(May 27): US chipmakers are coming to grips with the costs of an escalating trade dispute between the US and China as US President Donald Trump steps up tariffs and sharpens his attacks on Huawei Technologies. The emerging consensus: The price will be high.
“We’re all going to suffer in this industry if we don’t get this thing resolved,’’ says Tom Caulfield, CEO of Globalfoundries, the largest US contract manufacturer of chips. “Even though you try to do the right thing and force a better balance in trade, it could have negative consequences.’’
The presidential order banning the sale of US technology to Huawei provides a clear illustration of just how interconnected the global supply chain has become — it is almost impossible to avoid hurting domestic companies in the process of pressuring their Chinese customers and rivals.
Over the years, the semiconductor industry has lobbied multiple administrations arguing for protection from alleged overseas efforts to steal its inventions. Now, measures meant to shield US interests may hurt chipmakers as much as they help.
Caulfield’s company has plants in New York state, Germany and Singapore. On the surface, that makes him look well positioned to take advantage of any migration of orders away from China. But that is a simplistic view that does not take into account where electronics parts originate and where they end up, he says.
For example, a chip may be designed in California, manufactured in Taiwan or another part of Asia, shipped to Malaysia or the Philippines for packaging, then sent on to China for inclusion in a device. From there, the gadget could be sold locally or shipped anywhere in the world, including the US. “The supply chains in the semiconductor industry are completely entangled,” he says. “We can’t separate them.”
The US government’s blockade of business with Huawei, which it accuses of aiding Beijing in espionage, cuts off the world’s largest networking-gear -maker and No 2 smartphone vendor from the US semi-conductors and software it needs to make its products. The company was granted a partial reprieve on May 21 with a temporary general licence, though that licence will permit only the continuing export of parts under existing contracts — it still will not allow companies to move forward on new projects. That provides only short-term relief to the Chinese company’s suppliers.
The Huawei ban came on the heels of the Trump administration’s raising of tariffs and taxes on imports from China, including clothing, shoes, handbags and electronics.
According to a report by the Information Technology and Innovation Foundation, strict export restrictions on emerging technologies could cause US companies to lose US$14.1 billion ($19.4 billion) to US$56.3 billion in revenue over five years, threatening as many as 74,000 jobs.
The semiconductor industry alone could lose more than 9,000 jobs after a year of 20% tariffs, the researcher says. Some smaller chipmakers are already saying fewer orders from Huawei and China are taking a bite out of their income.
Lumentum Holdings cut its forecast on May 21, followed by Qorvo on May 22, a trend that is likely to pick up speed amid the combination of 25% tariffs on Chinese goods and the US blacklisting of Huawei, according to analysts. “We would expect that many, if not most, semiconductor companies will need to lower estimates,” Raymond James & Associates analyst Chris Caso wrote in a note to clients.
A swoon in industry stocks shows many investors expect the same. Since reaching a record high on April 24, the Philadelphia Stock Exchange Semiconductor Index has plunged 14%. Huawei suppliers such as Skyworks Solutions and Xilinx have been among the biggest decliners.
Most industry executives have declined to comment on the trade situation or the Huawei crackdown. They do not want to risk upsetting their home government — or raising the ire of customers in their biggest market. The US produced about half of the US$470 billion worth of chips sold globally last year, and China, whether for domestic consumption or use in products that are later exported, was the biggest purchaser.
The Semiconductor Industry Association trade group has attempted to call for moderation in a way that underscores the difficult position its members are in. “We hope to work with the administration to broaden the scope of the licence so it advances US security goals in a manner that does not undermine the ability of the US semiconductor industry to compete globally and ensures the economic security of an industry that is the backbone of this country’s technology leadership,” SIA president John Neuffer says in a statement.
Illustrating the importance of China, Qualcomm, for example, got two-thirds of its sales from China in its most recent financial year. As recently as 2011, the country accounted for less than a third.
And underlining the complicated relationships that exist, Qualcomm does not make chips. It designs them at its San Diego home base and has them manufactured in Taiwan, South Korea and China by subcontractors. The chips are then assembled into smartphones in China and sold there, or make their way to the US and Europe.
“We’re too far into free trade that the world cannot have countries not trading,” Globalfoundries’ Caulfield says.
