Disengaging from China manufacturing is hard, but it's happening slowly

Jay Goldberg

Posts: 23   +0
Staff
A hot potato: Like a train leaving the station, it now seems inevitable that US companies are moving to reduce, or entirely eliminate, their reliance on China. It took a long time to get started, companies had been complaining about changing conditions in China for a decade. The 2018 trade war was the spark that really got them moving, and their progress has only been gaining momentum since then. This process will take years, maybe decades, but at this point is probably unstoppable.

We recently heard about Texas Instruments opening a packaging plant in Chengdu, and we mused that this is probably the last semis plant TI, or any US company, is ever going to open in China. But what will decoupling entail for semis? There are two sides to this – China as a supplier and China as a customer.

Editor's Note:
Guest author Jonathan Goldberg is the founder of D2D Advisory, a multi-functional consulting firm. Jonathan has developed growth strategies and alliances for companies in the mobile, networking, gaming, and software industries.

As a customer, China is an important market, but not as important for other products like luxury goods. In 2021, China imported about $433 billion of semis, which is a huge slice of the industry, but crucially, the large majority of those imports were packaged into other goods and then exported to the rest of the world as PCs and phones and TVs.

In terms of domestic consumption, China's demand for semis and for products containing semis is somewhere closer to 10%-15% of the industry. This is still a big number, but a large portion of that is under threat from domestic alternatives, especially around trailing edge processes, so it is going to fall no matter what US companies do in China.

Barring serious geo-political strife, we think it is unlikely that US semis companies will be entirely blocked from China, so we tend to think of this as less losing a customer and more of a protracted period of sales headwinds. Less growth, not necessarily declines.

The supplier side is more complicated. Today, China really offers US semis companies two things: trailing edge fabs and Outsourced Test and Assembly (OSAT, or packaging and testing).

Trailing edge fabs are somewhat constrained now, but in general the world has sufficient capacity to pick up much of the slack. Every manufacturing economy is currently looking to add trailing edge semis capacity today. Much of that will not end up getting built, but enough of it will that we think US companies will have many options to choose from. True, there are certain corners of the industry that are more dependent on China, memory for instance, but for everyone else decoupling should be easier.

OSAT is more problematic. China's packaging and testing capacity has grown significantly over the past decade. This is high-skilled, labor-intensive work that fits nicely with China's overall manufacturing strengths. It will take considerable work to reduce reliance on this. Other countries have some packaging capacity, notably Malaysia, but China's position here is fairly strong.

On the other hand, packaging is becoming a more important part of the semis ecosystem, it is one part of the solution to the slowing of Moore's Law. As a result, it has attracted considerable attention lately. The leading foundries, like TSMC and Intel (not exactly a foundry yet), have been investing heavily in their packaging flows. Moreover, the typical OSAT flow is already fairly distributed. We regularly work with semis companies who contract OSAT work to a single vendor, but that vendor will ship parts around Asia to balance capacity and capabilities.

Extending this a bit further, we think it is also important to look at China's broader manufacturing capability. This is likely to prove the hardest part of the supply chain to reduce reliance on China.

In parts of China, ISO certifications are so ingrained to the local culture that we have seen bars, restaurants and associated entertainment venues proudly proclaim their adherence to certifiable process expertise.

China now has 40 years of compounding improvements in its manufacturing skills. Whole regions of the country have webs of inter-connected manufacturing facilities from hundreds of special-purpose vendors to training schools. In parts of China, ISO certifications are so ingrained to the local culture that we have seen bars, restaurants and associated entertainment venues proudly proclaim their adherence to certifiable process expertise. Getting things manufactured in China is just easier (not easy, but definitely easier). Ask anyone who has tried to develop a low-volume electronic gadget in recent years – finding reliable vendors in the US for design, sourcing, assembly and QA can be painful, while in China there are hundreds of firms that can do all of that in-house, usually for a lot less.

All of this is to say that decoupling semis, and electronics manufacture, from China need not be a traumatic process, but it will take many years. We have heard rumors that Apple is planning to entirely relocate the majority of its production outside China over the next seven years. And that is Apple, probably the world's best at electronics supply chain management. For everyone else, decoupling will come, but not quickly.

