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Chipmakers surged in Nikkei's latest Asia300 company rankings, but fresh pressures loom. (Illustration by Eric Chow)
The Big Story

SK Hynix surges to top Asia300 company rankings as trade war takes toll

Asian tech resilient, but rising barriers threaten to throttle ambitions

KENJI KAWASE, Nikkei Asian Review chief business news correspondent and CHENG TING-FANG and LAULY LI, Nikkei staff writers | China

TOKYO/TAIPEI -- Technology companies once again lead this year's Asia300 Power Performers ranking, the Nikkei Asian Review's list of leading companies to watch in the region. However, the sector faces headwinds from worsening trade disputes that could disrupt supply chains and raise new tariff barriers.

Among a patchwork of farmers' fields and gray apartment complexes in Icheon, a city about 50 km south of the South Korean capital of Seoul, a vast factory is taking shape -- eight stories high, with chrome arches soaring over its gates. Workers wearing badges circulate busily between the main gate and a commercial area across the street, while company shuttle buses ply the roads.

SK Hynix, one of the world's largest manufacturers of semiconductors, broke ground on the high-tech plant extension in December 2018. It is an ambitious project, dwarfing its existing production lines -- a 3.5 trillion won ($2.99 billion) bet on the future of a business that, even then, was bracing for a slowdown.

The company, along with other Asian semiconductor producers, has ridden a yearslong boom in the global tech sector that came to an end last year. Today, it faces a new and significant challenge to its supply chain, after a simmering dispute between Japan and South Korea escalated into new trade restrictions. On July 4, the Japanese government imposed tight regulations on the export of three chemicals -- photoresist, fluorinated polyimide and etching gas -- which are crucial to the manufacture of semiconductors.

Two South Korean producers, SK Hynix and Samsung Electronics, make up more than 70% of the global market for dynamic random access memory; Japan supplies around 90% of South Korea's demand for photoresist and fluorinated polyimide, and 44% of its etching gas, according to the Korean International Trade Association. A source from SK Hynix said the company had less than three months' worth of stocks, and had been scrambling to build up its inventories before the new restrictions came into force.

The South Korean government has brought the case to the World Trade Organization, and has pledged to allocate 1 trillion won per year to nurture domestic production of these strategically important materials.

These new supply chain concerns for South Korean chipmakers are a further sign of how exposed the Asian technology sector is to the fragmenting global consensus on free trade. Driven by the rapid growth in demand for smartphones, and for servers to meet the needs of increasingly data-intensive industries, semiconductor companies had been enjoying the upswing of a long supercycle. The remarkable results over the first three quarters of last year have pushed memory chip producers SK Hynix and its Taiwanese peer Nanya Technology to the top two slots on the Nikkei Asian Review's annual Power Performers ranking of profitable and fast-growing companies in non-Japan Asia for 2018.

Out of the top 16 power performers, 11 come from the tech sector. Overall, A300 companies' net profit margin stood at 8.99%, faring better than 5.4% for the top Japanese companies that comprise the Nikkei 225, but slightly lagging the S&P 500's 9.60%.

For the full picture of the latest Asia300 rankings, click here.

Trading tensions

Whether the tech sector's strength continues could depend on how high-level international relations play out in 2019. The semiconductor boom had already started to fade by last fall, due to saturation in the smartphone market, combined with overcapacity and falling demand for servers. That weakness has been exacerbated by an escalating "trade war" between the U.S. and China. In May, the U.S. government essentially barred American companies from selling components to the Chinese hardware manufacturer Huawei Technologies, citing national security concerns. That sparked concerns of tit-for-tat restrictions that could have profound impacts on the supply chains of major technology companies.

"The trade conflicts have elevated into a tech war. We are deeply concerned about the disruption within the whole supply chain that the tech war will bring about," said Chairman Wu Chia-chau of Nanya Technology, the world's fourth-largest -- and Taiwan's biggest -- maker of DRAM. "The supply chain is so interconnected. The most worrisome part for the tech industry is that some restrictions on tiny components or crucial materials could even risk the production of entire electronic devices."

The Taiwanese chipmaker will cut more than 30% of its capital spending this year to around $7 billion New Taiwan dollars ($225 million), down from a planned NT$10.6 billion. This spending target already marked a significant drop from last year's NT$20 billion, when the company reported record revenue of NT$84.72 billion.

