China's red supply chain

Inside China’s Red Supply Chain

Does China’s emerging ‘red supply chain’ pose a threat to the wider tech industry?

China's red supply chain

The emergence of a ‘red supply chain’ in China is exerting increasing pressure on existing suppliers in the fiercely-competitive technology sector. The move to cultivate a domestic supply chain is the brainchild of Chinese authorities and is looked upon as providing a much-needed shot in the arm to the country’s tech manufacturing sector.  Great news for China and its economy, less so for the countries that rely on China’s trade such as Taiwan.

Do you prefer your chips salty… or with an added sprinkle of competition?

Taiwan is feeling particularly threatened as this means China will depend less and less on imported parts (such as semiconductors and their ilk). And while predictions from some quarters point to Taiwan’s IT industry being replaced in the near future, others are confident in Taiwanese companies’ ability to sustain lead with smart manufacturing technologies.

Plans were also unveiled in May to set a 10-year plan in motion that would revolutionise manufacturing. The “Made In China 2025” initiative will be underpinned by smart technology and help China to shed its tired image and repackage itself as a respected player on the world’s stage.  With $20 billion already in the pot, a further $161 billion investment over the next decade will help to move China further away from its dependence on imported chips.

Earlier this year Chinese Vice Premier Ma Kai – speaking at CeBit, the world’s largest ICT trade fair, commented: “China intends to implement Made in China 2025 – which will change it from being just a big production country to a very powerful production country… Support for ICT, and innovative breakthroughs in ICT, will be an important link in this chain.”

China’s ability to manufacture chips on its own doorstep will no doubt send shockwaves through PC, smartphone, and tablet supply chains. Taiwan has long been the go-to for semiconductors, and is a highly profitable sector of the Taiwanese economy. The sector is currently valued at $70 billion and is expected to grow a further 5.5 per cent over the coming year.

In quotes obtained by Taiwan Business TOPICS Magazine, Christopher Thomas – co-head of consultancy McKinsey & Company’s Asia semiconductor practice, said that: “China’s increasing importance as a designer and manufacturer of ICs will not necessarily displace other semiconductor centers of excellence.” Adding that while Chinese IC firms enjoy important advantages, such as state support and proximity to a big mainland customer base, they are also “built for speed.”. He goes on to comment: “Chinese semiconductor makers are nimble, responsive, and with rapid design cycles, a good fit for the fast-moving mobile phone and consumer electronics markets.”

In a further twist of intrigue Taiwan has relaxed curbs on its own companies setting up semiconductor manufacturing plants in China, – a move that enables them to better compete for mainland clients.

According to Reuters, the Taiwanese economics ministry is now allowing a maximum of three wholly-owned 12-inch wafer foundries to be set up in China by Taiwanese companies, easing previous rules that limited such investments to mostly older technology and to joint ventures.

With global technology powerhouses like Samsung and Qualcomm already setting out stalls in China, along with Dell’s recently announced plans to invest $125 billion over the next 5 years – it is set to be an interesting few years indeed…

More information on the issues highlighted in this story can be found in a newly-published report that analyses the driving factors behind China’s red supply chain, along with Taiwan’s view on the emerging situation.