Carrot, stick and waiver

An important question hovering around the US semis sanctions on China is will the US get its allies to support the measures. People in the US may be shocked to learn that not all people in the rest of the world feel the same way about China, and even more shocking, those people may have strong interests in continuing to do business with China.

We are not policy experts (by a large margin), but we do have some sense of which companies in other countries will take the most umbrage with the restrictions and some things that might be able to offset those allies' concerns.

When the US issued the latest rules in October, the authors deliberately truncated the window between announcement and implementation, in some cases down to only a week. Past measures had usually been shared months in advance of announcement. With these latest, far wider measures, the US government wanted to eliminate the potential for last-minute hoarding orders. We also suspect they wanted to limit the ability of US-based lobbyists to dilute the sanctions. Tactically, this made sense, but it came at the cost of the rules getting no outside vetting. US companies had little opportunity to prepare, a topic for a future post, but crucially the US government provided essentially no notice to allies. To put it mildly, this was not received well.

There are four countries in particular most affected by these measures. The Netherlands – home of ASML; South Korea – home of Samsung, Hynix and a host of smaller vendors; Taiwan home of TSMC, UMC and a big part of the supply chain; and Japan – with a large electronics and WFE industry. Add in the UK – home of Arm, Germany whose industrial economy is fairly reliant on China, and a few of their neighbors leads to problems with the EU more broadly.

The situation for each country and set of companies is a bit different, but all of them find themselves in a position where support of their ally the US could directly lead to a loss of revenue, significant amounts in many cases.

These companies represent some very important parts of the supply chain, and having the allies' support will likely mean the difference between the success or failure of the measures. So how can the US keep its allies on-side? We think there are four avenues to consider.

The first is a recognition of shared goals. Many of these countries have shown rising concern over China's behavior in recent years, and many of the companies on this list suffered from the same unfair trade practices which sparked the trade war in the first place. On the diplomatic front, China's aggressive, "Wolf Warrior" diplomacy in recent years seems to have cut off more diplomatic approaches to finding common ground. We suspect that many of these countries share at least some of the US' national security concerns and economic anxiety around China, and so may support the measures.

Even if this is true for governments, many of the companies involved may seek to persuade their governments to allow them to continue doing business with China. Some of the companies have already invested heavily in China and losing access to those assets poses fairly serious hardship.

In particularly acute cases, the US government has been offering waivers to the rules.

In particularly acute cases, the US government has been offering waivers to the rules. Hynix and Samsung seem to have gotten these, and from what we can tell the US is being fairly lenient in handing these out for ally countries. However, the waivers are good for only one year, and no one really knows if those will be extended. From what we can tell, the US seems to be adopting selective enforcement of some its policies, which is not really a comfort to most companies, but does indicate some degree of flexibility.

On the other side of the ledger, the US government has made it clear repeatedly that it has a proverbial "stick" to burnish to "encourage" compliance. The new (and old) rules make it quite clear that any product that contain any intellectual property which can in anyway be tied to the US makes the whole product subject to the regulations. This is most apparent in the case of ASML, who has a large software operation in the US.

ASML's EUV machines are very much at the heart of the sanctions, and we think the US government will go a fairly long way to ensure that none of those get sold to China. To a lesser degree this holds true for TSMC as well. In addition to their dependence on machinery with US IP in it, there is also the matter of EDA tools, a crucial part of the foundry process flow. The EDA companies are all US-based, and their removal from the equation gums up the whole industry.

In between these two extremes the US seems to be considering a whole host of measures to assuage foreign concerns over the sanctions. In the Digits to Dollars newsletter, we linked to a Digitimes report that cautioned the US is considering curbs on China's OLED TV makers.

China's TV makers are a big part of the industry, but it is hard to see them as threatening to the US. They operate in a super-competitive market, eking out meager profits. The US has no domestic vendors and would seem to have little reason to go after this sector. That being said, South Korea, Japan and Taiwan all care a lot about TVs and have had to deal with years of low-cost PRC competition eating into their market share.

