Poking the Bear
Before World War II, the US economy was in a funk, not a Bootsy Collins funk, but an economics one. The Great Depression had been squeezing the life out of both the US and the global economy since the late 1920’s and even the Roosevelt ‘New Deal’ was only offsetting a bit of the economic misery, with unemployment averaging over 13% for most of the 1930’s. In 1939, when the war broke out in Europe the ‘New Deal’ had already helped to put the US in ready-mode, shifting production focus from consumer goods to armaments in case the war expanded. US industries like shipbuilding, which had seen better days during the early 30’s, began stepping up production under the US government’s preparedness programs, and by the time the US entered the war in late 1941, the US economy was in full production mode. This an example of how the human spirit can rally behind a common enemy and accomplish what would be considered impossible tasks. The certainly unintentional result of the rise to power of the Axis alliance, stimulated Allied countries to massively shift their focus to defend and protect their way of life, and put aside petty differences to accomplish those goals.
US Manufacturing Output Growth - Selected Industries - Relative to 1939 - Source: Millward, 1969
So what does this have to do with consumer electronics? The previous US administration faced an uphill battle against what was an almost unknown enemy that was killing citizens and destroying an economy that was the linchpin of the then President’s popularity campaign. While the real enemy was the COVID-19 virus, Trump’s desire for a rallying cry was ‘China’, and began to institute ever increasing trade restrictions against China’s key electronics players (Huawei (pvt), SMIC (688981.CH), HK Vision (state), etc.) with thin or unfounded claims of potential espionage, or claims of cooperation with the Chinese military. While we certainly do not condone China’s issues surrounding personal sovereignty or outright repression, much of the rhetoric was political in nature and used to keep the focus off of the dangers of the pandemic.
While the politics did create a bit of a rallying cry among the US population against China, it did far more in China itself, uniting the country to a common enemy, just as it did for the US during WWII. China found itself extremely dependent on US technology, particularly semiconductors, and while much of the CE industry had shifted assembly production to China because of its low-cost labor, the country was woefully behind in the development of the key components the US was restricting. Whether spurred by the Chinese government or by their own enlightened self-interests many Chinese CE companies saw what happened to Huawei and others as an omen as to further restrictions that might affect them more directly, and began a process of re-evaluating their supply chain. Here is one example:
Yangtze Memory Technologies (600345.CH) is a subsidiary of Tsinghua Unigroup (state) and the Hubei government that produces 3D NAND Flash memory products, both 64 and 128 layer. The company, which is under 5 years old, sends its top executives each month to Beijing to meet with China’s top economic organizations to update their progress on the process of removing their dependence on US technology and suppliers. In fact, even when Wuhan was shut down during the pandemic, those executives were the only ones allowed to travel by train to such meetings, and were picked up once a month by the same train that carried YMYC employees to the plant, the only train allowed to stop in Wuhan.
Under the eye of the government YMTC employs over 800 people that work full time to replace the company’s dependence on US suppliers, and not only is reviewing the origin of every component, system, and tool that goes into the production of their products, but does the same for its suppliers, down to each screw, nut, or bolt. Each supplier is assigned a risk level, and YMTC engineers are sent to suppliers for on-site reviews to verify the origin of every part, with US made parts assigned the highest risk, followed by Japan, and Europe, each with a declining risk level, followed by a ‘corrective action report’ that explains how source diversification can be improved and local alternatives found.
Now YMTC has stationed hundreds of engineers around the production campus who are working 24/7 to change production processes and replace as many non-Chinese tools as possible, raising local percentage targets almost every month. This represents a major opportunity for local process tool vendors and suppliers, as the government and other state-owned entities are offering massive subsidies and investments to almost anyone building or expanding a semiconductor line, as long as it has a minimum of 30% of its production tools sourced from local vendors. Such local companies are trying to mimic those US companies that dominate the field in almost every category of semiconductor manufacturing and the government has set a goal of 70% self-sufficiency in semiconductors by 2025, a goal that is far from ensured, given that the 2020 Chinese semiconductor production share was 15.9% according to IC Insights.
