Zool
Junior Member
Part 2:
The Problems – Made in China 2025, Belt and Road Initiative
Much of the problem exists in the shape of the US feeling that China may be getting a bit too big for its boots. High profile plans such as “Made in China 2025” which aims to reduce China’s reliance on foreign technology with a shift to domestic technology along with the “Belt and Road Initiative” which is trying to make China the centre of trade for emerging economies, coupled with concerns over long term intellectual property transfer, the rise of Chinese technology on what some perceive as the result of that transfer, Chinese stockpiling of assets such as US sovereign debt and gold bullion, along with a significant trade imbalance have all led the US to the situation we’re in today.
China openly touting its objectives is problematic…
To be clear, this is not a situation entirely of Trump’s making. Democrats and Republicans alike have both had long term concerns over American corporations doing business with China, particularly in sensitive areas such as technology and defence. China has embraced many of the hallmarks of western capitalism but retains sufficient independence from the rules the western world is used to which enables it to progress in a way that many see as unfair. Fairness is part of the issue but realistically it’s more like an “I’ll play fair when I have to but not when I won’t get caught” approach, all too evident in numerous US – European conflicts over Boeing and Airbus over the decades. State subsidisation of favoured or strategic companies has long been the modus operandi of every country/bloc in the world, in that sense China is no different from others.
Recent developments in the trade war have seen a cooling off from some of the fanfare China has touted in recent years including the news this week that Beijing no longer requires local governments to work explicitly towards the Made in China 2025 policy (), although it is clear that the policy should still be implemented and that the drop of the name seems to be more about the show than the substance.
China, looking to dominate Eurasian trade…
It’s also worth keeping in mind that China is not alone in the avenue it is pursuing. South Korea has its famous chaebols that were significantly favoured and had huge sums of money thrown at them to catch up with western competitors, decades of investment which culminated in the likes of Samsung now being the world’s largest chipmaker and its carmakers in many ways being the modern equivalents of Japanese carmakers in the 80s and 90s. The difference of course is that South Korea and Japan are about making money within a framework which is regarded as non-detrimental to US interests while China is increasingly regarded as a geopolitical competitor and/or threat.
The Source Discussion
I had the opportunity to ask some questions to a reasonable sized PC hardware assembler/manufacturer/retailer recently and this is what they had to say on the topic. Special thanks to Usman for getting me an industry source willing to talk on the topic. The source remains anonymous but I am convinced of their authenticity.
Wccftech: What is your view on the level of intellectual property transfer that is occurring between US and Chinese companies?
Source: Quite a bit of IP transfers from OEM to ODM. For our tooling projects, the ODM we select is responsible for taking our sketches and producing the image renderings. Then, after we provide our feedback on these they are responsible for prototype fabrication, modifications of design from our feedback, making all the tooling and then mass production. We lean quite heavily on Chinese ODMs in the design and development process and completely on them for the mass production.
W: Do you feel that private sector focus on making quarterly profits has made it misstep strategically with regards to gaining access to Chinese markets/manufacturers?
S: On the question of tariffs, I believe the electronics industry is too reliant on Chinese manufacturing because of the reduced labour cost and the availability of natural resources. Cheap items such as motherboards and peripherals are expected to remain in China since the cost to move the manufacturing is too high, even when factoring in tariff costs. Many Taiwan AICs are finding out that factory space is very limited and resources for building new factories non-existent in their homeland. As a result, most AICs are absorbing the tariff cost and passing on some or most of it to the consumer in subtle ways. Some have a clear advantage since they had existing manufacturing based in Taiwan which now allows them to have cost and sales advantage on NVIDIA RTX graphics cards sales in the US as the other AICs are impacted by the tariff but even those that do have quite limited manufacturing capacity in Taiwan so it’s only high end RTX graphics cards and not lower end GPUs or motherboards which will be able to avoid the tariffs.
AICs and other electronics OEMs are in a holding pattern right now since the 25% tariff isn’t in play yet and the possibility of trade agreements or the end of tariffs mean there is no incentive to expend the high investment right now to move manufacturing to other countries. Some are announcing plans to move some manufacturing out of China with Channel Well (large PSU manufacturer) planning a factory in Vietnam, while Quanta (Dell) and Foxconn (Apple) have plans to ramp up manufacturing in the US in the event that products are hit by tariffs
Memory is mostly unaffected by tariffs since large OEMs such as Micron and WD have existing manufacturing outside China, as do smaller firms like Avant.
W: Is there sufficient talent available in other economies to allow for a reasonably efficient on-shoring to take place regardless of the cost implications?
S: An AIC did express to me that moving manufacturing outside China or Taiwan wouldn’t be considered at this time given the lack of talent and presence and the uncertainty regarding the duration of the tariffs, they’ll aim to exhaust their options in Taiwan first before considering moving elsewhere, but it’s unlikely to go to the US and they’d look at places like Mexico, Malaysia, Singapore and Vietnam. It would also have to be quite clear that the tariffs were going to persist for a long time for the investment to be deemed worthwhile as they would have to relocate many personnel to do this too. The decision would be made in anything from a few months to a year but then the hard work would start and both the cost and effort to move would be enormous.
W: How difficult would it be for your company to continue operations in the current way if the US continues to impose restrictions on selling to Chinese companies it suspects of IP theft?
S: If the 10% tariffs increase to 25%, then we would have to raise prices to cover the costs but customers would not see a huge increase as we are sourcing inexpensive components and peripherals from China that do not make up a large percentage of the overall computer cost (things like motherboards, CPU coolers, PSU, fans, cases, keyboard and mouse). The expensive components such as CPU, RAM, SSD, some GPUs (depending on the AIC) and OS would generally not be hit. We would also explore setting up system integration in Mexico and import some of the components we buy from Chinese ODMs to Mexico in order to avoid some of the import tax.
Another factor which also increases reliance on Chinese manufacturing is the Made in China 17% tax credit provided by the Chinese government to its ODMs as long as they can show that payment was received from and the product was shipped to a country other than China, which provides a huge advantage over ODMs not in China.
If the unlisted items such as monitors, laptops and complete desktop systems were hit with a tariff then the impact would be much greater as prices would certainly rise on these products. Companies like Dell and Apple that do business with tier 1 ODMs like Quanta and Foxconn which have the capability of ramping up US manufacturing may gain a cost advantage. If either of these two scenarios were to occur, we would start attending many more trade shows in search of ODMs with factories outside of China to avoid paying the tax.
