help lower inventories and boost margins. But there’s a point where parts availability could tip the wrong way, ratcheting up lead times and leaving buyers scrambling for sources.

By sales, Samsung and SK Hynix manufacture about 23% of the world’s memory chips. Their combined sales last year topped $110 billion. But there’s no simple answer. Japan is in many cases a sole source of many of these critical materials. How long will South Korea be willing to suffer? And what lengths will it go to to protect its semiconductor dominance?

‘Huawei’ E.O. Portends Total Supply Chain Chaos

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The headlines have been filled with reports on the pending US ban on domestic companies from conducting business with Huawei.

In submitting the order, President Trump cited cyber-warfare, espionage and threats to US national security as rationale for the ban.

Less noted: The impact on bare board and assemblies procured from China. After all, the executive order “prohibits transactions that involve information and communications technology or services designed, developed, manufactured, or supplied, by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary” as determined by the Commerce Secretary.

So while Huawei is a $100 billion company, larger than IBM, Sony, Hitachi, Panasonic and all but a few other tech firms, the declaration could have tentacles that reach far beyond the Chinese OEM. Even if all the defense industry primes, for instance, buy all their boards onshore (doubtful), many others do not, including the financial markets, and key industries such as nuclear, power, and so on.

Almost every North America-based board today shop brokers boards from Asia, mostly China. Their suppliers are, in turn, generally located in China as well. That includes the vast majority of the laminate industry. Sure enough, we are hearing reports of major laminate makers suspending shipments of key materials, including ones for the US defense primes, because of the executive order.

What’s the alternative? North American board fabricators lack the capability and capacity to take on high-volume production. The EMS industry has the capability, but not the capacity. And that doesn’t begin to address the region-to-region cost differences.

Then there’s Washington. The legislators are simply ignorant when it comes to understanding supply chain issues. The executive order targets companies that could put the US economy at risk. Any logical read of that would see that the telecom industry is only one part of the equation. Wall Street is equally at risk.

Just because Cisco or Juniper or HP or IBM or Dell or Arista don’t have Chinese names doesn’t mean they aren’t as reliant on the China supply chain as Huawei. Same goes for their EMS networks. Intel has six chip fabrication plants and three assembly/test sites. Two are in China. Qualcomm is a minority owner of SMIC, which has nine plants open or planned in China. It also has a JV assembly/test house with Amkor in Shanghai.

Take a look at HP’s supply chain. The OEM is sourcing product from China facilities of Foxconn, Jabil, Flex, Celestica, Inventec, New Kinpo, Wistron, Pegatron, Qisda, and TPV, among others. The workers on the HP lines number in the tens of thousands. That can’t be replaced easily, if at all.

Not just the large shops stand to be squeezed. Besides relying on China for raw materials, many smaller North American fabricators also outsource certain services and otherwise procure other relatively finished goods from there, such as engineering or laser drilling or mass lam boards.

Insofar as consumers are concerned, it’s probably a good thing this isn’t happening during the Christmas ramp. But that date is drawing near. Even without the tariffs, given the looming capacity constraints, prices are bound to spike.

And even if the questions surrounding Huawei are sorted out — a big “if” — the fun won’t stop there. At this writing, the US government is considering action against other Chinese OEMs, including ZTE and Hikvision.

Actions Count More than Words

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China is a country that should be viewed through its actions, not its words.

It’s important to keep that in mind when considering the news today from the Associated Press, which is reporting China will cease its practice of forcing multinational companies wishing to do business there to share their IP.

If this turns out to be true — and the China legislature ratifies the law — one of the big
trade hurdles between the US and China will be eclipsed.

As usual, the devil’s in the details, and this case is no different. Per the AP, the new rule simply bars “government authorities” from making demands of foreign firms. So if, for instance, the steep duties China places on imports remain in place, an MNC will almost have to partner with a domestic company.

And that’s the rub. As the AP reports: “[T]he central government routinely says it has little control over commercial agreements between Chinese and foreign firms.”

So for most firms, the Catch-22 will remain.

China has a history of saying one thing and doing another. Sometimes it does so brazenly — such a ignoring WTO trade practices or currency interference. Other times it is on the sly, such as when it says it doesn’t believe in meddling in other nations’ affairs all while it’s meddling in other nations’ affairs.

Take China at its actions, not its words.

Will US Tariffs Accelerate ‘One China?’

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Asian media are reporting that major Taiwanese ODMs are looking into relocating some production to the island as means to sidestep the US tariffs on imports from China.

