07 November 2019
CM Industrial By CM Industrial

How the US-China Trade War is Hitting the Semiconductor Industry & Major Tech Brands.

Say what you will about the man, but it’s never boring with President Donald Trump.

One of his government’s hottest controversies right now is the ongoing trade war between the US and China, the world’s largest exporter.

Starting with an US import tariff on $50bn worth of Chinese goods, there has been a back and forth of trade tariffs and retaliations between the two nations since June 2018.

Fast-forward to the start of this September and now semiconductor companies are taking the hit globally. That’s because a 10% tariff has been activated on list 4A goods which includes TVs and consumer electronics.

On top of this, a further 10% tariff will be activated on the 15th December for dishwashers, toys, lithium batteries, PCs and smartphones.

This could seriously shake-up the semiconductor industry, with semiconductors crucial to the manufacturing of all these products.

Testing Times in Taiwan…

The tariff will affect both the manufacturing and exportation processes of products including notebook PCs, smartphones and tablets.

In terms of the semiconductor industry, this would mainly affect business in Taiwan – part of the Republic of China.

Apple, Hewlett Packard and Dell – America’s top three brands - all depend on Taiwanese manufacturing firms for 90% of their parts. With the tariff making the export of parts from Taiwan more costly, many of these major US clients could look elsewhere for their manufacturing needs.

If this becomes the case, many Taiwanese firms will suffer.

For example, Quanta Computer, would be exposed because its business largely relies on building notebooks for both Apple and Hewlett Packard. The same goes for Compal Electronics, which makes PCs for Dell.

With article four goods also including smartphones and tablets, Taiwanese signature assemblers such as Foxconn Technology and Pegatron are also likely to be hit. Both assemble phones in China for export to the US.

In the same vein, Taiwanese parts suppliers like Largan Precision and TDK Holding would suffer. They sell to smartphone exporters, like Apple, that are based in China.

Clients of these Taiwanese firms, that ship between the two superpowers, may look elsewhere for suppliers and manufacturers because the tariffs could damage revenue.

Are the US shooting themselves in the foot?...

Looking to US shores, many American chip makers and electronics manufacturers are being hit by the tariffs too.

This is because companies like NVIDIA Corp. (NVDA), Micron Technology (MU) and Intel Corp. (INTC) all depend on China for sales; but why would Chinese firms buy chips if they’re struggling to export manufactured products with tariff restrictions.

On top of this, in the midst of an escalated trade war, these US companies could be subjected to new taxes and added regulations by the Chinese government which would increase their costs.

Oh no, not another foot…

If the trade war escalates further, China appear to have an upper hand... when it comes to the semiconductor industry that is.

China supplies about 80% of the rare-earth elements imported by the US, a lot of which is used to manufacture batteries and consumer electronics.

Should China limit the supply of these elements to the US, it would seriously harm many US suppliers of electric car batteries – which is a rapidly growing area. It would also harm US suppliers of lithium batteries.

Unfortunately for the US semiconductor market, it would not be out of character for China to use its dominant position as geopolitical leverage.

In 2010, China sharply limited rare-earth exports to Japan, a big consumer, while the two countries were sparring over disputed islands.

My thoughts...

On October 11, the US and China struck a "phase one deal" that eliminated October tariffs. However, December tariffs, including fourth listed goods, are still under discussion.

There’s reason to worry about the impact and aftermath of these tariffs for companies on both sides, with their potential to dent and damage the revenues of manufacturers, suppliers and assemblers.

This is reflected by the multitude of global companies that have publicly commented on the matter, campaigning for the categories affecting their businesses to be removed from the list. These companies include powerhouses like Apple, Bose, Best Buy, Dell, Fitbit, Fujifilm, HP, Intel, Kingston Technology, Microsoft, Nintendo of America, Sony Interactive Entertainment and Zenimax Media.

But Taiwanese firms will be the biggest losers here, with many clients likely to venture elsewhere for suppliers and manufacturers. These clients could move production to areas such as Vietnam, a cheap and upcoming Asian manufacturing base unaffected by the trade war. 

But that's just one possible outcome as this fascinating drama unfolds... 

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CM Industrial


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