The price of DRAM has fallen by a third since its peak last September, and a standard 4 gigabit memory chip now trades at around $2.75 per unit, according to Nikkei data. Japan's new trade restrictions could push that back up. "It depends on the inventory level but ... the shortage in supply could push up the prices," said Yasuo Imanaka, chief analyst at Rakuten Securities.

The global semiconductor industry expects a 12% decline in shipments this year, down to $412 billion -- mainly due to a 30% fall in demand for memory chips, according to World Semiconductor Trade Statistics. The nonprofit data provider forecasts a 5% recovery in 2020.

However, despite the pall cast over the sector by the trade war and other regional tensions, some industry executives are upbeat about the sector's prospects, as new technologies drive another surge in demand for chips.

Taiwan Semiconductor Manufacturing Co., the world's largest contract chipmaker and a key supplier to Apple and Huawei, has seen a substantial slowdown since the end of last year, as the uncertainties over trade started to bite. However, Mark Liu, the company's chairman, said, "It's actually a very exciting moment for the electronics industry, as the world is seeing the start for the next technology boom brought by 5G as well as artificial intelligence."

Other downstream component manufacturers for the smartphone industry have been buffeted by the trade war and the fortunes of their major clients. Largan Precision, the world's largest smartphone camera lens provider, fell from the top power performer in 2017 to 5th in 2018, after cooling demand for Apple's iPhones led to a 6% decline in annual revenue and net profit. Things have turned around for Largan since the beginning of the year, after the company's second-largest smartphone client, Huawei, overtook Apple as the global No. 2 smartphone maker.

South Korea's major mastheads report on Japan's decision to restrict exports of materials vital for semiconductor manufacturing.   © Kyodo

Key iPhone metal frame supplier Catcher Technology proved resilient against the downtrend, delivering a net profit growth of 28% for 2018. The Taiwanese company said it foresees significant growth in the second half of this year compared with the first half, but admitted that the trade war creates huge uncertainties.

"Everyone has felt the pressure amid the Sino-American trade war. It's been a very challenging period for us in the past few months," Catcher Chairman Allen Horng told reporters in June. "But we can foresee the momentum to pick up in the remainder of this year."

Tech tail winds

The three major Chinese internet conglomerates -- Baidu, Alibaba Group Holding and Tencent Holdings -- took up three consecutive slots between 9th and 11th on the Nikkei list. "BAT," as they are collectively called, have been largely insulated from the reversal of the big tech cycle, as they earn most of their revenue and profits from the protected domestic internet-related market in China.

While Alibaba and Tencent compete for the crown of largest Asian company by market capitalization, Baidu has begun to fall behind. In the first three months of 2019, the company recorded its first quarterly net loss since its listing in 2005, due to lackluster growth in online marketing and heavy investment in new businesses, such as autonomous driving and artificial intelligence.

The other two BAT companies have also faced headwinds. Since last August, Tencent has faced a major challenge in its largest source of revenue, mobile games, after Chinese regulators announced a crackdown on the sector and slowed the rate of approvals for new games.

Alibaba investors are jittery over the company's succession plans, with the company's charismatic founding chairman, Jack Ma Yun, due to retire in September. However, "Alibaba's future is definitely not relying on Jack Ma himself or his successors," observed Joseph Fan, a professor at the Chinese University of Hong Kong who specializes in business succession. "It's whether the Chinese government would continue to support Alibaba's businesses as it did in the past, and whether regulations there continue to be favorable to Alibaba."

Jack Ma, the outgoing co-founder and executive chairman of Alibaba Group Holding: While Alibaba and Tencent compete for the crown of largest Asian company by market capitalization, Baidu has begun to fall behind.   © Reuters

Meanwhile, India's tech powerhouses are poised to take advantage of the long-awaited "fourth industrial revolution," where automation and artificial intelligence become more deeply and broadly deployed across the global economy.

The country's major IT services companies -- HCL Technologies, Tata Consultancy Services and Infosys, all in the top 30 of the Nikkei ranking -- are attracting commissions from clients eager to embed AI, big data analytics, cybersecurity and "internet of things" technologies into their businesses.

These emerging technologies now contribute around 30% of revenues at all of those three Indian IT majors, up from around 20% a year ago, and the segment is growing rapidly -- more than 40% per year at TCS and Infosys, and around 30% at HCL. This has helped to offset a slowdown in traditional IT spending, which had suppressed overall growth in 2016 and 2017. Full-year constant-currency revenue growth for the year ended March recovered to double-digit speeds at TCS and HCL, while Infosys' full-year revenue growth rebounded to 9%.

