Amid escalating tensions between the United States and China, intensifying geopolitical risks, China’s economic downturn, and the unstable political environment under the rule of the Chinese Communist Party, investors have lost confidence in China’s economic and political prospects. In order to reduce risks and enhance supply chain diversity, various enterprises continue to relocate their supply chains out of China, including technology companies.
According to the latest market analysis report released by S&P Global on September 2nd, Clifford Kurtz, Chief Credit Analyst at S&P Global, stated that “over the next two to three years, technology companies will continue to relocate their supply chains out of China, focusing on the midstream of the technology value chain.”
In the initial phase of relocation, many downstream Electronic Manufacturing Services (EMS) companies, including Taiwan’s Foxconn Industrial Internet, have shifted their investments from China to other countries such as Vietnam and India. This phase has largely been completed.
The second phase of evacuation involves the transfer of midstream production capacity out of China, specifically the intermediate stages of product manufacturing process, such as the production and assembly of core components. This relocation will entail higher expenditures, increased operational costs, and risks of execution failure.
The relocation in the second phase will be challenging to reverse, as it involves significant investments in factories and equipment that are difficult to transfer.
Nevertheless, these companies are adamant about moving out of China. Kurtz pointed out that “a more diversified geographical production layout will help technology companies cope with geopolitical risks, including the loss of critical supply lines, the imposition of punitive tariffs, or other events arising from the tension between the United States and China.”
S&P’s report indicated that from 2024 to 2026, technology hardware manufacturers may accelerate investments in new midstream capacity outside of China. This includes producers in areas such as passive components, power electronics and machinery, connectors and sensors, printed circuit boards, as well as outsourced semiconductor assembly and testing services.
S&P found that the fixed asset exposure risk of the 14 midstream technology companies it tracks decreased from a peak of 30% in 2021 to 26% in 2023. More than half of the new investments made by these companies in the past two years were distributed in the Americas, the European Union, or Asian regions such as Taiwan, Thailand, Malaysia, and India.
Furthermore, S&P believes that this trend has only just begun, as many companies began adjusting their risks exposure to China only at the end of the 2022 fiscal year (ending March 31, 2022). Based on capital expenditure plans disclosed by major technology hardware companies in 2024, the diversification trend is likely to continue.
S&P predicts that Foxconn’s annual capital expenditure over the next two years will reach 13 billion Chinese Yuan (approximately 1.83 billion US dollars), compared to 6 to 9 billion Chinese Yuan (approximately 850 million to 1.27 billion US dollars) in the past three years. A significant portion of these expenditures will be used to establish production capabilities outside of China.
TDK Corporation is a Japan-based electronic component manufacturer with a wide range of diversified product portfolios, including passive components, sensors, magnetic applications, and energy applications.
As of March 31, 2024, the proportion of TDK’s assets in China has decreased from 45% two years ago to approximately 30% in the 2024 fiscal year. The main reason for the reduction was the sale of the medium-sized battery business to a joint venture with China’s Ningde Times New Energy Technology Company.
Simultaneously, TDK continues to invest outside of China, particularly in India, to align with its localization production strategy.
Another example is Vishay Intertechnology, a US semiconductor manufacturer, which plans to invest over 1 billion US dollars in the next two years to expand production in Mexico, Taiwan, and Europe. The company’s capital expenditure last year was 300 million US dollars.
Despite additional costs, operational disruptions, and efficiency reductions, S&P’s report stated that global technology hardware companies will continue to withdraw from China due to various push and pull factors.
Push factors include restrictions from Washington on technology product imports from China, as well as export controls on high-end semiconductor and artificial intelligence technologies, while pull factors include new incentive measures adopted by foreign governments to promote the development of their domestic technology industries.