We have no idea if the US is actually going to take any actions against China's TV makers, but it would probably be a smart diplomatic move to offer those up to its allies. (Pro-tip for US regulators: take a look at those companies' data collection and retention agreements.)

Moving beyond semis, we also think there are other incentives that these sanctions could provide to allied countries' companies. From our viewpoint, one of the most contentious parts of the sanctions will be what they mean for China's nascent automotive industry. China has ~50 EV makers today, and the PRC would very much like to have a globally competitive auto industry. As we have noted, semis are an increasingly important part of the industry. China is on a path to self-sufficiency for analog and trailing edge auto semis, but the future of the auto industry will depend heavily on access to leading edge digital processors for ADAS and autonomy systems. If China's auto makers are unable to obtain those chips they will be at a significant competitive disadvantage. This is a situation which other countries might appreciate. Germany, for instance. We imagine there are many other similar points of leverage which the US can apply, if necessary.

Putting this all together, we think the US has enough arrows in its quiver to generate support from allies. It is not clear if the US government will be able to win over support from some of the individual companies, but we suspect their governments will see reasons to come around.

Permalink to story.

 

dangh

Posts: 848   +1,441
I don't get it. If US supports free market and believe market regulate itself, then why to do any changes?
If US believe China is a problem, those sanctions will only strengthen China's push for creating similar technologies in-house, and to expand their influence to growing countries (no matter if they want it or not).
The only way to tackle the issue is to admit Taiwan is a country whatever China would say about it, clarify situation on south china sea (and by that I mean remove heaps of sand called 'chinese territory islands'), and push for social changes in China and growing countries.
For now all I see is US for decades exploiting cheap work force, and - when exploited country becomes strong player - attempt at economical war, reducing as well other competing regions like Netherlands or Germany.
If US would won this attempt with China, then who's next? There were already some economical constraints placed on EU, and leverages done on ASML to support policy of external country just because it is a bigger customer.
Great Britain was exploiting many countries and had to run after they get overboard. Is history repeating itself?
I mean, it is still about the money. I see no care about people or growing economies, just a panic because someone else is making money as well and they could be better at it. And while I could support actions to help Taiwan, Vietnam, and other countries China threatens (and to help chinese citizens), I kinda do not care about fight for money - especially, US wants other countries to participate in this as well.
 

yRaz

Posts: 4,962   +6,412
Of course it's easier, we've been sending our manufacturing over for the last 30 years and closing American manufacturing facilities.

At my company we have contracts going into 2028 on building ne manufacturing facilities. Many abandon facilities are being retro fitted, but even that takes about 2 years with new construction taking upwards of 5 years.

Simply from a construction perspective, it will take nearly a decade to bring all this back to the US, that's not even including training people to work and finding skilled workers. We are easily 15 years behind China on manufacturing and we did it to ourselves. Most of it is because of unfair trade agreements and turning a blind eye to human rights violations.
 

Kinemon

Posts: 33   +29
Here's my unpopular take. Boomers ruined our manufacturing. The race to the bottom for consumer goods was because boomers wanted the cheapest products possible.

In the end everything was crappy. And all made overseas.

Younger generations are getting sick of wasting money on crappy goods. They are demanding quality and bringing manufacturing back.
 

Avro Arrow

Posts: 3,344   +4,354
Here's my unpopular take. Boomers ruined our manufacturing. The race to the bottom for consumer goods was because boomers wanted the cheapest products possible.

In the end everything was crappy. And all made overseas.

Younger generations are getting sick of wasting money on crappy goods. They are demanding quality and bringing manufacturing back.
That's not an unpopular opinion, it's quite a popular one and I share it. The Boomers were the last generation to not require advanced education to succeed so they, like most ignorant fools, just crapped all over everything.

The Baby Boomers are/were an entire generation that personifies the Dunning-Kruger effect in that they know objectively less than generations X, Y and Z but are convinced that they know everything.

That's a VERY dangerous attitude for an entire generation to have and we're living with the consequences of it.
 

emmzo

Posts: 808   +1,244
That's not an unpopular opinion, it's quite a popular one and I share it. The Boomers were the last generation to not require advanced education to succeed so they, like most ignorant fools, just crapped all over everything.

