Apple’s tech supply chain shows difficulty of dumping China

Political headwinds in the US have been steadily leaning against US-Chinese integration. Under President Joe Biden, the $US615 billion US-China trade relationship has simmered into a cold war following the commercial tensions under Trump that resulted in tariffs on a collective $US360 billion worth of bilateral goods, along with US sanctions on key Chinese technology manufacturers such as Huawei Technologies.

The pandemic then ushered in President Xi Jinping’s strict virus-containment policies, which essentially barred travel and has left major areas locked down for extended periods of time. Rising tensions over US ties with Taiwan and China’s unprecedented scale of military exercises in the Taiwan Strait have become the latest flashpoint offering a case for decoupling.

“There was some momentum in this direction as a consequence of the trade war and the pandemic,” Scott Kennedy, a senior adviser at the Washington-based Centre for Strategic and International Studies, said about decoupling. “The Shanghai lockdown was really a monster accelerant. And the cross-strait crisis in early August added more fuel to the fire.”

Yet the Biden administration’s reshoring strategy – or “friend-shoring” as termed by US Treasury Secretary Janet Yellen – remains a lofty but unfulfilled ambition, as far as the data go.

US firms had $US90 billion directly invested in China at the end of 2020, and despite all the talk of decoupling, added another $2.5 billion in 2021, according to data compiled by China’s commerce ministry. The actual total is likely even higher because some businesses are thought by analysts to route some investments through Hong Kong, or via tax havens such as the Cayman and Virgin Islands.

US tech supply chains in China rely on firms from Taiwan and elsewhere as well as domestic Chinese firms, increasing the level of dependence further.

Furthermore, America’s allies aren’t exactly swayed by Yellen’s “friend-shoring” concept. Key US partners such as Singapore warned the Biden administration that isolating China could destabilise the global economy and potentially “sleepwalk” the world’s largest economies into a dangerous conflict.

“Such actions shut off avenues for regional growth and co-operation, deepen divisions between countries and may precipitate the very conflicts that we all hope to avoid,” Singapore’s Prime Minister, Lee Hsien Loong, said following Biden’s visit to the region in May.

That’s not to say untangling the tech supply chains that link the US with China isn’t already happening to some extent. A September 23 Goldman Sachs report found that the share of US tech imports coming directly from China had declined by 10 percentage points since 2017, “mainly on moderating China mobile phone exports”.

Apple’s exposure to China is also notably bigger than many others. Amazon.com, HP, Microsoft, Cisco Systems and Dell Technologies also depend on China to produce hardware for servers, storage and networking products, but the extent of their dependence is far below that of Apple.

‘Unwinding ties with China … may result in lasting damage to an already battered global economy.’

Bloomberg Intelligence says that overall tech-industry dependence could be reduced by 20 per cent to 40 per cent “in most cases” by 2030. For hardware and electronic manufacturers, they could reduce their reliance on the Chinese market to between 20 per cent and 30 per cent over the next decade.

The Biden administration is taking a two-pronged approach to weakening economic ties with China that simultaneously incentivises companies to shift their production via subsidies and penalises investment in China via tariffs and export controls.

This summer, Biden signed two pieces of legislation – the Chips and Science Act and the Inflation Reduction Act – that contain provisions to help bolster domestic manufacturing of certain strategic goods such as semiconductors, electric vehicles, batteries and pharmaceuticals.

The legislation bars companies that access the program’s $US52.7 billion in federal funding from materially expanding production of chips more advanced than 28 nanometres in China – or a country of concern such as Russia – for 10 years.

Also this year, the US administration expanded curbs on sending US semiconductors to China, with new licence requirements to sell chip-making equipment to factories that produce 14-nanometer or more advanced chips.

US industry officials are developing contingency plans in anticipation of more barriers to US-China trade and expect the Biden administration to trigger a slate of additional export restrictions sometime this fall.

While there’s the potential for a political reset between Biden and Xi on the sidelines of the coming Group of 20 leaders summit in Bali, expectations for a grand detente remain low.

“I don’t see any breakthroughs coming out of the Xi-Biden meeting,” said Wendy Cutler, a former US trade negotiator and vice president at the Asia Society Policy Institute.

Meanwhile, private-sector sentiment has also deteriorated.

A recent survey from the US-China Business Council found that US firms’ optimism about China has already fallen to a record low and evolving challenges – such as China’s COVID-zero policy, power cuts and geopolitical tensions – have caused more than half of surveyed companies to delay or cancel planned investments in China.

Nearly a quarter of the survey respondents said they’ve moved segments of their supply chains out of China over the past year.

US Commerce Secretary Gina Raimondo said on Thursday that even some companies that have been manufacturing in China for decades – for which it would be “very disruptive” to depart the country – are putting plans in place, citing conversations she’s had with chief executives.

But it’s not exactly an exodus from China. A common approach has become “China Plus One” – whereby China remains a core production base, and any additional capacity is added in south and South-East Asian nations such as India, Vietnam, Malaysia, Thailand and Indonesia.

Last year, US firms pledged to invest about $US740 million in Vietnam, the most since 2017 and more than double the amount in 2020.

Taiwan itself remains a vital but vulnerable component of US supply chains. Led by Taiwan Semiconductor Manufacturing, the island currently manufactures more than 90 per cent of the world’s most advanced chips used for military and corporate computing services. Apple, MediaTek and Qualcomm, which control more than 85 per cent of the global handset chip market, all rely on TSMC’s supply.

Taiwan is expected to remain the key manufacturing hub for cutting-edge chips over the next five years, according to the Bloomberg report.

China’s booming market also underscores the opportunity cost for US suppliers. Some 19 of the world’s 20 fastest-growing chip industry firms over the past four quarters, on average, are based in China, according to data compiled by Bloomberg.

Bloomberg

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.