DigiTimes reported today that Quanta Computer and Wiwynn are among those looking to avoid new duties on server-use motherboards, which represent a major product line for both ODMs.

Quanta builds server motherboards in Shanghai, then performs final assembly in Nashville, TN, and Fremont, CA, and Wurselen, Germany. Executives say the company might expand production outside China to make up for any domestic reduction.

Wiwynn, which is part of Wistron, also has production in China. It performs performs final assembly in Mexico.

Question: With China increasingly flexing its authority over Taiwan, will moves by companies in the critical technology space accelerate or exacerbate Chinese claims to Taiwan?

Tariffs are Taxing the Supply Chain

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The breaking tariff situation in the electronics industry is equal parts fascinating and chilling because of its lack of near-term precedence and unpredictability. We’ve spoken with several EMS companies (read the article here) to gauge the extent of the disarray and get a sense of how they are (attempting to) resolve the issue.

Our reporting is ongoing, so be sure to check back occasionally for updates.

 

 

In China, A Bet on Tariffs

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Several news stories are breaking today about President Trump’s anticipated tariffs on scores of goods from China. On the list of items that will see new import duties is consumer electronics.

The effects of this move have the potential to go far beyond the administration’s stifling of a series of high-profile acquisition attempts, including Singapore-based Broadcom’s attempted not-so-friendly takeover of Qualcomm, or that of a Chinese investment firm’s deal for Lattice Semiconductor. One wonders, if the TTM-Meadville deal were in play today, what the ruling from the feds would have been.

China has successfully reached its goal of the “world’s factory,” but is it good for the US — or the world, for that matter — to have so much critical manufacturing concentrated in one place? I would argue no. Foreign companies get a raw deal trying to access the China market. The rules are set up to favor domestic companies, the government’s reach extends into all levels of private businesses, and the judicial system is weak, at best. As we have noted before, in China, “copyright” means “the right to copy.”

The US is the only economic body, except perhaps the European Union, capable of forcing China’s hand. China will not change on its own.

It would take a better fortune teller than me to predict how this will play out. On principle, some critics are primed to dismiss the administration’s move. But governments interfere in economic systems all the time. The entire US import system is one giant hurdle. So is Europe’s. It says here the risk is worth taking.

 

In Trade War of Words, Huawei Goes on Offensive

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“Huawei won’t move manufacturing to America.”

The headline sounds, well, weird, almost like “Tiffany’s not robbed.”

But the crux of it is a tale of global politics and business tactics growing ever-more-fascinating by the day.

In short, at the Consumer Electronics Show this week, the head of Huawei’s consumer business group issued a statement saying the smartphone maker doesn’t think much of the incoming Trump administration’s habit of calling out companies that build and import product to the US.

While Trump has thus far had mostly automakers in his sights (GM, Toyota, Ford), Apple has been the poster child for the war of words over trade. By speaking out at CES, the world’s largest technology trade show, Huawei is among the first companies, and likely the biggest, to go on the offensive.

“If [companies] move all manufacturing to the U.S., some manufacturing is not good for US companies, because costs will likely increase,” said Richard Yu, who was also a keynote at the show. “If you move all that [low-cost] manufacturing to the US, you’ll damage the US.”

Huawei has an uneasy history with the US. Its head is a former Chinese military officer Ren Zhengfei, and the company was banned from supplying telecom equipment to US government buyers after a Congressional committee accused the firm of spying on behalf of China. It is also the third-largest smartphone OEM in the world, and given the easy nature of using those devices as tools for capturing user habits and data, that is hardly less troubling.

More complex, Huawei, like Apple, depends heavily on Foxconn as a contract manufacturer. Although based in Taiwan, Foxconn founder and chairman Terry Gou is a strong supporter of China. He also is reportedly considering a run for president in his native Taiwan, a move that if successful would likely strengthen the ties between the island and mainland — and potentially further complicate already precarious relations between China and the US.

Until the new administration is officially installed in two weeks, the machinations are mostly bluster. But the chatter shows no signs of abating, and the campaigns for — and now, against — Made in America are just starting to heat up.

Patents, Home and Abroad

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The annual review of the world’s patent filings always tells an interesting story.

Some 2.9 million applications were filed in 2015, up 7.8% year-over-year. China led with 1.01 million filings, followed by the US (526,000) and Japan (454,000), reports the World Intellectual Property Organization.

But … (when it comes to China there’s always a big but) … only 4% of China’s applications were outside their own borders, while 45% of US applications were filed abroad.

