This article first appeared in The Edge Malaysia Weekly on September 3, 2018 - September 9, 2018
CHINA and the US are engaged in a trade war with both sides slapping tariffs on the other’s goods — ranging from steel, aluminium and cars to agricultural products — worth billions of dollars.
Higher tariffs on Chinese goods exported to the US would lead to a fall in demand, and theoretically, affect exports of Malaysian intermediate components used in these products.
In an Aug 23 discussion paper, Khazanah Research Institute deputy director of research Aidonna Jan Ayub and research assistant
Alyssa Farha Jasmin say that if trade in final goods between China and the US is at risk, Malaysian exports could also be negatively affected.
“The electronic and electrical (E&E) industry in Malaysia is a major world player in producing components such as semiconductors for mobile devices, automotive components as well as computer parts,” they wrote.
As an illiustration, in a simplified three-country global value chain for the production of electronic devices, Malaysia exports integrated circuits as intermediate goods to China, before the latter exports electronic devices such as computers as final goods to the US.
However, some captains of industry believe Malaysian semiconductor and semiconductor-related firms may benefit from the trade war as Chinese and foreign companies could choose to relocate their plants to Malaysia or other Southeast Asian countries to avoid higher tariffs imposed by the US.
JF Technology Bhd managing director and CEO Datuk Foong Wei Kuong, remarked in mid-August that his company stands to benefit from the trade conflict as some of its associates in China and the US are already exploring the possibility of moving parts or entire operations to Malaysia, owing to concerns over the impact of tariffs on their operations.
Do other industry experts share the same optimistic view?
Data from the Observatory of Economic Complexity (OEC) — a Massachusetts Institute of Technology site that compiles international trade statistics — shows that semiconductors were the world’s 19th most traded product in 2016.
Malaysia one of the top semiconductor exporters
According to OEC, the top three exporters of semiconductors are China (US$29.3 billion), Malaysia (US$11.7 billion) and Japan (US$10.6 billion).
The top three importers are Hong Kong and China (US$14.2 billion each), followed by the US (US$13.6 billion).
Of China’s production of US$29.3 billion worth of semiconductors, 11% or US$3.08 billion worth were exported to the US.
Meanwhile, out of the US$14.2 billion in semiconductors imported by China, 12%, worth US$1.77 billion, came from Malaysia.
Malaysia exported US$11.7 billion worth of semiconductors in 2016, of which 26%, US$3.02 billion, went to the US, with 15% (US$1.77 billion) going to China.
The country’s semiconductor players thus have a fairly significant exposure to the US and Chinese markets.
The links are even stronger as China exports about a tenth of its products to the US.
Going back to the potential relocation of factories, is it realistic for Malaysian semiconductor players to expect more orders if Chinese firms relocate their plants here?
Note that China exported US$3.08 billion worth of semiconductors to the US in 2016. So, to fully absorb the spillover orders from China, Malaysia needs to double its exports to the US.
Be careful and selective
Globetronics Technology Bhd CEO Datuk Heng Huck Lee observes there was an initial wave of potential business, or transfer of operations from China to Southeast Asian countries like Malaysia, but cautioned that local firms may not necessarily benefit and should not rush into short-term opportunities.
“We had two potential opportunities under discussion. [But] until and unless these product transfers result in win-win benefits to both sides, it may not necessarily translate into benefits for the Malaysian company.
“Globetronics is not excited about projects and opportunities that are labour intensive, as well as those that are not related to high-technology products,” he tells The Edge.
“We are quite careful and selective to ensure that any ongoing opportunity fits our long-term business strategy, and there must be business and operational synergy,” he reveals.
ViTrox Corp Bhd founder, CEO and president Chu Jenn Weng is also of the view that Asian semiconductor and electronics manufacturing services (EMS) companies outside China could benefit from the trade conflict.
“I believe that in the immediate short term, OSAT [outsourced semiconductor assembly and test] and EMS companies will increase their capacity ... outside China to mitigate the risk. If the trade war is prolonged, in the medium to long term, they may consider building new factories in Asean, particularly in Malaysia,” he says.
However, ViTrox has yet to receive any word of its existing customers planning to build new factories here or in Southeast Asia.
“As ViTrox has a strong presence outside China and the US, any new factory or increase in capacity by our existing customers or new customers would impact positively on our business,” says Chu, adding that the real impact of the trade war has yet to be felt.
How big is the spillover effect?
FoundPac Group Bhd vice-president of sales and marketing Low Cher Shyong believes that the affected players in the US and China may move their operations, or part of their operations, or at least divert their capacity output from other countries that are not in the trade war zone.
“It is highly possible that some of the impacted industries may relocate their factories, and Malaysia could be one of their choices. Of course, we do not have sufficient capacity to absorb all of the [potential] relocation. However, that does not mean we can’t absorb some of it.”
Low says that if it happens, it will definitely benefit the supply chain locally but notes that the trade war has so far had a “very minimal impact on our company”.
Elsoft Research Bhd CEO Tan Cheik Eaik remarks that if the trade war persists, Chinese manufacturers will have to move their manufacturing operations out of China. If that happens, Malaysian semiconductor players and equipment makers would stand to benefit.
Moreover, US customers can be expected to source for products outside of China to avoid the tariffs, benefiting Southeast Asian manufacturers, particularly Malaysia, which is a major semiconductor manufacturing hub.
“The key question is whether the trade war will persist and for how long. Owing to Malaysia’s relatively small capacity, the spillover effect will be big. In the shorter term, OSAT players will be the first to benefit,” he says.
According to Tan, the US has imposed a 25% tariff on LED products from China from July 1. As a result, Elsoft Research’s Taiwanese customers in China, which export directly to the US, are affected.
“They are relocating part of their operations back to Taiwan, and also looking to relocate to Malaysia. They are our customers, but our exposure is minimal because we will continue to supply test equipment to them no matter where they are,” he explains.
Other industry chieftains are still unclear what semiconductor components will be hit by the trade war.
What is widely known is that the tariffs are mainly on electronic modules and systems from China. As such, integrated circuit chips and semiconductor supply chain products will be directly and indirectly hit.
On July 31, the global microelectronics industry association, SEMI, announced its support for the call by nearly 50 members of Congress to the Trump administration to remove tariffs on semiconductor products imported from China.
“SEMI fully supports the congressional recommendation and believes that the proposed tariffs will ultimately reduce semiconductor-related exports, limit technology innovation, introduce significant uncertainty in the semiconductor supply chain and cost US companies ... more than US$500 million annually.”
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