Which Way is the Digital Iron Curtain Blowing?

Two events are shaping the way the world looks at the high-tech industry today.  The first is the trade war between the two tech giants—the US and China—and the second, the current Covid pandemic, which has accelerated the first event.  In fact, the pandemic has served as a catalyst to make the world sit up and realize it has put all its eggs in one basket in allowing China take over the crown of “the world’s factory”.

With the pandemic effectively disrupting global supply chains, many high-tech companies want a migration of production units from China to new factories in India, Vietnam, and Taiwan—they are targeting several manufacturing ecosystems in such countries.  Moving out of China will help address concerns of security and intellectual property, and avoid US tariffs thrown up the by the trade war.

In addition to and possibly related to the trade war, the US Department of Commerce has been adding more companies and agencies to a running blacklist of Chinese firms that they have banned from doing business in the USA.  The special focus has been on companies specializing in machine learning, artificial intelligence, telecommunications, and digital surveillance.

It is as if the US is throwing a digital iron curtain over the high-tech industry, with China on one side of the curtain and the rest of the world on the other.  The major impact has been on the telecommunications side, with 5G or the fifth-generation mobile network poised to enter the western markets in a big way.  There is a huge global competition for securing intellectual patents and market consolidation, as 5G could be the defining breakthrough for technology for at least the coming decade.

The Rise and Rise of Huawei

The trouble is, Huawei of China, is the leading provider of 5G mobile technology in the world, and the global influence of the telecommunication giant has stoked heartburn and fears in several countries, including the US.

This has led Washington to impose sweeping restrictions on Huawei, claiming certain Chinese intelligence laws can allow the Chinese government to force Huawei to spy, sabotage, or take similar actions on its behalf.  Although there is no concrete evidence to support this has really happened, the latest allegations of TikTok collecting user data for passing on to mainland China gives credence to this view.  President Trump has imposed a ban on the use of TikTok and WeChat, both popular Chinese apps for mobiles, in the US.

Washington is not alone in airing such suspicions.  Other countries such as Australia have also expressed concern about the Chinese government using Huawei to spy through backdoors installed in 5G infrastructure, allowing Beijing control over public utilities and communications networks in other countries.

As far back as 2012, a report from the US House Permanent Select Committee on Intelligence had concluded it was risky to use equipment from Huawei and ZTE, another Chinese telecommunications company, as they could “undermine core US national security interests.”  In 2018, six US intelligence chiefs, including those of the CIA and FBI, seconded this view.

The US suspicion may have stemmed from the special treatment Huawei was receiving from the Chinese government and military since 1996.  Beijing was explicitly supporting domestic telecom companies, with special emphasis on Huawei, to the point of preventing foreign domination of the industry.  For instance, Huawei received easy financing and subsidies to the tune of $222 million in grants from the Chinese government in 2018 alone.

Such support from the Chinese government has allowed Huawei and other companies price their equipment far below the rates of other foreign competitors.  For instance, Huawei was able to outbid the Swedish firm Ericsson by 60 percent for network equipment in the Netherlands for the national 5G network.  Experts are of the viewpoint that prices quoted by Huawei were so low, they may not even have covered the cost of production without subsidies.

According to industry experts, however, there is merit in Huawei’s claim that its low prices are due to technological expertise and not government interference.  The annual R&D budget of Huawei is one of the largest in the world.  In 2018, it stood at US$15 billion, close to that of Amazon and Alphabet (Google).

Restricting Huawei and Others

The United States has blocked Huawei in many ways. Since 2018, the Trump administration does not allow US federal agencies to use equipment from the Chinese telecom giant.  Regulators forced AT&T to step away from a deal with Huawei to sell their smartphones.

The following year, Trump signed an executive order that banned US companies from doing business with Huawei.  As the Commerce Department has added Huawei to its entity list, the company cannot buy US goods—microchips, lasers, software, and more—unless the government gives it permission.  Since then, the entity list has grown, including more than a hundred affiliates of Huawei.  Extending Trump’s executive order until 2021, the department has also blocked foreign semiconductor manufacturers using US machines and software from shipping their products to Huawei without a license.

Apart from corporate leviathans like Huawei and ZTE, the Commerce Department has been adding other smaller but still significant players in China’s technology growth and international expansion to their entity list.  This includes Hikvision, a global leader in the security industry, and Dahua Technology, a large video surveillance and security camera company.

Other names include Iflytek, a voice recognition company; Megvii Technology, a facial recognition company; SenseTime, an artificial intelligence SAAS platform; Meiya Pico, a digital forensics company; YITU, an AI research company; and Yixin Technology, an information security company.