This segment is likely to grow as companies worldwide see these technologies as drivers of growth and competition. In March, Tony Fernandes, the CEO and co-founder of AirAsia, told Nikkei that his company will invest at least 100 million Malaysian ringgit ($24.1 million) a year in technology and data in order to compete with a new generation of disruptive, low-cost airlines that have emerged to challenge it.

"We are going to be the travel technology company for the region, and as part of this journey, we've set our sights on becoming an intelligent, connected enterprise," Fernandes said. "We are going to disrupt disrupters. ... We are going to fight back, and we have strong data that would enable us to compete with them."

AirAsia has jumped 19 slots to 20th on the back of robust demand for air travel in the region, driven by the continued emergence of Asian cities as globally competitive tourist destinations. That trend has helped other travel-focused businesses, such as Airports of Thailand, operator of six major airports in the kingdom.

Other standouts in the consumer sector are Chinese hard liquor distiller Kweichow Moutai, Indian producer of health and personal care items Godrej Consumer Products and Vietnam's largest dairy goods manufacturer Vietnam Dairy Products. More widely known as Vinamilk, the latter holds close to 60% of the domestic market and has expanded its footprint into more than 30 countries, including Cambodia, the Philippines and Iraq.

Guangzhou Automobile Group and Maruti Suzuki India, automakers from China and India, were ranked 18th and 22nd, respectively, on Nikkei's list. Their Japanese-branded cars -- Toyota and Honda for Guangzhou and Suzuki for Maruti -- have given them a competitive edge in their respective markets, but both will have to cope with an ongoing slowdown in domestic sales.

Indonesian state-owned coal miner Bukit Asam, which made sixth place on the Nikkei list, has benefited from its growing international reach. In 2018, 45% of its revenue was derived from 12 Asian countries -- principally China, India and South Korea -- amounting to 9.49 trillion rupiah ($671.3 million). From here, the company is set to add Laos to the list under a freshly signed coal-trading deal with state-owned Petroleum Trading Lao, or PetroTrade.

Rising pay, climbing costs

Real estate remains a core sector for the region, with Hong Kong's CK Asset Holdings heading the pack at seventh in the Nikkei ranking. Led by tycoon Li Ka-shing's elder son Victor Li Tzar-kuoi, the company has ridden a bull market for property in Hong Kong -- although inflated prices for residential properties have caused disaffection among Hong Kongers, and fed into simmering social anger that recently boiled over into mass demonstrations against Beijing's growing influence over the territory's government.

Beyond Hong Kong, real estate developers, such as the Philippines' SM Prime Holdings, are profiting from rising private incomes in Southeast Asia, which are driving demand for residential and commercial property.

But rising pay is also creating challenges for some companies that have previously taken advantage of the relatively low labor costs in markets such as Vietnam. Major apparel makers are feeling the pinch from growing wage demands, as well as rising competition for land and talent from tech companies that are gradually moving production out of China and into Southeast Asia.

Real estate remains a core sector for the region, with Hong Kong's CK Asset Holdings heading the pack at 7th in the Nikkei ranking. (Photo by Ken Kobayashi)

Eclat Textile, Taiwan's largest sportswear supplier, which provides for global brands like Nike and Under Armour, is one of them. Most of the company's production is currently based out of Vietnam and Taiwan, but Vice President Roger Lo told Nikkei that Eclat will look elsewhere for future expansion. "From this year, we will not add capacity to our Vietnam site and we are still looking for other countries to make further investments," Lo said.

There have been signs that trade tensions are easing, with talk of a temporary "truce" between the U.S. and China and a return to the negotiating table. However, the capricious nature of American foreign policy under President Trump -- combined with other potential flashpoints around the world -- makes for an uncertain outlook for Asian companies.

"It's very difficult to make any specific predictions. ... Things are changing rapidly every day," TSMC Chairman Mark Liu said in June. "The second half of this year looks slightly better than the same period last year, from our point of view. But I cannot guarantee you that the outlook would not change, as the uncertainties are still very high."

Nikkei Asian Review editor-at-large Ken Koyanagi in Mumbai, Nikkei staff writers Kim Jaewon in Seoul, Noriko Kamada in Tokyo, Nikkei deputy editor Tomokazu Miki in Tokyo and Nikkei Asian Review contributing writer Steven Borowiec contributed to this report.

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