Understanding China: China-US: From trade war to tech war
- A China-US tech war could lead to the relocation of parts of the electronics supply chain …
- … from China to other emerging Asian economies
- Thailand, Vietnam and Malaysia should stand out to benefit
- Impact on Asia’s advanced economies – South Korea and Taiwan – will be complicated and double-edged
Supply chain relocation – Thailand, Vietnam and Malaysia stand out to benefit
For Asia’s emerging economies, a key question about the tech war is whether and how it will lead to a relocation of electronics supply chains. The US and its allies will likely use tariff and regulatory measures to encourage global tech companies to move their production out of China, to avoid intellectual property theft, forced technology transfer and cybersecurity issues. This could affect the manufacturing process of a variety of electronics products, including chips, servers, networks, computers, mobile phones, video/audio equipment, and other security-sensitive products.
The countries with existing production networks should be well positioned to receive the electronics work transferred from China. Presently, China is Asia’s largest electronics production base, accounting for as much as 45% of global exports of information and communication technology goods (including Hong Kong). Elsewhere in Asia, Thailand, Vietnam and Malaysia also play a significant role in the electronics supply chain, each accounting for 2-3% of global ICT goods exports. Vietnam is the region’s second largest exporter of communication equipment, thanks to strong investment from South Korea’s Samsung to build the smartphone assembly factories. Thailand, meanwhile, is the second largest exporter of computers in the region, especially in the area of hard disk drives. Thailand, Vietnam and Malaysia are also the leading exporters of consumer electronics products in Asia, just after China and Japan.
Based on the existing production capacity, Malaysia, Thailand, and Vietnam should be the priority destinations for multinational companies to relocate their electronics supply chains. These three economies are in a good position to undertake the electronics work transferred from China in the lower value-added segments, such as the assembly of computers, mobile phones, and consumer electronics products.
Another perspective is to look at the future potential for emerging Asian economies to attract new foreign direct investment in the electronics sector. A number of supply-side factors need to be considered, including not only wage costs, but also labour skills, infrastructure conditions, macroeconomic stability, institutional efficiency, tax policies, trade policies, among others. A well-trained and productive workforce, for instance, is critical for the electronics industry, which requires a high defect-free rate and strict product quality control. Highly reliable and precise power supply is also essential, to avoid machine malfunctioning, data losses and other unwanted consequences.
Our finding is that Thailand and Malaysia are most like China in terms of the overall supply-side conditions to attract FDI. India, Indonesia, the Philippines, and Vietnam are cheaper than China on the wage front (20-40% of China’s wage level). But they rank behind China in education, infrastructure, macroeconomic conditions, contract enforcement, and other related areas. Multinational companies venturing into these markets will need to cope with various structural challenges, such as the high costs associated with labour training, logistics, risk management, and legal disputes.
Double-edged impact on South Korea and Taiwan
For Asia’s advanced economies like South Korea and Taiwan, discussions about the impact of China-US tech war are not confined to supply chain relocation. Tech war may reduce the competition pressures facing South Korea and Taiwan from China’s industrial upgrade. Chinese tech companies like Huawei, Oppo, and Xiaomi have been rapidly gaining shares in the global smartphone market in recent years, challenging the Korean and Taiwanese counterparts like Samsung, LG and HTC. The “Made in China 2025” plan now sets an ambitious goal of achieving 70% self-sufficiency ratio in chip production. This could be a new and direct threat to South Korea and Taiwan, which are global leaders in IC foundry currently. A possible slowdown in China’s pace of industrial upgrading, as a result of technology protectionism by the US, may provide some relief for South Korea and Taiwan – buying more time for them to further move up the value chain and maintain competitiveness.
On the other hand, tech war could hurt South Korea and Taiwan through disrupting the China-centered electronics supply chain. A possible direction of the tech war is for the US and its allies to further restrict the access of Chinese tech companies to the western markets. For instance, officials from the “Five Eyes” nations (US, Canada, UK, New Zealand and Australia) have expressed concerns or taken actions to block Huawei from installing 5G networks within their borders. These trade restrictive measures would indirectly harm the upstream Korean and Taiwanese firms supplying chips, semiconductors and other components to the Chinese tech companies. South Korea and Taiwan are currently China’s two largest import sources of electrical machinery and equipment, each accounting for a share of about 20%. As far as Huawei’s core suppliers are concerned, 10 out of 92 are from Taiwan.
Another direction of the tech war is for the US to further control the exports of key components and technology to China. For example, the US Department of Commerce temporarily banned the sales of Amercian components to China’s telecom equipment manufacturer ZTE and chipmaker Fujian Jinhua last year. As Chinese companies look for alternative sources of supply, it may bring some opportunities for the Korean and Taiwanese producers. Nonetheless, the very upstream IC design is still largely dominated by the US today. Taiwanese semiconductor companies like TSMC and UMC largely act as contract manufacturers for the American fabless companies like Qualcomm and Nvidia. The field of IT software, such as the operating systems of computers and mobile phones, is also dominated by the US. If the US were to cut the upstream technology supply, it would carry the risk of disrupting the entire electronics supply chain, and creating collateral damage on South Korea and Taiwan.
China’s tech war responses and implications for Asia
Last but not the least, China’s responses to the tech war could also have profound implications for Asia. In order to offset falling demand from the western markets, Chinese tech companies will likely further expand their access to emerging markets. This could drive Chinese FDI in Southeast/South Asia under the Belt and Road Initiative. India, Thailand and Vietnam have seen rising investment from China in telecom infrastructures in the past five years since the BRI was launched. Investment in electronics hardware should also have the potential to pick up.
Meanwhile, to secure the supply of advanced technology, Chinese companies will likely redirect their strategy of overseas technology acquisition from the US to other developed economies. Among Asia’s advanced economies, Japan, South Korea and Singapore have been open to Chinese capital in the high-tech sector in recent years, while Taiwan has been imposing strict scrutiny due to political reasons. Japan and South Korea are most likely to become the new targets of China’s overseas technology acquisition and receive a boost from Chinese M&A, in our view.
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