A bitter trade war has locked in the two largest economies of the world, US and China. The dispute has led to the US and China levying tariffs on one another’s goods worth hundreds of billions of dollars.  On one hand, the US President accuses China of theft of intellectual property and unfair trading practices.  On the other, China perceives the US as curbing its rise as a global economic power.

Fallout of the Trade War

Although the US and other western nations cite the close ties of Huawei to the Chinese government as their reasons for imposing sanctions, many remain skeptical.  To them, the two economies are deeply intertwined, at least technologically, and banning Huawei seems like a loaded excuse, especially when US military contractor Lockheed Martin relies on Chinese subcontractors to supply them with essential circuit boards, which they incorporate in their F-35 fighter jets.  Lockheed Martin then sells these jets around the world to several nations.  In turn, Huawei relies on US companies for chips, lasers, and software.

With the above in mind, banning Huawei from the high-consumer markets looks more like an effort by western nations to insulate high-tech markets such as 5G for local corporations.  Apart from seeking to undermine Huawei on the global market by banning their products, western nations have been actively funding technology competitors in Europe such as Nokia and Ericsson.

With 5G estimated to produce nearly 22 million jobs by 2035, and US$3.2 trillion in global economic output, it is no surprise western nations worry about Huawei leaving them behind, and are scrambling for technology patents and markets.  For instance, although Canada has not banned buying 5G technology from Huawei, it is funding the competition to stunt Huawei’s international presence.

Since the ban, Ericsson and Nokia have been filling the 5G vacuum—Ericsson holds 93 commercial contracts of 5G, and Nokia has 63—leaving only 50 for Huawei.  However, this may not last long, as Huawei is actively seeking industrial self-sufficiency from the sanctions placed on it.

Where are we Heading?

On one side, China is creating a political uncertainty by holding military maneuvers in the South China sea, and aggressively entering territories of India, Nepal, and Bhutan.  On the other, its trade wars with the US are escalating and tensions with the western nations on technological hegemony increasing.

All this is causing a digital iron curtain, splitting the supply chains of the world between the Chinese and the non-Chinese.  It is still not clear which way the digital iron curtain is blowing, with the technology industry becoming a key arena for playing out geopolitical tensions.

This will surely affect the day to day trading of electronic components.  It is hard to predict which products will be most affected, so one can preemptively secure a safe and steady supply of components.  AERI is ready to step in and assist your company should there be a shortage on any of your components.

To lock in your electronic components and to avoid production slowdowns, please contact one of our Search Experts by email; USA calisales@aeri.com, Asia ausales@aeri.com, or Europe uksales@aeri.com

Bringing Back Chip Making to the USA

The present US-China trade spat has acquired an unusual centerpiece—the semiconductor.  Although most people are ignorant to their significance, our daily lives are greatly influenced by them, most industries would come to a screeching halt without them, and every electronic device has some incorporated within them.

Almost all sectors of the US economy depend on semiconductors, the key foundational technology for anything digital—telecommunications, the Internet, transportation, healthcare, 5G, artificial intelligence, quantum computing, and more.  America’s national security exclusively depends on its continued leadership in semiconductors, as chips pave the way for the US to defend its critical infrastructure and to field its advanced weapons systems.

Crux of the Problem

While US is the undisputed global leader in the development of semiconductors, designing many of the leading chips for cutting-edge applications, its leadership in this critical technology is vulnerable to numerous challenges.  Topmost on the list of challenges is the widening supply-chain gap.  The realization is beginning to sink in that semiconductor supplies are far too reliant on foreign suppliers, mainly the Chinese.  For advanced chip manufacturing, US chip designers today must rely heavily on suppliers in Asia.

At present, of the global semiconductor manufacturing capacity, the US accounts for only 12%, Asia 79%, distributed among China, Taiwan, and South Korea, while Japan, Europe, and SE Asia account for the balance.  However, the Chinese government is aggressively funding the construction of several new semiconductor fabs or foundries with an eye to cornering a major share of chip production by 2030, targeting up to three times the global share of US chip manufacturing.  Over the long term, this is likely to disrupt the industry.

Increasing geopolitical tensions between US and China, and enhanced Chinese state-backed competition can lead to the US losing market share in China.  This may allow China’s share in chip manufacturing to increase even further.  Although there is growing awareness in the US about the situation, addressing the issue requires significant public and private investments, given the complexity and costs involved in increasing chip manufacturing onshore the US.

Exploring Initiatives

Fab construction is capital intensive, and in countries around the world, government incentives drive it largely.  Comparatively, the US does not offer much government support, providing few incentive programs for manufacturing semiconductors.  For instance, around the world, other governments offer generous cash grants, tax incentives, and other subsidies to the extent of 40% of the cost of constructing and operating a fab.  The US semiconductor manufacturing lags in growth mainly due to unfair competition from the competitor’s government incentives.

