S&P Global — 12 September 2024
Daily Update: September 12, 2024
Tech Supply Chains Shift Despite Cost and Convenience
By Nathan Hunt
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As geopolitical tensions and other factors increase supply chain risk, some technology companies have begun to shift their strategies and partnerships. Countries such as Vietnam, India and Mexico have benefited from an influx of demand from buyers looking to diversify beyond China, especially in the early days of the shift. These early moves tended to involve factories dedicated to the downstream assembly of completed devices. Because these activities are less asset-intensive and more labor-intensive, it was logical to relocate downstream manufacturing to markets with large, inexpensive workforces. A comparative lack of skilled labor was immaterial because the final assembly of an iPhone is not a technically complex task, unlike the midstream production of the device’s components.
Midstream technology manufacturing requires substantial capital investment and a knowledgeable and experienced workforce. The midstream supply chain is where sophisticated components such as displays, capacitors, sensors, speakers and cameras are produced. Due to the cost and complexity of midstream manufacturing, S&P Global Ratings previously suggested that it was not a good candidate for a shift to new manufacturing locations. However, a recent analysis by S&P Global Ratings concluded that, despite these hurdles, a substantial shift is underway.
“The Shifting Of China Tech Supply Chains: The Hard Part Starts” analyzes the credit implications of shifting midstream supply chains. Firms that are diversifying beyond China are likely to face hefty capital expenditures, lost efficiency and disrupted operations. Technology companies are unlikely to shift all midstream operations out of China as the country remains an important market. This means tech companies are adopting a “China +1” manufacturing policy, in which other Asian markets are beneficiaries.
There is a steep capex cost and lost efficiency when supply chains for technical products move. The estimated capex for midstream manufacturers ranges from US$190 million for US-based printed circuit board manufacturer TTM Technologies to US$930 million for Taiwan-based Delta Electronics.
According to S&P Global Ratings’ analysis, “Once perceived as unlikely, the splitting (China/non-China) of the technology supply chain is accelerating. The cost of this transition will climb as firms add geopolitics to their set of credit risks.”
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