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Huawei chip Mission reveals Taiwan’s trade war economic gains

Growth surpasses Huawei, but tech companies in difficult situations between the US and China.

A group of high-ranking Huawei executives went on a mission to Taiwan last month to ensure that a critical vendor will continue to deliver state-of-the-art chips to the Chinese tech giant in the middle of the ongoing trade war between Beijing and Washington.

Huawei’s negotiations with Taiwan Semiconductor Manufacturing Co. were also aimed at persuading China to devote more specialised production to the world’s largest contract chipmaker, according to people familiar with the issue. Huawei aims to secure critical parts for its devices as well as networking equipment — both essential for the company’s sustainability of the U.S. clampdown.

Elizabeth Sun, a TSMC spokeswoman, told the Nikkei Asian Review that the firm would not reflect on its customers’ affairs and stated that there was no plan to move more advanced chip development to China. Huawei said it is not intervening on client executives ‘ calendar as a matter of policy.

Also under pressure from American customers is TSMC, the sole producer of core iPhone processors and a key supplier for top U.S. chip developers such as Qualcomm, Nvidia, Broadcom and Xilinx. Taiwanese chip chairman Mark Liu said last week that the Pentagon had asked U.S. clients of TSMC to encourage them to make chips for security reasons on American soil.

“In regular and calm days, TSMC is just an essential distributor within the software supply chain,” Founder Morris Chang of TSMC told employees on the company’s annual sports day. “But as the globe becomes more volatile, TSMC is developing as a vital area that all global powers seek to control.” The strain on TSMC, Taiwan’s most significant market capitalisation firm, from both sides, shows the importance of the strategic position of the island. Taiwan is in the centre as the two major economies in the world are trying to decouple and create increasingly independent supply chains in the fight for future technological dominance.

With several other leading partners in Taiwan, the U.S. hopes to keep Taiwan as a loyal ally in Asia by measures that include improved counter-cyber attack cooperation. While, China is making offers to the self-ruled democratic island that it considers as a ludicrous territory, and is carrying out rewards such as granting Taiwanese companies more substantial chances to spend and develop the 5 G network of the mainland.

To date, the ongoing economic disputes have helped the broader economy in Taiwan. On the island’s gross domestic product increased by 2.91 per cent in the July-September quarter, outperforming global peers including South Korea (2 per cent) and Singapore (0.1 per cent), whereas Hong Kong’s protest-hit economy shrank by 2.9 per cent in the same span. According to the company’s Corporate Social Responsibility Survey, TSMC accounts for 4.6 billion of Taiwan’s GDP, and it’s market capitalisation makes up more than 20 per cent of Taiwan’s entire stock market.

As many Taiwanese manufacturers move production out of China to escape tariffs, Taiwan has gained more than 600 billion New Taiwan dollars ($19.7 billion) in inbound investment so far this year. Also, Taiwanese suppliers profit from Chinese firms pressing for non-U safety. S. Alternatives to ward off the threat of a drastic drop in the supply of firms including Huawei following Washington’s clampdown.

An example of China’s aggressive push for non-American suppliers is the meteoric rise of Richwave, a smaller Taiwanese rival of American radio frequency and Wi-Fi component companies such as Broadcom, Skyworks, and Qorvo. Over 350 million of Richwave’s shares have rocked so far this year as they listed as a Huawei distributor.

“It’s far beyond our imagination how strict and difficult it is to meet this kind of global tier-one customer’s quality need… From the end of last year through this year, we have been like a cow getting whipped every day by our key Chinese customer,” a Richwave executive who asked not to be named told the Nikkei Asian Review. An executive from Taipei-based WPG Group, the world’s leading chip manufacturer, also said that the de-Americanization drive in China is a spark that can help sustain momentum in the second half of 2019 to early next year. “We consider our Taiwanese partners have won many contracts that previously belonged to U.S. companies,” CFO and spokesperson Cliff Yuan said.

To fight punitive tariffs, Taiwanese firms are also bringing back some supply from the mainland. These include Foxconn and Pegatron primary vendors from Apple, Quanta Computer leading database developer from Google and Facebook, and Compal Electronics laptop manufacturer from HP and Dell. Makers of critical components of electronics such as Delta Electronics and Lite-On Technologies have also extended the island’s output bases.

With opportunities such as low-interest rates and government helping to acquire ground, over 150 Taiwanese firms have re-allocated some production capacity from China back home. Taiwanese President Tsai Ing-wen has welcomed the trade war as an incentive to attract investment as she tries to gain support in the presidential election in January.

The United Nations Conference on Trade and Development considers Taiwan, the primary winner of Washington’s sanctions on China’s trade diversion impact. In the first half of 2019, UNCTAD said in a report published Nov. 5 that new sales to the U.S., primarily from communications equipment and machinery products, exceeded about $4.2 billion.

Sean King, a researcher of Asia & Asian affairs at the University of Notre Dame Liu Institute, said other influences are benefiting Taiwan, including increasing manufacturing costs in China and offers from Tsai to attract home firms.

“Statistics suggest that Taiwan’s an at least moderate beneficiary of the U.S.-China trade conflict, but I suspect there’s more to Taiwan’s better numbers than merely any longer-term trend toward some level of the Washington-Beijing economic disengagement,” King said.

Erik Norland, a senior CME Group economist, said that there are some winners like Taiwan and Vietnam as supply chain firms diversify production to fight tariffs, but this pattern may not continue.

“Tariffs may not stay forever,” said Norland. “There are still several risks.” but some analysts say the investment inflow from China back to Taiwan also represents how reliable Taiwanese companies were on the mainland.

“Why haven’t we seen strong investments for South Korean companies back to South Korea, and Japanese companies back to Japan amid the trade war? It is because they had already begun their diversification efforts years ago. Taiwanese companies are slow to move,” said Roy Lee, deputy director at CIER’s Taiwan WTO Center. “Overly centralising in one area poses threats for national economic stability… Now that it is a recession, the market transfer helps to reduce the risks.” In the first three quarters of this year, Taiwan’s new investment in China fell by more than 55 million a year, while its sales to the US soared by almost 18 per cent. China, though, remains Taiwan’s largest trading partner— contributing 27 per cent of total exports over the first three quarters of 2019.

While the economy of Taiwan has so far gained from the trade war, this impacts various businesses in various ways. The U.S.-China decoupling has become a once-in-a-life-time opening for firms like Richwave to reach into the supply chains of corporations like Huawei. Yet TSMC’s interests were sandwiched between the two largest economies in the world.

“As a Taiwanese corporation, we are stuck on a thin balance beam every day between the world’s two big powers… We have to look out for the U.S.’s mentality and at the same time be extremely careful not to disrupt the other hand,” a tech industry executive said, speaking on condition of anonymity. “We just want to do trade peacefully.” CIER’s Lee said the businesses in Taiwan are in a tough spot.

“We see the U.S. forcing them to withdraw from China, but they are also being pushed by China to sustain their supply chains,” Lee said. “You were walking on eggshells.”

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