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HP, Dell and Microsoft look to join electronics exodus from China

Wednesday - 03/07/2019 19:36
Global consumer electronics makers HP, Dell, Microsoft and Amazon are all looking to shift substantial production capacity out of China, joining a growing exodus that threatens to undermine the country's position as the world's powerhouse for tech gadgets.
HP, Dell and Microsoft look to join electronics exodus from China
HP, Dell and Microsoft look to join electronics exodus from China
HP and Dell, the world's No. 1 and No. 3 personal computer makers who together command around 40% of the global market, are planning to reallocate up to 30% of their notebook production out of China, several sources told the Nikkei Asian Review.

Microsoft, Google, Amazon, Sony and Nintendo are also looking at moving some of their game console and smart speaker manufacturing out of the country, multiple sources told the Nikkei Asian Review. Other leading PC makers such as Lenovo Group, Acer and Asustek Computer are also evaluating plans to shift, according to people familiar with the matter.

Tech companies' plans, spurred by the bitter trade battle between Washington and Beijing, have not changed despite the truce that was struck between U.S. President Donald Trump and Chinese President Xi Jinping at last weekend's Group of 20 summit in Osaka. Multiple sources said the situation was still too uncertain, while rising costs in China were also prompting manufacturers to examine alternatives.

The decision by some of the world's biggest computer and game console brands to shift production -- mainly of products destined for the U.S. -- follows manufacturing reviews by other tech companies. Apple is exploring the cost implications of moving up to 30% of its smartphone production, Nikkei reported last month. Elsewhere manufacturers of servers, networking products, and some key electronics components are shifting out of China, often at the request of U.S. customers.

The moves will be a blow for China's electronics exports, which have powered the country's decades-long growth. China is the world's biggest producer of PCs as well as smartphones.

Total Chinese imports and exports in the electronics segment ballooned 136 times to $1.35 trillion in 2017 from just over $10 billion back in 1991, according to Chinese data provider QianZhan.

However, many tech companies have been hit hard by the trade conflict, which has seen tariffs slapped on $250 billion worth of Chinese imports into the U.S. while the threat of another round remains.

Builders of key data center servers -- Quanta Computer, Foxconn Technology and Inventec -- have all moved some production out of China to Taiwan, Mexico and the Czech Republic to avoid the threat of additional tariffs and to assuage customer concerns over U.S. claims of potential national security risks. "After the tariffs on Chinese goods ... took effect on Sept. 24, we started to manufacture and ship servers outside of China from October," said an executive of a Taiwanese server manufacturer.

The moves are sparking concerns over job losses in China and the country's economic growth, which has already hit its slowest pace since 1990.

The U.S. could be expected to feel some negative impact from the shift as "products there could be more expensive," said Darson Chiu, an economist specialized in trade at the Taiwan Institute of Economic Research. "But China would feel the rest as the country's economy will have to brace for a further slowdown and many factory workers need to look for jobs elsewhere."

HP and Dell, which together shipped around 70 million notebooks globally last year, mostly make the computers in the Chinese cities of Chongqing and Kunshan, the world's two biggest clusters of laptop production. Notebooks, global shipments of which exceeded 160 million units, are the world's second largest consumer electronics gadget by volume after smartphones' 1.4 billion units.

But Chongqing, which once produced one in every three laptops in the world, is losing its shine with global manufacturers. A local government official told Nikkei that HP has lowered its production forecast for 2019 to fewer than 10 million laptops, roughly half of its output two years ago.

"China's hiked production costs have already led to a decline in global orders. Now, the uncertainties associated with the trade war are adding insult to injury," the official said.

HP has drawn up plans to move some 20% to 30% of production outside China, two sources familiar with the matter told Nikkei. The company is looking at gradually building a new supply chain in Thailand or Taiwan. The production shift could kick off as early as the end of the July-September quarter but it is still subject to change, one person said.

Dell has already started a "pilot run" of notebook production in Taiwan, Vietnam and the Philippines, two people who knew about the plan said. People said the company wanted to avoid fallout from the trade war but was also concerned about a shortage of factory workers and rising costs in China.

About 47% of Dell's laptop shipments went to the North American region, its biggest market, while 40% of HP notebook computers are heading there, according to research company Trendforce.

"The industry consensus is to move an average of some 30% of production out of China depending on how important the U.S. market is... Everyone needs to come up with a plan," a supply chain executive familiar with the plans said. "Apple is really the very last and the slowest to start formulating plans, while everyone else out there is much more aggressive."

Meanwhile, Amazon -- for its Kindle e-reader and digital assistant, Echo -- and Nintendo are looking at Vietnam as an alternative, while Microsoft is eyeing Thailand as well as Indonesia, several sources said.

Even if Washington and Beijing resolve their long-running dispute, the shifts mean that China will face growing competition as an electronics production base, say experts. "There is no turning back, and it is not only about tariffs but also about reducing risks for the long term [such as rising labor costs]," said TIER's Chiu. "Southeast Asian countries and India will together become new competitive hubs in coming years for electronics production," the economist said.

"There is plenty that policymakers can do in the short-term to pick up the slack if some exporters relocate out of China," said Mark Williams, a China economist at global research firm Capital Economics. "But China would suffer over the years ahead if it could no longer benefit from the know-how that globally competitive exporters bring to its economy."

Acer and Asustek both confirmed to Nikkei that they are exploring the feasibility of shifting some production outside of China. Dell declined to comment on the production shift but said it encourages "the U.S. and Chinese governments to continue dialogue to resolve outstanding issues" and hopes to see a deal.

HP, Google, Microsoft, Sony, Nintendo, Lenovo and Amazon did not respond to Nikkei's request to comment as of publication.

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