The Baby Boomers are/were an entire generation that personifies the Dunning-Kruger effect in that they know objectively less than generations X, Y and Z but are convinced that they know everything.

That's a VERY dangerous attitude for an entire generation to have and we're living with the consequences of it.
I wouldn't blame boomers or entire generations, but mostly companies giving up on people for maximal profit. Ofc, it's not all that simple. But basically, politics and money. As usual, nobody reacts until the sh1t hits the fan. Very good article TS, btw.
 

Uncle Al

Posts: 9,363   +8,581
They are very correct ..... it is easy to start getting things made in China, there is just one major drawback ..... getting any manufacturer in China to admit to quality flaws is all but impossible and even when they do admit to it, they won't necessarily fix it and if you drop a company, word spreads quickly and you'll play hell getting another manufacturer to work with you. Bottom line, don't waste your time and go a different route. Vietnam is one that has a good reputation and will work with you, but they are so swamped with work it's hard to get into there.
 
R

Red34jfp

It's all nice and good, until China retaliates in kind and stop, for instance, the export of rare earths.
 

Theinsanegamer

Posts: 3,947   +6,945
I wouldn't blame boomers or entire generations, but mostly companies giving up on people for maximal profit. Ofc, it's not all that simple. But basically, politics and money. As usual, nobody reacts until the sh1t hits the fan. Very good article TS, btw.
Anyone who is still blaming everything on "da boomers" honestly just doesnt understand economics. It doesnt matter what gen they are, C suites are sociopathy by nature and will royally screw anyone they can to get ahead.
That's not an unpopular opinion, it's quite a popular one and I share it. The Boomers were the last generation to not require advanced education to succeed so they, like most ignorant fools, just crapped all over everything.

The Baby Boomers are/were an entire generation that personifies the Dunning-Kruger effect in that they know objectively less than generations X, Y and Z but are convinced that they know everything.

That's a VERY dangerous attitude for an entire generation to have and we're living with the consequences of it.
Case in point right here. "oh I'm so much smarter then my daddy" syndrome is prevalent in those who blame boomers for everything. Even when all the boomers are buried people like you will still be blaming everything on boomers, ignoring that 3-4 generations have come up since then and failed to fix anything. Gen X are in leadership roles, millennials are in management, and none of them have fixed anything, they just blame boomers because that's the easiest thing to do.

It's like the sam hyde joke, but instead of being funny it's just learned infantilism.
 

wiyosaya

Posts: 8,407   +7,840
I wouldn't blame boomers or entire generations, but mostly companies giving up on people for maximal profit. Ofc, it's not all that simple. But basically, politics and money. As usual, nobody reacts until the sh1t hits the fan. Very good article TS, btw.
This! ^ I could not agree more. It's the pursuit of the almighty business God, or should that be Dog, profit. Its not generational, it is a fundamental problem with society - at least as I see it.
 

wiyosaya

Posts: 8,407   +7,840
It's all nice and good, until China retaliates in kind and stop, for instance, the export of rare earths.
That's not as big of a problem as one might think. Once again, the only reason for going to China for rare earth elements is price. The US, and other countries, have re-started rare earth mining as they have realized that dependency on China, just because their goods are cheaper, is not a good idea.
 

yRaz

Posts: 4,962   +6,412
Anyone who is still blaming everything on "da boomers" honestly just doesnt understand economics. It doesnt matter what gen they are, C suites are sociopathy by nature and will royally screw anyone they can to get ahead.
Case in point right here. "oh I'm so much smarter then my daddy" syndrome is prevalent in those who blame boomers for everything. Even when all the boomers are buried people like you will still be blaming everything on boomers, ignoring that 3-4 generations have come up since then and failed to fix anything. Gen X are in leadership roles, millennials are in management, and none of them have fixed anything, they just blame boomers because that's the easiest thing to do.

