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Trade war

'Made in USA' push is here to stay: Taiwan tech giant

Advantech, world's biggest industrial IT company, ready to expand in America

Chaney Ho, Advantech’s executive board director, said companies need to move at least some part of production to their major markets including the U.S. and India to counter protectionism.

TAIPEI -- Advantech, the world's top maker of industrial computers, regards President Donald Trump's trade war against Beijing as a wake-up call to rethink production strategy and expand its footprint in the U.S.

"We expect the trade frictions between the U.S. and China to stay for the next five to eight years, which after all drives a mega-trend that multinational companies need to rethink their sourcing strategy," Chaney Ho, executive director of the Taiwanese company's board, told the Nikkei Asian Review in an interview.

"The previous way -- for companies to do most of the production in China and sell products to the whole world -- no longer works in the future."

"'Made in USA' is a trend," he said. "It's entering a new era that business owners have to at least move some production close to big markets such as the U.S and India, and reduce dependence on China."

The trend stems from the U.S. feeling the threat from a fast-rising China, Ho said, driving the world's longtime industrial leader to adopt a tougher stance, including tariffs, to curb Beijing's tech ambitions and economic growth.

 Advantech currently operates two small assembly plants in the U.S. state of Illinois and California, while most of the productions are still in Taiwan and China.

"The structural change and rebalancing move might not go away for the next decade, no matter who is the next U.S. president," Ho said.

The first wave of Washington's tariffs, covering $34 billion in imports from China, took effect July 6, while another $16 billion under review could follow in August. Those do not include $200 billion in Chinese goods that the Trump administration identified in July for up to 25% tariff. Trump in late last month even threatened to add tariffs on $500 billion in goods, which would cover almost everything imported from China.

Advantech's factories are primarily in Taiwan and mainland China, and it has only small U.S. production facilities in the Illinois city of Ottawa and Milpitas, California. The company also has sales offices in Cincinnati and the California city of Irvine. But Ho said Advantech plans to overhaul its U.S. strategy to manage risks in case tariffs are imposed on additional parts and goods.

"We are considering expanding final assembly lines at our Ottawa facility in Illinois and opening new offices in various U.S. cities, including Boston, Madison [in Wisconsin], Detroit, Philadelphia, Atlanta, Seattle and others to be close to our end markets," Ho said. Advantech obtained the Illinois plant when it acquired U.S.-based networking product maker B+B Smartworx in 2015.

The company also seeks local suppliers that later could support its expansion in the country, the executive said. Advantech likely could import printed circuit boards from Taiwan and assemble them with casings made in the U.S. The size of any U.S investments and plans to hire more workers are not finalized, Ho said.

For 2017, Advantech made around 27% of its 44.37 billion New Taiwan dollars ($1.45 billion) revenue in the U.S., while China accounted for about 25%. Ho expects American sales to reach 35% or even 40% of the company's total, while the contribution from China might be flat in the coming years.

China's economic growth could be affected in the long term by strong U.S. intervention, continuing to slow even though China remains a key market, Ho said. Advantech boasts nearly 8,000 employees worldwide, with around 3,000 in China and some 600 in the U.S.

Heavy machinery and the American flag are seen at Foxconn Technology's LCD manufacturing campus, in Mount Pleasant, Wisconsin.   © Reuters

Many Asian manufacturers eye U.S. expansion. Major iPhone assembler Hon Hai Precision Industry, known as Foxconn, recently kicked off construction on a $10 billion display factory in Wisconsin, while Japanese carmaker Toyota Motor and South Korean tech giant Samsung Electronics announced further investment in the country. Some Chinese companies such as CRRC, the world's largest supplier of rail cars, and Fuyao Glass Industry Group, an automotive glass maker, are boosting production in America.

Advantech offers customized computer solutions, embedded systems and industrial automation platforms for factories, retail stores, medical centers, robotics, transportation and defense information technology systems. The company supplies IBM, General Electric, Cisco Systems, Amazon, Philips and many others. With no single client accounting for more than 3% of total sales, Advantech boasts a diverse customer base and continues to diversify its markets.

Advantech also looks to expand its footprint in Southeast Asia and South Asia. It set up a factory in Bangalore about five years ago, ahead of Indian Prime Minister Narendra Modi's "Make in India" campaign in 2014. Ho said Advantech foresees India as a key market like the U.S., which is why his company built a small-scale production base.

The Taiwanese company has gained permission to use the "Make in India" logo, meaning it will face fewer tariffs for components imported for final assembly in the country. Finished industrial computers face tariffs as high as 40% in India, whereas imports of components for final production only carry about 20% tariffs, Ho explained.

"This is just the beginning," Ho said. Advantech would increase its production capacity based on the economic growth in the local market and accelerate the expansion when the demand increases, he said. "Like the U.S. case, India's facility could later supply to some neighboring countries."

While India would serve as Advantech's forthcoming production hub in Southeast Asia, the company is extending its reach in the region by setting up new sales branches. The Taiwanese company's footprints cover Indonesia, Malaysia and Thailand. A subsidiary in Vietnam that opened in June marked Advantech's latest expansion in the region. The overall sales contribution from the South Asia-Pacific region accounts for 7% of Advantech's total revenue.

Active acquisitions have been Advantech's strategy to strengthen its competitiveness. In March, it initiated three consecutive strategic investments. It first announced plans to purchase a 25% stake in Turkey distributor Alitek and said it spent NT$299 million to grab an 18% share in Taiwan's Bluetooth and Wifi module maker AzureWave Technologies. Advantech later acquired a 19% stake in Japanese system integrator Nippon RAD for 1.10 billion yen ($9.9 million). As of the quarter ended on March 31, Advantech's cash and cash equivalents totaled NT$5.29 billion, the company's financial statements showed.

Ho said his company always keeps a "sense of crisis" and warned that it's very risky for many Taiwanese electronics contract manufacturers such as Apple suppliers Pegatron, Wistron, Compal Electronics and Inventec to still operate more than 90% of manufacturing in only one market.

"They could be very vulnerable if they have no plan B," said Ho. "We haven't seen tariffs imposed on information technology products so far, but we could see them in the future."

Steve Huang, an analyst at Yuanta Investment Consulting, echoed Ho's view, saying "it makes sense to diversify the production base from China."

"In Advantech's case, we think it's feasible and it would not be too costly for it to expand assembly lines in the U.S.," said Huang. "It's also a win-win strategy to address the current political climate and to reduce risks from reliance on China."

For the first half of 2018, Advantech saw revenue jump 12% on the year to NT$24 billion. The industrial computing solutions provider saw a 5.6% growth year-over-year in revenue for 2017, while its net profit increased 8.6% from a year ago to NT$6.15 billion. The company targeted lifting annual revenue to $2 billion by 2020.

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