Taiwan is profiting from the trade war between the US and China as computer production returns home, partly to avoid the Trump tariffs. Americans may still have to pay more for their computers and smartphones, but the price increases will be lower than they would be if a 25% tax was imposed on imports.
Originally, Taiwanese companies such as Acer, Asus, Hon Hai (which owns Foxconn), and MSI moved manufacturing from Taiwan to China because of local labour shortages and higher costs. Acer and Asus then spun off their manufacturing operations into separate companies -- Wistron and Pegatron, respectively -- to do contract manufacturing for American technology companies such as Apple, Dell, HP, and Microsoft.
Moving manufacturing back to Taiwan will increase costs, but highly automated production lines should mean labour shortages are less of a problem. Also, companies don't need to move everything, just enough to supply the US market. This could be as little as a quarter of their total output.
It has been relatively easy to move the production of high value/low volume products such as servers, especially for the manufacturers who still had factories in Taiwan. That includes Compal, Wistron, MSI, and Inventec.
It will be harder to move the production of low value/high volume products such as cheap laptops, and even worse for smartphones. There is less also incentive, because China is the world's largest smartphone market.
However, as China has become more expensive, Taiwanese manufacturers have been opening plants in other countries. According to Taiwan-based Digitimes, which reports on Asian technology manufacturing, "Compal has production lines in Vietnam. Wistron has facilities in the Philippines and Inventec in Malaysia." Foxconn and Wistron also have factories in India, which is trying to emulate China's manufacturing success.
This diversification is a key part of the Taiwanese government's New Southbound Policy (NSP), which aims to reduce the country's dependence on China. It may also reflect the fact that China's working population has stopped growing, and the Chinese government expects an unstoppable decline in population after 2030.
The problem is that giant factories cannot operate efficiently without deep supply chains, which stretch from sourcing rare Earth minerals to high-volume containerized shipping. In the Shenzen area of China, there are thousands of companies supplying hundreds of factories.
The supply chain also involves world-class expertise that has taken decades to develop, and that is unavailable anywhere else. Because it requires physical not just intellectual work, involving millions of parts, it would be harder to move Shenzen than to move Silicon Valley, where much of the work can be done online.
Timing is everything
There's also the question of how long the trade war is going to last. Companies that expect a 25% tariff for the foreseeable future have a stronger incentive to move production than those who expect a settlement later this year.
A deal may depend on two things: The damage done to American companies, and the effect on the stock market.
American companies such as Apple, Dell, and HP could be hit hard. They import millions of devices from China, and -- unless they can source production from other countries -- they may have to pay the tariffs. Ultimately, the cost will have to be passed on to consumers, in higher prices, and/or shareholders, in lower profits.
Price rises may take several months to feed through, especially for companies that have built up inventories at lower tariff levels. But current stocks can't last forever, and higher prices may lead to lower sales.
The effect on share prices could have a more immediate impact. A Marketwatch story headlined "Here's the damage done to the stock market since Trump's May 5 trade tweet" (announcing the 25% tariff) noted that share prices are down but bonds are up.
Marketwatch highlights a technical phenomenon known as a "yield inversion," where short-dated US treasury notes yield more than long-dated ones. (Basically, the next three months look riskier than the next 10 years.) It says:
Such rate inversions are rare because investors tend to demand higher yields for extending loans over a longer period. Therefore when rates invert it is viewed as a signal that an economic recession is in the offing. The 3-month/10-year inversion currently stands at the most severe since 2007.
Trump inherited an eight-year bull run, but the Dow Jones and the S&P 500 peaked on 26 January 2018 and both are lower more than a year later. He will not want to campaign for re-election with the US entering a recession like the two it suffered under George W Bush: The dot-com crash in 2001 and the sub-prime mortgage crisis in 2008-09.
China can play a long game, but short-term pressure in the US could yet result in a free pass for tech giants or a settlement with China.