However, the point is that the Trump administration’s constant battle over trade with China and its continued push to stifle China’s semiconductor development, has not only lit a fire under the Chinese government, but has become a rallying cry for the Chinese population and even more importantly for Chinese component and tool buyers, who previously saw little reason to purchase from local suppliers. The earlier buyer thought process was “Why take a chance with a local vendor when I can buy the same tool that Samsung (005930.KS) or Intel (INTC) uses?” Now that such thoughts are either limited by US sanctions, unavailable due to demand, or are not able to receive government financing, local suppliers are given an opportunity to compete and develop more competitive products. We doubt that China will meet what is a very aggressive goal for 2025, but they are certainly trying and will continue to do so. “The wise man doesn’t poke a sleeping bear with a stick”, Stephen King – ‘Wolves of the Calla’
While the politics did create a bit of a rallying cry among the US population against China, it did far more in China itself, uniting the country to a common enemy, just as it did for the US during WWII. China found itself extremely dependent on US technology, particularly semiconductors, and while much of the CE industry had shifted assembly production to China because of its low-cost labor, the country was woefully behind in the development of the key components the US was restricting. Whether spurred by the Chinese government or by their own enlightened self-interests many Chinese CE companies saw what happened to Huawei and others as an omen as to further restrictions that might affect them more directly, and began a process of re-evaluating their supply chain. Here is one example:
Yangtze Memory Technologies (600345.CH) is a subsidiary of Tsinghua Unigroup (state) and the Hubei government that produces 3D NAND Flash memory products, both 64 and 128 layer. The company, which is under 5 years old, sends its top executives each month to Beijing to meet with China’s top economic organizations to update their progress on the process of removing their dependence on US technology and suppliers. In fact, even when Wuhan was shut down during the pandemic, those executives were the only ones allowed to travel by train to such meetings, and were picked up once a month by the same train that carried YMYC employees to the plant, the only train allowed to stop in Wuhan.
Under the eye of the government YMTC employs over 800 people that work full time to replace the company’s dependence on US suppliers, and not only is reviewing the origin of every component, system, and tool that goes into the production of their products, but does the same for its suppliers, down to each screw, nut, or bolt. Each supplier is assigned a risk level, and YMTC engineers are sent to suppliers for on-site reviews to verify the origin of every part, with US made parts assigned the highest risk, followed by Japan, and Europe, each with a declining risk level, followed by a ‘corrective action report’ that explains how source diversification can be improved and local alternatives found.
Now YMTC has stationed hundreds of engineers around the production campus who are working 24/7 to change production processes and replace as many non-Chinese tools as possible, raising local percentage targets almost every month. This represents a major opportunity for local process tool vendors and suppliers, as the government and other state-owned entities are offering massive subsidies and investments to almost anyone building or expanding a semiconductor line, as long as it has a minimum of 30% of its production tools sourced from local vendors. Such local companies are trying to mimic those US companies that dominate the field in almost every category of semiconductor manufacturing and the government has set a goal of 70% self-sufficiency in semiconductors by 2025, a goal that is far from ensured, given that the 2020 Chinese semiconductor production share was 15.9% according to IC Insights.
However, the point is that the Trump administration’s constant battle over trade with China and its continued push to stifle China’s semiconductor development, has not only lit a fire under the Chinese government, but has become a rallying cry for the Chinese population and even more importantly for Chinese component and tool buyers, who previously saw little reason to purchase from local suppliers. The earlier buyer thought process was “Why take a chance with a local vendor when I can buy the same tool that Samsung (005930.KS) or Intel (INTC) uses?” Now that such thoughts are either limited by US sanctions, unavailable due to demand, or are not able to receive government financing, local suppliers are given an opportunity to compete and develop more competitive products. We doubt that China will meet what is a very aggressive goal for 2025, but they are certainly trying and will continue to do so. “The wise man doesn’t poke a sleeping bear with a stick”, Stephen King – ‘Wolves of the Calla’
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