It's like the sam hyde joke, but instead of being funny it's just learned infantilism.
I would argue that they are more aware of the problems of the times and navigating the current issues. Things have changed from the boomers generation that the way they would have solved problems at our age don't work in today's world. That by no means we are smarter, just that we are different people solving different problems
 

wiyosaya

Posts: 8,407   +7,840
The 2018 trade war may have been the pebble that started the avalanche only because US citizens were paying the tariffs, not China. The CHIPS act, IMO, would have been a much better solution in 2018.
 

bviktor

Posts: 1,152   +1,684
I don't get it. If US supports free market and believe market regulate itself, then why to do any changes?
If US believe China is a problem, those sanctions will only strengthen China's push for creating similar technologies in-house, and to expand their influence to growing countries (no matter if they want it or not).
The only way to tackle the issue is to admit Taiwan is a country whatever China would say about it, clarify situation on south china sea (and by that I mean remove heaps of sand called 'chinese territory islands'), and push for social changes in China and growing countries.
For now all I see is US for decades exploiting cheap work force, and - when exploited country becomes strong player - attempt at economical war, reducing as well other competing regions like Netherlands or Germany.
If US would won this attempt with China, then who's next? There were already some economical constraints placed on EU, and leverages done on ASML to support policy of external country just because it is a bigger customer.
Great Britain was exploiting many countries and had to run after they get overboard. Is history repeating itself?
I mean, it is still about the money. I see no care about people or growing economies, just a panic because someone else is making money as well and they could be better at it. And while I could support actions to help Taiwan, Vietnam, and other countries China threatens (and to help chinese citizens), I kinda do not care about fight for money - especially, US wants other countries to participate in this as well.
If you think China is a "free market" state, you have... problems.
 

waclark

Posts: 781   +487
Of course it's easier, we've been sending our manufacturing over for the last 30 years and closing American manufacturing facilities.

At my company we have contracts going into 2028 on building ne manufacturing facilities. Many abandon facilities are being retro fitted, but even that takes about 2 years with new construction taking upwards of 5 years.

Simply from a construction perspective, it will take nearly a decade to bring all this back to the US, that's not even including training people to work and finding skilled workers. We are easily 15 years behind China on manufacturing and we did it to ourselves. Most of it is because of unfair trade agreements and turning a blind eye to human rights violations.
I don't think they are necessarily advocating bringing it all back to the US. Just not in China. Other places, Taiwan, Korea, Malaysia, India and more would likely be the targets.
 

waclark

Posts: 781   +487
snip

Younger generations are getting sick of wasting money on crappy goods. They are demanding quality and bringing manufacturing back.

Now that's funny. Younger people want quality but they scream like little children when the cost is beyond their means. Look at the current GPU conversation. People are bitching about $1000 GPUs but when you consider the power you get in a GPU on a card, $1000 is a ridiculously low price. I sold some of the first Graphics Accelerators that HP made, back in the late 80s. They cost 10-20 times what a 4090 cost and yet the 4090 would blow them away on performance, by a wide margin.

Boomers are not your problem, it's your "my **** don't stink" attitude that is holding you back.
 

ragreeen2646

Posts: 36   +22
That's not an unpopular opinion, it's quite a popular one and I share it. The Boomers were the last generation to not require advanced education to succeed so they, like most ignorant fools, just crapped all over everything.

The Baby Boomers are/were an entire generation that personifies the Dunning-Kruger effect in that they know objectively less than generations X, Y and Z but are convinced that they know everything.

That's a VERY dangerous attitude for an entire generation to have and we're living with the consequences of it.
Talk about stereotyping a whole generation. I was born in 1946, so I guess I'm a boomer. What a bunch of CRAP.
 

yRaz

Posts: 4,962   +6,412
I don't think they are necessarily advocating bringing it all back to the US. Just not in China. Other places, Taiwan, Korea, Malaysia, India and more would likely be the targets.
I don't what's going on more where, all I know is that for current manufacturing building going on currently in my try state area, these buildings won't be ready for another 3-5 years. We don't have the commercial real-estate to move much back here now. Once it's finished, then we still have to train people. These are the logistics of ALREADY STARTED projects and there are likely more to come.
I can say first hand experience that we were shorthanded and didn't have the capacity to take on the projects we did, they labor industry for skilled trades people just isn't there. People just don't want to do skilled labor like masonry, carpentry or iron working.

even if we trained more skilled tradesmen, which takes on average of 4 years, then we still 3-5 years for new construction and THEN the hiring of people skilled in manufacturing. I feel we are 15 years behind on CURRENT demand for work in the US. Expanded demand could be well beyond that.
 

