Changing supply chains : the semiconductor industry

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Chinese and non-Chinese supply chains, a policy of diversification of large international companies in Asia to the benefit of Asean countries and a partial and progressive shift of part of the chains from East to West, here are some of the trends that seem to be shaping the transformations of global supply chains in the semiconductor world in the post-Covid -19 era.  

A fundamental reshaping of trade flows is underway in early 2023 across multiple sectors and the semiconductor industry is no exception. The causes of this change are to be found in shifts: when China entered the global trading system in 2001 via its entry into the WTO, it was welcomed by other players. Today, there are growing fears about China’s intentions towards its neighbours. The Covid-19 pandemic has highlighted trade vulnerabilities in some regions that have come to rely on a single country for supplies of products essential to health security or technological independence.

Geopolitical rivalries are intensifying, particularly between the US and China, to the extent that “soft trade” is no longer just about trade. It will be shaped, and in many cases constrained, by geopolitical considerations. The centrality of technology to economic and military pre-eminence justifies the extension of certain restrictions on trade and investment. The latest example is the agreement signed between the governments of Japan, the Netherlands and the United States that limits exports of advanced semiconductor manufacturing tools to China.

In the coming period, trade outcomes will be increasingly shaped by government interventions, mainly in the form of trade restrictions, subsidies and access to preferential trade zones. How are international companies adapting to this new landscape? We have taken some examples from the tech world.

Semiconductors: a matter of national security

Semiconductor industry veteran Lu Keh-Shew Lu believes that companies need to prepare for two developments: the future coexistence of Chinese and non-Chinese supply chains due to geopolitical tensions between Washington and Beijing, and the pre-eminence of politics over commercial considerations in investment.  Mr Lu is now the head of semiconductor manufacturer Diodes and is watching the changes unfold.  “A sustainable and secure supply of semiconductors has become a matter of national security. The way we used to think about our semiconductor industry was very commercial. What was sought was low production costs.  Today, this logic does not always work. “If security of supply of semiconductors is equivalent to national security, every country that is capable of doing so wants to take full control of its production chain. In the future, key economies such as the US, Japan, Germany and China, will want to accelerate the shift to home-grown semiconductor production.”

Diodes is a supplier of semiconductors to Apple, Samsung and Sony, as well as to many global car manufacturers.  The company had sales of $1.8 billion in 2021. For semiconductor manufacturers, here is the strategy to have according to Mr. Lu: “If [your] production is in China, it will serve the local Chinese market, while the production in non-Chinese sites will be for the rest of the world market. … The split may not happen overnight, but companies need to be able to do it in order to operate in this new economic environment. He added: “The geopolitical tensions between the two superpowers of China and the US are here to stay, that’s for sure. Diodes itself will have to adapt. Today, most of its semiconductors, including those subcontracted to contract foundries, are manufactured outside China. The in-house semiconductor assembly and test facilities are still mainly in China. In the future, “we need to think about other production bases for packaging, assembly and testing of our own semiconductors”. “The main growth driver for the next decade or more will come from the electrification of automobiles, of which electric cars will be only one part.

TCMS: a strategy of geographical diversification 

Companies such as TSMC and Intel are implementing geographical diversification policies in response to Sino-American tensions and the demand of their large customers. Thus, the Taiwanese TSMC is building factories in the United States, Japan and soon in Europe. The American company Intel, whose strategy for a long time was to design but not manufacture semiconductors, has changed its strategy completely. It is returning to a manufacturing, foundry business, with factories under construction in the US and Europe. Further down the smartphone production chain, Taiwan’s Foxcoon has decided to shift some of Apple’s iphone assembly from China to India. This decision follows a request from Apple. And other American computer companies such as Dell and HP are about to follow suit.   

Focus on South East Asia and Mexico as an assembly area

Several Taiwanese semiconductor suppliers have decided to increase their production capacity in Mexico to meet the growing demand for electric cars and computer servers to be manufactured in the Americas. There is a gradual shift of certain blocks in the supply chain from East to West. Foxconn recently established a headquarters in Mexico to centralise the management of its subsidiaries and business groups in the country. The iPhone assembler, which also counts Google and Amazon’s AWS among its customers, has made electric vehicles its next growth driver amid a slowdown in the smartphone market. US electric car start-ups Lordstown, Fisker and INDI EV are among Foxconn’s new automotive customers. Mexico is one of the key locations for the company’s strategic investments in 2023. Also for semiconductors for electric cars, Foxconn will have three local US manufacturing options for its North American customers in Ohio, Wisconsin and Mexico.

          Other Taiwanese companies such as iPhone assembler Pegatron, MacBook maker Quanta Computer, iPad supplier Compal Electronics, and laptop maker Inventec for HP and Dell are all planning to expand their presence in Mexico this year. These companies are key players in the production of computer servers and data centres. Like Foxconn, they have been allocating more resources to capture demand from the electric vehicle industry in recent years. The choice of Mexico marks a new trend in supply chain diversification. In 2018, these companies first began moving production of servers, routers and game consoles from China to Taiwan and Southeast Asia. This was a way to mitigate the impact of the Sino-US technology war and thus the US tariff hike on Chinese products. “We expanded our capabilities in Taiwan and Malaysia, but customers said that wasn’t enough. They now want to be even closer to the North American market,” according to Pegatron vice president Jason Cheng. His company, which also serves Tesla and General Motors, has earmarked $300-350 million in annual capital expenditure for Mexico and Southeast Asia because of increasing customer demands to diversify and get closer to their end markets. Compal and Quanta are following suit. According to Compal president Martin Wong, the company was going to increase capacity at its Mexican plant for its automotive electronics business. Quanta, meanwhile, is increasing its hiring of Mexican engineers specialising in automotive electronic computer systems. A supplier to HP and Dell says: “We are building a new manufacturing plant in Mexico for the assembly of servers and laptops”.

The impact of US industrial policy: Chip and Science Act, Inflation Reduction Act

The acceleration of investment by technology suppliers in Mexico is taking place in a favourable policy context. The US government’s Inflation Reduction Act (IRA), which came into effect in August 2022, aims to stimulate US industrial manufacturing. In particular, it sets conditions for local production, such as the assembly of electric cars in North America, to benefit from tax credits. In a 2022 supply chain report, the US Department of Commerce warned that manufacturing of servers, data centres and networking equipment – items with implications for IT security – remained largely concentrated in Asia. This is seen as a supply chain security risk. Yet Taiwanese high-tech suppliers have had appliance and computer manufacturing plants in Mexico for decades. “There were signs that Taiwanese tech companies were increasingly investing in Mexico, but the trend has become more evident in recent months, especially after the passage of the US IRA,” according to one Taiwanese analyst. It remains to be seen how big this change will be and what impact it will have on global commodity flows. 

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