Congress and the Administration are considering policies for advancing semiconductor design and manufacturing development in the US; fab construction and research in the US.    To compete on price will require significant incentives to ensure the US drives the next generation of semiconductor innovation.

The House and Senate have both passed new amendments to the National Defense Authorization Act in the US.  This is the annual bill authorizing military spending.  Although these addendums do not provide the funding, they offer a framework for creating multiple grants of up to US$3 billion to chip manufacturing companies based in the US.  Names include Micron, Global Foundries, Intel, and branches of other large chip-makers such as Samsung (South Korea based), for building and expanding chip manufacturing facilities in the US.

The addendums will also provide private companies or US universities grants for research in semiconductors, either through DARPA, the Defense Advanced Research Projects Agency, or directly.  In addition, a National Technology Center may also be set up, serving as the organizational control point, and clearing house for chip manufacturing in the US, in addition to functioning as a new research and development facility.

The above incentives for setting up facilities for domestic chip-making in the US could have multiple benefits.  Apart from protecting national security and enhancing broader economic advantages, funding new research, and building new manufacturing sites, it would also create new highly skilled jobs.  While significantly expanding the number of highly skilled and well-paid workforce, these investments will significantly enhance the present jobs in America.  As the semiconductor industry will surely drive innovation in the economy, the US semiconductor industry is likely to contribute millions of jobs in future industries.

On the practical side, the initiative will also decrease the US dependence on foreign chip manufacturers.  The proposed efforts are of immense advantage to all types and sizes of US-based semiconductor companies.  Apart from the large businesses mentioned above, other lesser-known companies will also benefit, such as Texas Instruments, Xilinx, or Marvel, and even smaller companies like National Instruments, Silicon Labs, and Lattice Semiconductors.

Moving Forward

The US is the world leader in semiconductor technologies for making chips that drive several industries.  Almost every industry in existence uses these chips, be it for wireless networking, making medical equipment, automotive, manufacturing equipment, or others.  The path America is taking to maintain that lead and improve its share of global manufacturing is in the right direction.  The industry needs the push towards increasing the amount of research and manufacturing support, while we proceed to a future driven by technology.

Semiconductor research and development companies in the US presently contribute the second-highest rate of research investment of any industry.  While this high level of investment has driven innovation and growth throughout the economy, it has also fueled the rapid pace of innovation in design and development in the semiconductor industry.

Whether the US-China trade war subsides or flares up further, the US is making an all-out effort to substantially improve onshore semiconductor manufacturing growth.  This will likely influence the daily trading pattern for electronic components.  Although it may be difficult to predict which semiconductor devices the trade spat will likely affect most, AERI can step in to help preemptively secure a safe and steady supply of components should there be any shortages.

Please contact one of our Search Experts by email; USA calisales@aeri.com, Asia ausales@aeri.com, or Europe uksales@aeri.com.

Why the Electronic Manufacturing Supply Chain is So Complex

Article Reposted from EPSNews.com

The complexity of global supply chains depends largely on what and how much you’re sourcing.  With some materials — like paper — you’ll find a suitable supplier almost anywhere in the world.

However, in the electronics industry, things are not so straightforward.  Multiple commodities from multiple suppliers across various geographic locations mean global electronics supply chains are much trickier to manage.

One of the main challenges of electronics is the sheer volume of parts that go into one product.  Some of these parts also need to have approvals, and suppliers will require certain certifications.  Bespoke parts are often manufactured to specific designs, too — meaning rigorous testing and sampling are necessary to ensure they meet meticulous quality standards.

Why is a stable supply chain so important?

A good supply chain is all about remaining competitive.  If a customer comes to you wanting a specific part for a project, you need to know that you can deliver through a trusted chain of suppliers.  As such, having a range of approved global suppliers is key to ensuring you never have to reject new enquiries.

A strong network of suppliers also allows you to free up capacity and manufacture a range of products more cost-effectively (and at short notice) — which, ultimately, translates to a better price for the customer.  This is why so many companies in the electronics sector will have at least some offshore suppliers.

However, supplier selection is crucial. It’s not enough to have a good website or a good booth at an exhibition — you need to see the factory and the quality of the parts they produce first-hand.  When customers place orders, you need to know exactly where their products are coming from.

It’s also important not to cast the net too wide.  Once suppliers are spread out too far, the chain becomes more difficult to manage, and you lose control of where the materials come from.  Instead, it’s crucial to build long-term partnerships with suppliers that share and uphold your ethos, integrating them into your business to ensure a fluid process.

What is the impact of external factors?

SEE FULL ARTICLE HERE

 

To lock in your electronic components and to avoid production slowdowns, please contact one of our Search Experts by email; USA calisales@aeri.com, Asia ausales@aeri.com, or Europe uksales@aeri.com