In 2018, under President Donald Trump, the US began imposing tariffs against China and launching a Trade War with them to combat their “unfair trading practices.” The decision was primarily based on two factors:
- American electronic interests being encroached upon by Chinese industry.
- There was concern that some Chinese goods, such as civilian drones and Huawei mobile phones (a competitor to Apple and Samsung), could be used for spying.
Now, in 2022, the Biden administration is implementing new methods of attacking China’s economy. In an effort to halt China’s access to semiconductor chips, a major component of China’s electronic industry, President Joe Biden recently implemented new export rules. The Chinese government imports more than $300 billion in foreign semiconductors every year, since computer chips are the country’s largest export. Micro-chips and semiconductor chips are produced using American tools and software, enabling them to be easily used as financial weapons against China.
To sell microchip development technology to China, a US company must first obtain a license, a process the USA is not interested in simplifying. This includes all companies who are currently using American tools in microchip or semiconductor chips development, if they plan to sell to China, they need a license to use their tools.
Chip Manufacturing in The United States
Taiwan’s TSMC (Taiwan Semiconductor Manufacturing Co.) and South Korea’s Samsung make up around 80% of the world’s chip foundry market, and it appears they are already redesigning their global supply chain to focus production within the United States. This is due primarily to U.S. export laws, which also apply to foreign companies using American-made tools in microchip foundries. Other factors are also at play, such as China’s declining manufacturing industry, largely attributed to China’s zero-COVID-19 policies and power grid failures.
Multiple industries are moving away from China and diversifying their manufacturing interests, so they are not heavily reliant on them as of October 2022. Rather, they settled on their neighbors such as Taiwan, South Korea, Vietnam, and Japan.
An example of this scenario includes Apple: factory shutdowns have affected Apple’s manufacturing hub in China, which supplies 35% of its products. TSMC has announced plans to build a $12 billion chip fabrication plant in Arizona by 2024. Apple CEO, Tim Cook, says the company plans to be the site’s largest customer.
It is clear the US wants microchips for computers and AI used by them to be made domestically. But this process of allocating resources and manufacturing to other reliable countries will be a time-consuming process, and time means money.
Tech Equipment Prices
TSMC has already confirmed that prices will go up by 6% in January 2023 due to demand. The prices of Intel, Nvidia, and Samsung are also expected to rise in 2023. Semiconductors are a major component in our everyday electronics, and the industry is currently struggling to meet the demand. Semiconductor chips are in short supply due to the lingering effects of COVID-19, with the prices of raw materials necessary to make these chips rising ever since the demand for computer chips increased during lockdowns.
It is unknown how the trade war between USA and China will fully play out, some analysts estimate it will continue up to 2050. Tech companies are only now starting to deisolate their product production from the once reliable Chinese labor force, and it will continue to be a costly transition process until a new status quo is settled.
As a result of the current economic climate, AOTMP® recommends assessing budgets and planning ahead for potential increases in electronics costs. The ability to mitigate supply inflation lies dormant in many organizations. However, with the right approach, companies can rebuild their price-negotiation capabilities and remain competitive for years to come.