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Trade war

Server maker Super Micro to ditch 'made-in-China' parts on spy fears

Trade war also pushing global data center supply chain to new locations

U.S. server maker Super Micro Computer wants to avoid Chinese-made parts due to customer concerns about cyber espionage risks.
U.S. server maker Super Micro Computer wants to avoid Chinese-made parts due to customer concerns about cyber espionage risks.   © Reuters

TAOYUAN, Taiwan/TAIPEI -- Super Micro Computer, the California-based server maker at the heart of spy chip allegations last autumn, has told suppliers to move production out of China to address U.S. customers' concerns about cyber espionage risks, according to industry sources familiar with the matter.

Super Micro, the world's third-largest server maker by shipments after HP and Dell, has strongly denied allegations made last October that its Chinese made motherboards had been implanted with malignant chips to hack big tech customers such as Apple and Amazon. Independent testing showed no evidence of the claims made by Bloomberg Businessweek, the group has said.

Nevertheless, U.S. customers and especially government-related clients have asked Super Micro not to supply them with motherboards made in China because of security concerns, according to one company executive.

The motherboard is an essential component within a server on which key parts such as central processing units, graphics processors, memory chips,and  major integrated circuits are mounted.

Super Micro is not alone in responding to concerns over Chinese made motherboards in data centers and servers. In 2017 roughly 90% of the motherboards used in the 13.9 million servers shipped worldwide were made in China. Last year that had dropped to less than 50% of motherboards used in the global total of 15.2 million, according to Digitimes Research, a tech supply chain specialist. 

"There is a major shift out of China happening from the server supply chain," said Betty Shyu, a server analyst at Taipei-based Digitimes. Chinese-made server motherboards had also been hit by the additional tariffs imposed by Washington, she said.

In addition to asking suppliers to shift production, Super Micro is expanding its own in-house manufacturing facilities to mitigate any perceived risk. The company mostly assembles server systems in-house but outsources motherboard production to many suppliers. "We have to be more self-reliant [to build in-house manufacturing] without depending only on those outsourcing partners whose production previously has mostly been in China," the executive said.

On Monday the group broke ground on a 2 billion New Taiwan dollar ($65 million) new factory in the northern Taiwanese city of Taoyuan and it is weighing a further NT$10 billion investment locally, Charles Liang, founder and CEO said this week. It is also expanding in Silicon Valley.

Super Micro's shift comes as the group continues to suffer fallout from the ongoing trade war between Beijing and Washington and from concerns about cyber espionage, even though customers such as Apple and Amazon strongly deny they have seen any evidence of affected hardware.

Super Micro Computer executives break ground on a new $65 million factory in the northern Taiwanese city of Taoyuan. (Photo by Cheng Ting-Fang)

The group, which derives more than 60% of its revenue from U.S. customers, has seen server sales fall significantly since October and is forecasting a near 10% decline in total revenues for the January to March quarter on the previous three months.

"There is a possibility that Super Micro could fall to the number four position in servers this year, after Amazon," said Shyu.

Super Micro's motherboard suppliers include Taiwan's Wistron, a smaller iPhone assembler after Foxconn, formally knoiwn as Hon Hai Precision Industry, and Pegatron, Universal Scientific Industrial, a unit of the world's biggest chip packaging and testing house ASE Technology Holding, Taiwan's Orient Semiconductor Electronics and its own Taiwanese subsidiary Compuware Technology, according to the company.

Orient Semiconductor Electronics has contributed to Super Micro's shift of motherboard production from the Chinese city of Suzhou to the southern Taiwanese city of Kaohsiung, another executive familiar with the plan told the Nikkei Asian Review. "The shift started in the fourth quarter of last year as the trade tension intensified," the executive said.

Mounting security concerns about the supply chain have helped to accelerate the move, he added. Super Micro's products for the U.S. market had largely eliminated motherboards made in China, he said. Mirroring the global trend, less than 50% of the motherboards used in the 1.55 million servers shipped by Super Micro last year were made in China, according to Digitimes's Shyu. This compares with more than 90% in 2017. 

Important Taiwanese tech groups such as Lite-On Technology, the power parts company, Quanta Computer, data center supplier to U.S. companies such as Google and Facebook, and even Foxconn, which helps HP, Dell, Cisco and others build servers, have all either begin to shift production or said they are considering a move. Many have suffered from the tariffs imposed by the U.S. on these sensitive products made in China, but several have also said they are responding to requests from U.S. customers.

The trade war between the U.S. and China hit many manufacturers in China hard in the second half of last year, prompting Taiwanese and other foreign manufacturers to shift production, said Gordon Sun, director of the Taiwan Institute of Economic Research. The trend deals a double blow to China's ambition to become a world leader in high tech industries.

"China will be affected by the loss of production and exports at the same time," he said.

Super Micro did not respond to Nikkei Asian Review's request for comment.

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