Computer technology (7.9% of the total) saw the highest percentage of published patent applications worldwide, followed by electrical machinery (7.3%) and digital communication (4.9%), WIPO reports.

WIPO doesn’t indicate why Chinese inventors are by and large choosing only to protect their claims in-country. Here are some possible reasons:

1. The US requires that inventors obtain a “foreign filing license” before filing foreign patent applications on inventions that occur in the US.  “This allows the government to assess, for example, whether the technology could threaten US national security,” says Dennis Crouch, a professor at the University of Missouri School of Law and co-director of the Center for Intellectual Property and Entrepreneurship.

2. China, on the other hand, requires inventors to first file domestically, where it will then determine whether the invention needs to remain secret for security or other purposes. Only then is the inventor allowed to submit an application abroad.

In summary, domestic firewalls in the world’s two largest markets could well be hampering outsiders.

Foxconn Labor Strategy Emblematic of China’s Growing Influence

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A pair of University of Padua researchers have written a really interesting comparison of Foxconn’s management practices in Turkey and the Czech Republic versus those in China.

Among the findings:

  • Foxconn relies heavily on a temporary work staff in the CR, where 40% of its 9,000 workers are temporary, but all its 350 staff in Turkey are direct.
  • In both countries, Foxconn’s strategy is to drive down labor costs.
  • Foxconn leans heavily on the respective countries for financial support in the way of tax rebates, worker hiring rebates, tax holidays and other incentives.
  • Foxconn actively seeks to minimize the influence of worker unions.

The researchers say the emergence of China is having a direct impact on labor practices elsewhere, and global production is inseparable from “social reproduction.” It’s worth a read.

Does Rising Nationalism Pose Threat to Electronics Supply Chain?

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The amount of geopolitical discord around the world at present is stunning: Thailand, Vietnam, Korea and other major electronics manufacturing hubs are seeing a rise in nationalism and severe internal tension over how to address foreign pressure.

Thailand in May endured yet another military coup — its 19th since declaring independence from its monarchy in 1932. Some observers feel the military wants a permanent seat in the national parliament, a move that could hinder its democratic movement.

In Vietnam, citizens are outraged at what it feels is Chinese strong-arm tactics. Its Northern neighbor has provoked many Southeastern nations over the past few years, often by occupying seaborne territory that others had staked claims to in the past. (The Philippines have a similar complaint dating to 2012, when China evicted Philippine fishermen from their long-held fishing grounds.) Lately, Chinese oil rigs took up in Vietnamese waters, leading to riots at Fittec, Foxconn and elsewhere, where domestic workers took aim at their Chinese* employers.

Korea is losing business to Vietnam, aided in part by its own OEMs: Korea is now the largest investor there, pumping in nearly 23% of all outside investments in the first quarter this year. As Samsung relocates its cellphone manufacturing there, Vietnam is on track to produce 250 million handsets this year, versus 200 million in China and just 30 million in South Korea. As the linked article indicates, as of March 2014, Samsung Electronics subcontractors had invested an aggregate $2 billion in Vietnam. Meanwhile, while Samsung buys a reported 53% of its parts from Japan, South Koreans now view Japan as their second-leading military threat, next to North Korea, and resentment from World War II is rising once again.

Indonesia is suffering through a contested presidential election, one that involves an ex-general and the possibility of an overturned ballot result.

Japan, my friend Dr. Hayao Nakahara tells me, has essentially stopped investing in new manufacturing sites in China, with the only new developments minor capacity add-ons to existing plants. The two nations have been at odds over everything from possession of uninhabited islands in the East China Sea to a rehashing of wartime atrocities.

Southeast Asia is home to the bulk of the world’s electronics production, and holds the majority share of products built for the consumer, industrial/instrumentation, telecommunications, PC and peripherals end-markets (not to mention the vast majority of the raw materials and components supply). We’ve absorbed several of nature’s bullets of late — flooding in Thailand, the typhoon in Malaysia and of course the 2011 earthquake and subsequent tsunami in Japan. I am told that the media reports have exaggerated what’s happening on the ground in Southeast Asia, and that on a day-to-day basis little dissent is noticeable. That may be true, and to be sure, the self-inflicted disruptions have thus far been held to a minimum. Given the number of countries involved — unprecedented in recent times — and the enormity of what’s at stake, we can’t help but feel it will take some luck if the next supply-chain breakdown is only as bad than the last.

*Fittec is based in Hong Kong, Foxconn in Taiwan, but most employees and manufacturing for both companies are in China.