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“It’s a good thing we kept our production line in Taiwan and didn’t move our equipment,” says K.J. Sun, a spokesman for leading electronics supplier Gigabyte Technology. “We won’t be trapped or be hurt by the new tariffs on US$300 billion in goods.”

Taiwan-based Gigabyte is a major manufacturer of motherboards and graphics cards, but it has more recently focused on such consumer products as notebook computers and gaming peripherals to drive growth.

Most of Gigabyte’s production is in China, which is why the new 10 percent tariffs that U.S. President Donald Trump has threatened to impose on US$300 billion worth of goods imported from China, including smartphones and notebooks, could put it under pressure. But judging by Sun’s tone, he’s not the least bit worried.

Products shipped to the United States account for about 18 percent of Gigabyte’s revenue. Almost all of those products, except for some work contracted out, have been produced in China. But to steer clear of the waves of punitive tariffs the United States has imposed on Chinese-made goods, the company has moved production lines for four of its main products – graphics cards, motherboards, notebooks and servers – to Taiwan in the past year.

The Benefit of not Abandoning Taiwan

“When the U.S.-China trade dispute broke out in 2018, we immediately decided that regardless of what the product was, we would transfer the production of any component shipped to the United States back to Taiwan,” Sun says.

Gigabyte understood early on that not being a high-volume manufacturer would make it impossible to use economies of scale to compete with other lower-cost vendors [in a trade dispute], and it therefore decided to devote its resources to the two ends of the “smile curve”: the front end (R&D, new technologies) and the back end (marketing, branded products).

The “Made in Taiwan” status obtained by Gigabyte in bringing back higher-value parts of the smile curve value chain to Taiwan has enabled it to stay calm amid the trade storm.

Scrambling for Production Capacity

The solution is not that simple, however, for many Taiwanese vendors who have long focused their attention on manufacturing intermediate products. According to the Trade in Value Added database developed by the World Trade Organization and the Organization for Economic Co-operation and Development (OECD), more than three-quarters (75.4 percent) of the goods Taiwan exports are low-margin “intermediate products,” destined mainly for China.

A PwC Taiwan report analyzing the consequences of U.S.-China trade friction for Taiwanese and Chinese businesses concluded that the trade war had real risks for Taiwan.

Taiwan “provides a lot of intermediate products for Chinese exports to the United States. At the same time, it appears in the industrial chain of American exports to China, meaning it could easily be affected in both directions. As a result, Taiwan is particularly vulnerable to U.S.-China trade friction,” the report said.

(Photo by Ming-Tang Huang/CW)

Now that Trump has threatened new tariffs on a list of goods that includes the smartphone and notebook computer value chains, many Taiwanese vendors that had so far dodged the U.S.’s punitive tariffs have been dragged into the fracas. To avoid the tariffs, companies are desperately trying to shift production out of China.

“Everybody is looking for capacity right now, with some urgency,” Sun says. “We have seen that in the end, even Apple’s supply chain will not be able to avoid the consequences.”

CommonWealth Magazine learned in early August that Quanta Computer, which assembles notebooks for Apple, has begun to take action.

A Quanta supplier and two people familiar with the industry have indicated that Quanta is preparing to shift some of its notebook production back to Taiwan and is currently in the testing phase. The aim is to bring back contracting capacity for Apple’s MacBook.

Quanta later confirmed at its investor conference on Aug. 13 that it was prepared to shift some of its notebook production to Taiwan should the need arise. It is already producing servers destined for the United States at its production base in Linkou.

“It’s not only Quanta. Major vendors like Inventec, Compal Electronics, Wistron Corp., and Micro-Star International are all thinking about this (Read: Made in Taiwan, Straight to the United States). In the end, Quanta and Inventec are the ones who are most likely to bring their notebook lines back to Taiwan,” says one of the industry insiders.

Capacity Limited, but Needed only for U.S. Orders

Taiwan was once known as the “notebook kingdom,” but many electronics contractors began moving their factories west to China around the year 2000.

“Much like Japan sinking into a lost 20 years after its industries moved out, Taiwan’s economy also began weakening at the time. Now we may be seeing the reversal of that era’s tide,” the industry insider says.

The major shift in the supply chain was predictable, but what has surprised the source is the pace at which vendors are moving around their operations as the U.S.-China trade war continues to escalate.

The source predicts, however, that only a limited amount of notebook capacity will return to Taiwan, “at most an annual capacity of 10 million to 20 million units for export to satisfy demand from U.S. government purchases and special defense specifications.”

In fact, Taiwan’s wage structure and technologies are vastly different than what they were 20 years ago when the “notebook kingdom was at its peak, and looking forward to notebook production returning to Taiwan “is not realistic and would not work cost-wise,” the industry insider says.

Taiwan’s notebook computer capacity is too limited and notebook margins are too low to make it worthwhile to make the product in Taiwan, the source says.

The Real Disaster: iPhone Stuck in China

If Trump’s new tariffs are carried out, the market expects the real disaster zone will be the Apple supply chain’s iPhone (Read: Apple’s Souring - How’s Manufacturing Transitioning in the Post-Smartphone Era?). Fubon Securities Investment Services analyst Arthur Liao said in a report that even if the U.S. imposes punitive tariffs on smartphones made in China, it would be impossible to move the iPhone supply chain in the short term.

(Source: Shutterstock)

There are three main reasons for that. First, only about 20 percent of an iPhone production line is full automated, meaning labor costs are high. Second, iPhone shipments can vary greatly from quarter to quarter, and neither Taiwan nor the United States can provide the steady supply of labor needed to accommodate those fluctuations. Finally, the tooling needed to make the iPhone is far more precise than that used for notebooks, making it harder to shift production to another country.

After Trump announced he would impose new tariffs on US$300 billion in goods imported from China, Liao issued a research note saying that Apple will demand a 10 percent price cut from iPhone suppliers shipping products from China, in effect forcing the supply chain to take the fall for Apple.

Yet, the supply chain is not expected to move away from China in the short term. Next year, Apple could shift the burden of the tariffs to consumers, reducing demand.

Apple is not the only company caught in this dilemma. Every American company that is dependent on China’s supply chain is in the same boat, which explains why American stocks plummeted soon after the new tariffs were announced.

In contrast, Gigabyte’s decision to move its center of production out of China early on showed considerable foresight and skill.

“The trade war has clear targets. No matter how it plays out or how it is settled, the conflict between China and United States will continue on,” says Gigabyte’s Sun. “Over the long term, we will search for production bases outside of China. That’s a core condition that will not change.”

In Sun’s eyes, the U.S.-China trade tensions present Taiwan with another opportunity. “If we expect manufacturing to return, it definitely won’t be in labor-intensive industries of the past. This will compel everybody to become more automated.”

In other words, if Taiwan does not capitalize on the migration of the supply chain to upgrade its level of automation, its potential gains from the trade war could end up being very limited.

More on Taiwan’s role in the Trade War:

Taiwan, Unexpected Beneficiary of US-China Trade War

Why Are Google, Microsoft, and ASML Flocking to Taiwan?

Trade War Brings Orders for 300 Million Pairs of Socks to A Small Township in Taiwan

Translated by Luke Sabatier

Edited by Sharon Tseng