22 May 2018
Is the trade war really over?
Raymond Yeung |
The China-US armistice is good news but the crux of the matter has yet to be addressed.
25 May 2018
ZTE & China’s electronics battlefield
China’s trade outlook rests on its electronic supply chain. Recent developments in trade discussions between China and the US - of which Chinese tech giant ZTE is a key component – put this into focus.
Given China’s limited participation in upstream activities the country is still effectively a technology taker, rather than a maker in the global electronics industry.
"China’s trade outlook rests on its electronic supply chain.”
Despite the rise of Chinese names in the mobile-phone market, China’s involvement in the electronic supply chains remains concentrated at the low-value-added front.
In the wake of the US ban on component and software sales from ZTE, China will surely boost domestic chip production and R&D activity going forward.
Source: IDC, Statista, ANZ Research
Exposure
Asia’s exports have very high exposure to global electronics. Electronics product represents at least one third of total exports for many Asian economies. The vertical integration of the electronic industry has resulted in a more-synchronised trade performance of relevant economies.
Complex supply chain relations underlie China’s exports to the US. Typically the production process involves the supplies of semiconductors and other high precision components from Korea and Taiwan to Chinese factories which put together the parts into final products.
Source: PWC, ANZ Research
China’s share of the global mobile-phone market is rising as Chinese consumer electronic brands become better known. However, Chinese producers are still predominately focused on the application of technology and parts assembly. It is still not the owner of critical upstream technology.
Chips
In electronics, chip is everything. In the semiconductor industry China is a buyer and the US is a seller. China’s semiconductor consumption is 58.5 per cent of the world’s total while the US owns half of the market in the supply side.
Source: WSTS, ITA, ANZ Research
Chip production is very sophisticated and China’s involvement in the value chain has been at the low end. Until 2015 China had little involvement in high-value-added activities but small share of global revenue in fabless (10 per cent), foundry (7 per cent), and outsourced assembly and testing (12 per cent).
In chip production, owners of the intellectual properties and IC designers reap the benefit the most. However, there are increasing signs China is getting itself involved in design and less on packaging and testing. As a fast learner, we won’t be surprised when China becomes self-sufficient in semiconductor.
China way
It is likely China will now speed up domestic chip supply after the ZTE incident which highlights the importance of ‘chip security’.
The US recently banned the US part supplies to ZTE after the second-largest Chinese mobile phone-maker was accused of violating sanctions. Without a strong domestic supply, the risk of ‘short-circuits’ in the supply chain of integrated circuits remains high.
ANZ Research believes after this incident China will be determined to move up to the electronic value chain. From this perspective, US President Donald Trump’s measure is giving a boost to China’s tech development.
“America was the early mover (in semiconductors). 100% of the market for chips is controlled by Americans.
If they stop selling them to us, what that means... you understand? And that’s why China...needs core technologies.”
Jack Ma, Alibaba CEO, April 2018
Source: CSIA, Hua Hong, ANZ Research
Source: CCID, CSIA, PwC, 2004-2016, ANZ Research
Raymond Yeung is Chief Economist, Greater China at ANZ and Kaushik Baidya is an Economist
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
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