MasterMace

Posts: 241   +184
I don't get it. If US supports free market and believe market regulate itself, then why to do any changes?
If US believe China is a problem, those sanctions will only strengthen China's push for creating similar technologies in-house, and to expand their influence to growing countries (no matter if they want it or not).
The only way to tackle the issue is to admit Taiwan is a country whatever China would say about it, clarify situation on south china sea (and by that I mean remove heaps of sand called 'chinese territory islands'), and push for social changes in China and growing countries.

Because China does not believe in a Free Market.
 

Avro Arrow

Posts: 3,344   +4,354
This! ^ I could not agree more. It's the pursuit of the almighty business God, or should that be Dog, profit. Its not generational, it is a fundamental problem with society - at least as I see it.
Sure, but when one massive generation is the one in complete control when everything goes south, to deny their responsiblity is crazy. I don't blame everyone in the boomer generation for the state of the world today but everyone that I do blame for it does happen to be a boomer.
 

Tantor

Posts: 390   +660
That's not an unpopular opinion, it's quite a popular one and I share it. The Boomers were the last generation to not require advanced education to succeed so they, like most ignorant fools, just crapped all over everything.

The Baby Boomers are/were an entire generation that personifies the Dunning-Kruger effect in that they know objectively less than generations X, Y and Z but are convinced that they know everything.

That's a VERY dangerous attitude for an entire generation to have and we're living with the consequences of it.

Let me get this straight. You accuse the Boomers of being 'know-it-all's. And you know this is true because you know it all. Is that correct?

(lol)
 

shark975

Posts: 107   +126
I don't get it. If US supports free market and believe market regulate itself, then why to do any changes?
If US believe China is a problem, those sanctions will only strengthen China's push for creating similar technologies in-house, and to expand their influence to growing countries (no matter if they want it or not).
The only way to tackle the issue is to admit Taiwan is a country whatever China would say about it, clarify situation on south china sea (and by that I mean remove heaps of sand called 'chinese territory islands'), and push for social changes in China and growing countries.
For now all I see is US for decades exploiting cheap work force, and - when exploited country becomes strong player - attempt at economical war, reducing as well other competing regions like Netherlands or Germany.
If US would won this attempt with China, then who's next? There were already some economical constraints placed on EU, and leverages done on ASML to support policy of external country just because it is a bigger customer.
Great Britain was exploiting many countries and had to run after they get overboard. Is history repeating itself?
I mean, it is still about the money. I see no care about people or growing economies, just a panic because someone else is making money as well and they could be better at it. And while I could support actions to help Taiwan, Vietnam, and other countries China threatens (and to help chinese citizens), I kinda do not care about fight for money - especially, US wants other countries to participate in this as well.


yep. this article is written as if the USA is the center of the universe, and increasingly it may be becoming the other way around. China doesnt have to deal with woke ideology, lawsuits, drastic unrelenting ever stricter faux environmental regulations choking off growth <--(this is the biggie) or the welfare state. Those advantages are almost incalculable singularly, let alone combined.

I am a bit surprised China doesnt fight back more openly. Imagine the massive market tremors if China even began making noises about heavy tarriffs or even bans on Apple products, to name just one. let alone if they actually did it.
 

shark975

Posts: 107   +126
Of course it's easier, we've been sending our manufacturing over for the last 30 years and closing American manufacturing facilities.

At my company we have contracts going into 2028 on building ne manufacturing facilities. Many abandon facilities are being retro fitted, but even that takes about 2 years with new construction taking upwards of 5 years.

Simply from a construction perspective, it will take nearly a decade to bring all this back to the US, that's not even including training people to work and finding skilled workers. We are easily 15 years behind China on manufacturing and we did it to ourselves. Most of it is because of unfair trade agreements and turning a blind eye to human rights violations.


It's mostly because of USA draconian environmental regulations. We should stop lying about the causes of things. It is far too expensive to open a factory in the USA due to the EPA. Factories and especially mining are effectively banned here, they emit CO2.