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View from Taipei: It’s still complicated

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Engineering and manufacturing companies are already adapting to the threat of a trade war, while banking on a longer-term political retreat. Part two of this analysis.

The point repeatedly gets made that during the last Cold War, the two main rivals had largely separate supply chains. Today, China is extensively integrated into the global manufacturing base, but it goes much further than that.

As the Trump Administration’s assault on Huawei shows, China generates IP, sells advanced and more commoditised high-technology products. Alongside Huawei are companies such as Lenovo, Xiaomi and ZTE.

At the same time, it is hard to think of a major engineering company that does not have both a manufacturing and a design operation in China. The popular view of the supply chain as simply a matter of assembling components is misguided; it now starts with product definition.

Similarly, as the case of ARM shows, it is not only US companies that are covered by Washington’s actions. ARM has to comply with whatever measures Trump applies because it has 1,400 staff in North America developing IP covered by US law. Again, what goes for ARM as a Japanese/UK company goes for almost all other tier one and two engineering firms (and a great many below).

Within manufacturing, companies are looking to minimise their exposure both to the Huawei controversy and to the wider threat of US trade tariffs on digital products.

The first point many make is that the threat may be overstated. According to research from Digitimes, published at last week’s Computex in Taipei, only 23 per cent of shipments from Taiwan’s display companies would be covered by Trump’s tariffs – the rest go elsewhere in the world, mainly Europe and Asia. For Taiwan’s largest player, TPV, the number falls to 18 per cent.

Since display assembly is one of the easier manufacturing processes, companies have already begun to shift output. TPV is said to have been renting capacity in Thailand since April 2019. A local rival, Qisda, is repatriating some of its output to Taiwan. Vietnam is also said to be another growing home for display assembly and other easier-to-produce hardware.

These are only short to medium-term answers, but they do show technology players using a period that has seen – Huawei notwithstanding – more bellicose rhetoric than action. In realistic terms, the clock is ticking up until roughly the end of July, given how long it will take Trump to get Congressional sign-off on the tariffs.

A second set of ‘solutions’ is also being applied at the IP level, albeit quietly at the moment. There are anecdotal reports of companies rejigging their design teams in case the US looks to spread the IP net more widely.

In some cases, this has involved moving staff out of China, especially those on projects where the US is the main or a major end-customer. This has not necessarily involved just expats. More accommodating countries are taking a faster-track approach to approving immigration visas for suitably qualified engineering staff (unlike, notably, the US).

In other instances, Chinese design sites have been recast to focus, again, on IP and products for use outside of North America. So, we saw it coming, yes?

Well, only up to a point. Asia-based engineers are particularly mobile. It is not some cultural ‘gotta make a buck’ thing, but rather demographic. They tend to be younger than the global average with fewer ties to a particular place. Nevertheless, if China becomes particularly concerned about a ‘brain drain’, it is expected to respond – more with carrot than stick – by subsidising packages that match or beat what is available elsewhere. Already, the political drive to retain talent and encourage so called ‘sea turtles’ to return from elsewhere is strong and consistent.

The other problem is that while it is possible to relocate more straightforward manufacturing processes – even if only temporarily – more complex ones can only be shifted over extended periods. These tend to be those for products that attract higher margins (e.g. iPhones).

China’s big card here could, according to some executives at Computex, be its investment in robotics. This has progressed rapidly as its once lower labour costs have become less of a differentiator. The International Federation of Robotics says that China’s share of global sales of advanced robots will rise from about 25 per cent in 2017 to nearer 40 per cent this year – and the country is looking for a 10x increase in installations under its 'Made in China 2025' (MIC25) programme.

This has its own supply chain ironies. To feed alternative sources, companies will need to source robotics analogous to those in the megafactories of Shenzhen, but China does not merely already have orders on the books – in many cases, the robotics companies are themselves Chinese (the local industrial group Midea acquired top-five robotics player Kuka in 2017, for example).

Brought together, these issues are leading major supply-chain players – from IP to assembly – to address the current tensions through a mixture of immediate adaptation backed by a longer-term assumption that Trump and his officials are in an intractable situation; one with, as several Europeans in Taiwan noted, possibly as few viable outcomes as Brexit.

Some pain is considered inevitable. I couldn't find anyone at Computex who could see China backing down. As discussed in part one of our 'View from Taipei', China has too much riding on broader domestic political goals such as MIC25 and its AI plan to see things as a zero-sum economic game.

Within Beijing, it is said there is therefore a strong sentiment that the pain will be worth it. If anything, they also look to the Trump Administration’s relative lack of experience in global design and supply chains (commerce secretary Wilbur Ross, treasury secretary Steven Mnuchin and national economic council director Larry Kudlow are all more experienced in Wall Street financial engineering than, say, EE). Faced with that, some shock therapy is again seen as ‘making sense’.

However, China’s hand is not entirely a strong one. Part three of our overview will look at some of those weaknesses, particularly inherent in fueling the future innovation which Beijing has demanded.

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