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Trade war

Huawei chip mission shows Taiwan economy gaining from trade war

Growth outpaces peers, but tech companies in tricky spot between US and China

Huawei is seeking to have Taiwan Semiconductor Manufacturing Co. allocate more advanced production to China. (Nikkei Montage/ Source photo by Reuters)

TAIPEI -- A small group of high-ranking Huawei executives went to Taiwan last month on a mission to ensure that a crucial supplier could continue delivering cutting-edge chips to the Chinese tech giant amid the protracted trade war between Beijing and Washington.

Huawei's talks with Taiwan Semiconductor Manufacturing Co. were also aimed at persuading the world's biggest contract chipmaker to allocate more advanced production to China, according to people familiar with the matter. Huawei is seeking to secure key components for its smartphones, as well as networking equipment -- both vital to it surviving the U.S. clampdown on the company.

TSMC spokeswoman Elizabeth Sun told the Nikkei Asian Review the company would not comment on the affairs of its customers, and reiterated that there were no plans to move further advanced chip production to China. Huawei said, as a matter of policy, it does not comment on the schedule of company executives.

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

"During normal and peaceful times, TSMC is just an important supplier within the tech supply chain," TSMC's Founder Morris Chang told employees at the company's annual sports day. "But as the world becomes more chaotic, TSMC is emerging as a strategic territory that all geopolitical forces aim to secure."

The pressure from both sides on TSMC, Taiwan's biggest company by market capitalization, shows the importance of the island's strategic position. Taiwan finds itself in the middle as the world's two biggest economies struggle to decouple and build more isolated supply chains in the battle for future tech supremacy.

With several other leading suppliers in Taiwan, the U.S. hopes to keep Taiwan as a loyal ally in Asia through moves that include increased collaboration to counter cyberattacks. China, meanwhile, is making offers to the self-ruled democratic island that it views as a wayward province, and is rolling out incentives such as allowing Taiwanese businesses greater opportunities to invest and build the mainland's 5G infrastructure.

The prolonged trade tensions have so far benefited the larger Taiwanese economy. Gross domestic product on the island grew 2.91% in the July-September quarter, outperforming regional peers such as South Korea (2%) and Singapore (0.1%), while protest-hit Hong Kong's economy shrunk 2.9% in the same period. TSMC accounts for 4.6% of Taiwanese GDP, according to the company's corporate social responsibility report, and its market capitalization makes up more than 20% of the entire Taiwan stock market.

Taiwan has so far this year received more than 600 billion New Taiwan dollars ($19.7 billion) in inbound investments as many Taiwanese suppliers move production out of China to avoid tariffs. Taiwanese suppliers are also benefiting from Chinese companies pushing to secure non-U. S. alternatives to fend off the risk of having supply suddenly cut off in the wake of Washington's clampdown on companies such as Huawei.

The meteoric rise of Richwave, a smaller Taiwanese rival of American radio frequency and Wi-Fi component companies such as Broadcom, Skyworks and Qorvo, is an example of China's aggressive push for non-American suppliers. Shares in Richwave have rocketed more than 350% so far this year as it qualified as a Huawei supplier.

"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. "Everyone was extremely stressed... But it's really an accelerator of our technology and development."

An executive from Taipei-based WPG Holding, the world's leading chip distributor, also said that China's de-Americanization campaign is a catalyst that can help sustain growth in the second half of 2019 through early next year. "We find our Taiwanese partners have secured several projects that previously belonged to U.S. companies," said CFO and spokesman Cliff Yuan.

Taiwanese companies are also bringing some production back home from the mainland to counter punitive tariffs. These include key Apple suppliers Foxconn and Pegatron, major Google and Facebook server builder Quanta Computer, and HP and Dell notebook maker Compal Electronics. Key electronics component makers such as Delta Electronics and Lite-On Technology have also expanded manufacturing bases on the island.

Morris Chang, founding chairman of TSMC, established a new business model manufacturing semiconductors for other companies. (Photo by Shinya Sawai)

With incentives such as low interest rates and government help to secure land, more than 150 Taiwanese companies have reallocated some production capacity back home from China. Taiwanese President Tsai Ing-wen has touted the trade war as an opportunity to lure investment as she attempts to gain campaign momentum for January's presidential election.

The United Nations Conference on Trade and Development calls Taiwan the biggest beneficiary of the trade diversion effects of Washington's tariffs on China. Additional exports to the U.S., largely from communications equipment and machinery goods, reached almost $4.2 billion in the first half of 2019, UNCTAD said in a report published Nov. 5.

Sean King, a scholar at the University of Notre Dame Liu Institute for Asia & Asian Affairs, said other factors were helping Taiwan, including rising manufacturing costs in China and Tsai's incentives to lure companies home.

"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 economist at CME Group said there are some beneficiaries such as Taiwan and Vietnam as companies in the supply chain diversify manufacturing to counter tariffs, but this trend may not continue.

"Tariffs may not stay forever," Norland said. "There are still a lot of uncertainties."

Huawei's first global flagship store is pictured in Shenzhen, China, in this Oct. 30 photo.   © Reuters

But some analysts say the inflow of investment back to Taiwan from China also reflect how reliant Taiwanese companies have been 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," Roy Lee, deputy director at Taiwan WTO Center of CIER, told Nikkei. "Overly centralizing in one location causes risks to national economic security... Now that it is wartime, the trade diversion actually helps to reduce the risks."

Taiwan's new investments in China plunged more than 55% on the year in the first three quarters of this year, while its exports to the U.S. jumped nearly 18%. However, China is still Taiwan's largest trade partner -- accounting for 27% of total exports over the first three quarters of 2019.

While Taiwan's economy has so far benefited from the trade war, it is affecting different companies in different ways. For companies like Richwave, the U.S.-China decoupling has become a once-in-a-life-time chance to squeeze into the supply chains of giants such as Huawei. But the likes of TSMC are finding themselves sandwiched between the world's two biggest economies.

"As a Taiwanese company, we are standing on a thin balancing beam every day between the world's two big powers... We have to watch out for the U.S.'s attitude and at the same time be extremely careful not to upset the other side," said a tech industry executive, speaking on condition of anonymity. "We just want to quietly do business."

CIER's Lee said the Taiwanese companies are in a very tricky spot.

"They feel the U.S. pushing them to retreat from China, but they are also being pulled by China to support their supply chains," Lee said. "They are walking on eggshells."

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