TAIPEI -- The time has come for many key suppliers behind Apple, Google and Amazon -- the most valuable companies on the planet -- to make emergency plans to move some production out of China as U.S. President Donald Trump escalates a trade war that risks hitting electronics makers hard.
Trump on Friday said tariffs covering an additional $267 billion of Chinese imports would be "ready to go on short notice," on top of a $200 billion round already on the way. The most notable targets for escalation would be electronics, especially a wide range of Apple devices, which had been spared before.
Faced with this reality, major Taiwan-based technology suppliers who spoke to the Nikkei Asian Review showed a heightened sense of urgency compared with just a few months ago, before the first two rounds of U.S. tariffs on China had taken effect. Back in May, these companies all said they needed to keep monitoring trade developments before taking further action, such as increasing production capacity outside of mainland China.
Now, the threat has become more palpable. Shares in Taiwanese and mainland Chinese assemblers of Apple products slumped on Monday.
The world's most valuable tech company warned on Friday that the next wave of tariffs would hit its Watches, AirPods wireless headphones, new HomePod smart speakers and some Beats headphones, as well as adapters, chargers and accessories. That could undermine the U.S. economy and trigger price hikes, Apple said in a letter to U.S. Trade Representative Robert Lighthizer.
Suppliers agree that a full-blown trade war would hurt. Moving long-established production lines is a laborious process involving massive challenges including building a new electronic supply chain from scratch and finding enough qualified workers, they all said. "It's never going to happen overnight," a supply chain executive told Nikkei, while another said that assembling iPhones in the U.S., specifically, would add $150 of costs to each smartphone.
Trump, in a Saturday tweet, told Apple there was an "easy solution" to the tariff problem: "Make your products in the United States instead of China."
Most of Apple's products including its flagship iPhones are made in China, as are smart speakers by Amazon and Google, Fitbit smart wearables and notebooks by HP and Dell. Any shift of the supply chain could cause major disruptions, market watchers say.
Yet despite the difficulty of relocating mainland Chinese production, most key tech suppliers are preparing a Plan B. Apple Watch and MacBook manufacturer Quanta Computer of Taiwan said it has formed contingency plans in case any major clients decide to increase production outside of China to avoid tariffs.
"We have several locations outside China for us to expand to meet temporary needs once the trade battle continues to escalate," a Quanta spokesperson told the Nikkei Asian Review. Although the company has most of its production sites in China, Quanta also assembles products in the U.S. cities of Fremont, California, and Nashville, Tennessee, as well as in Germany and Taiwan.
Quanta also makes Google Home smart speakers and various HP and Dell notebooks, and it builds customized data center servers for Google, Amazon, Facebook and others. But Apple accounted for more than 60% of Quanta's revenue in 2017.
Quanta Chairman Barry Lam told reporters in August the company is working to automate more production processes in order to reduce trade risks. "If we could come up with more automated solutions, that would make it easier for us to go anywhere in the world later," said Lam.
AirPods and HomePod assembler Inventec confirmed to Nikkei that the $200 billion of Chinese imports subject to pending tariffs would affect its production lines. The Taiwanese company also supplies U.S. wireless speaker makers Sonos and Fitbit. Inventec said it has proposed to clients increasing some assembly lines at the company's manufacturing facilities in Taiwan or in Mexico as a short-term strategy.
Quanta's smaller rival Compal Electronics said the company's Taiwan facility is the most prepared should there be urgent requests from customers to shift production outside mainland China. Compal makes Apple Watches and iPads, while also assembling Amazon's Echo smart speakers and manufacturing notebooks for Lenovo Group, HP and Dell. Compal also operates major production sites in China, while it has small facilities in Vietnam, Mexico and Brazil.
Major iPhone assemblers also have a sense of crisis.
Pegatron told Nikkei that it has initiated a backup plan to respond to the upcoming tariffs on networking equipment and wearable devices. "We have begun to adjust the space at our overseas manufacturing facilities," a company spokesperson said.
Pegatron said it can also increase the production lines at its maintenance sites in the Czech Republic and Mexico, as well as its manufacturing plant in Taiwan for networking equipment and some other products. But it will take months to move in machines, to qualify the equipment and train employees for production, according to the company.
Foxconn Technology Group, trading as Hon Hai Precision Industry, is not only the leading iPhone assembler but also a key maker of other Apple products, including MacBooks, iPads and HomePods. Like its peers, Foxconn's main production hubs are based in China, where it employs close to 650,000 production line workers.
But the company also has larger production sites in Vietnam, India, Mexico and Brazil than its smaller rivals. These manufacturing plants could support Foxconn when the latest round of tariffs takes effect. In the longer term, Foxconn's $10 billion manufacturing park in Wisconsin on which it broke ground in June could also offer flexibility for the company to plan and diversify its production allocation, market watchers said.
In addition to Apple, Foxconn helps Amazon and Google, making smart speakers and gadgets for almost every electronics brand in the world.
Apple supplier shares sold off on Monday as tariffs on $200 billion of Chinese imports loom. China-based AirPods assembler Luxshare-ICT's stock price plummeted 10.1% on the Shenzhen Stock Exchange, while shares of Chinese acoustic component maker Goertek dropped 4.31%. The Shenzhen benchmark contracted by 1.97%. Apple acoustic component supplier AAC Technologies' stock price fell 3.63% in Hong Kong.
Also affected was Taiwan's benchmark index, which declined around 1% on Monday. Foxconn's shares fell more than 3% to a two-year low and have slumped nearly 20% so far this year. Foxconn's smaller rival Pegatron fell almost 4%, while shares of another iPhone assembler, Wistron, sank nearly 5%. Inventec, Quanta and Compal all dropped at least 1% in Taipei.
Jeff Pu, a tech supply chain analyst at GF Securities in Hong Kong, said the impact of the $200 billion tariff list should be relatively limited, as it mostly hit lower-priced wearables, accessories and connected speakers. But he said the latest threats for tariffs on another $267 billion of Chinese goods, including iPhones, "could be a huge deal, as that could increase a lot of costs, and need to be watched closely if that should devastate demand."