Taiwan’s major electronics manufacturers and key component suppliers are facing calls from customers to relocate more production to the US, not just away from China, as US President Donald Trump pursues tougher trade policies, which is escalating the tech competition with Beijing. Such requests are compelling, given their customers’ prominence in the tech sector, particularly in artificial intelligence (AI).
The latest supply chain shift is different from the one sparked during Trump’s first term in the White House and might not be all for the worse, despite what some say.
Manufacturing diversification tends to swell capital spending and increase costs due to having production sites scattered around the globe, but it also opens the door to greater profits by tapping into higher-margin products.
Taiwan Semiconductor Manufacturing Co moving some of its advanced chip manufacturing technology to the US from Taiwan seems set to pay off.
Over the past few years, the electronics makers that are now eyeing the US tended to allocate manufacturing capacity to countries where labor costs were lower. However, Taiwanese companies did not play an essential role in producing components for them. Now that they are asking manufacturers to build factories in the US for servers, mainly pricey AI servers and related components — rather than the low-margin computers and mobile phones they were making previously — profits are likely to rise, pushing gross margin up from a meager 3 or 4 percent.
During the supply chain shifts due to US-China trade conflicts of Trump’s first administration, some Taiwanese electronic manufacturing service (EMS) providers turned to Mexico for manufacturing, given its lower labor costs and proximity to the US. Big-name EMS suppliers based in Taiwan — such as Hon Hai Precision Industry Co, Pegatron Corp, Wistron Corp, Quanta Computer Inc, Compal Electronics Inc and Inventec Corp — operate manufacturing facilities in Mexico, as they do in locations such as Southeast Asia since the out-of-China trend. PCs and smartphones still account for a significant portion of their revenue, but AI servers have become one of the most profitable businesses, with the top customers being US-based firms such as Nvidia Corp and other large enterprises, as well as key cloud service providers.
With Trump having announced 25 percent tariffs on all imports from Mexico, making goods there might no longer be a viable choice, so further production diversification appears imminent.
Hon Hai, a key supplier of AI servers based on Nvidia chips, last week told investors that it is scouting multiple locations to build new factories in collaboration with customers, after reporting its strongest net profit since 2008. Quanta also reported a record net profit for last year. Wistron’s server manufacturing arm, Wiwynn Corp, spent US$300 million to set up a factory in Texas and might convert a warehouse there into a production line.
To meet Trump’s aim of drawing manufacturing, US customers appear willing to discuss absorbing the additional production, labor and inflationary material costs that stem from relocating to the US. They might also simply absorb the 25 percent tariff.
Despite the boost in support from customers compared with the 2017 to 2021 period, it remains a challenge for EMS firms to balance securing more orders and optimizing their cost structures. As Taiwanese companies have an impressive track record in managing supply chain shuffles, they should be well-positioned to capture the new business opportunities in the US.
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