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Panic in the semiconductors sector

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05/22/2019 | 10:39am EST

The US de-listing of Huawei raises the much larger issue of the smartphone industry's supply chain. Widely exposed to China, its web is extremely complex. If retaliation measures escalate, paralysis areas would be numerous and problematic, primarily for both sides but also for the rest of the economy.


The real impact of the restrictions imposed on Huawei by the United States is complex to quantify, given the high level of globalization required to manufacture a smartphone. The final assembler is responsible for assembling several dozen components supplied by a cloud of subcontractors, who themselves are equipped by a myriad of other actors. Their exact number varies from one brand to another. It is obviously impossible to know them all because Apple, Samsung and others like discretion. It is often necessary to wait until a terminal is removed and disassembled by specialists to learn that STMicroelectronics has provided a particular sensor or that Sunwoda will charge the battery.

Who provides whom?

On the Web, it is possible to find lists of components for a particular smartphone, but none of them are exhaustive. After some research, we found that the closest thing to an official supplier inventory comes from Fairphone, the Dutch brand that offers sustainable smartphones and seeks to be as transparent as possible about the origin of its terminal components. The supply chain is not necessarily the same as that of market leaders, but it gives a good picture of the diversity of suppliers.
 
Source : Fairphone

Fairphone, therefore, has found 102 suppliers and 1 final assembler (Hi-P Suzhou EMS, China) for its Fairphone 2, the last copies of which were sold a few weeks ago. I use the word "found" deliberately because the company does not know exactly who provides what. It naturally has a good visibility on its direct business relationships, known as "Tier 1", those that supply the assembly plant with products or compounds. There are 58 "Tier 1" players. But they source themselves from other so-called "Tier 2" companies. And it gets more complicated for Fairphone, who only knows 42. As for subcontractors of subcontractors, the "Tier 3", the designer of the Fairphone 2 has only identified... 2! There must certainly be many more, because it would be surprising if the pyramid were to be completely reversed. So much for the visibility of contractors.

The great geographical puzzle

As for the production sites, Fairphone was able to identify 68, 45 of which are in China, i.e. 66% of the total number of sites identified. Taiwan and Malaysia followed with 6 sites each (9% and 9%), followed by Japan with 4 sites (6%). The equation becomes particularly complicated when we look at the relationship between the place of production and the nationality of the company operating the site. For example, Infineon, which supplies chips for the Fairphone, does so from its factory in Malaysia. And while 11 of the suppliers are American (Qualcomm, Synaptics, Corning, 3M, Analog Devices, etc.), none of the identified production sites are located in the United States. Similarly, 16 suppliers are Japanese, but only 4 production sites are listed in the Archipelago.

Fairphone's list, although incomplete, illustrates very well the globalization of the sector... and the difficulties of analysts in quantifying the impact of the radicalization of positions, especially if Beijing decided to respond by imposing bottlenecks on the supply of technological subcontracting equipment to American industry.

Microeconomic reading is easier

It is still possible to measure the direct impact on the Chinese group's own suppliers. The Liberum design office tried the exercise. Analysts Janardan Melon and Alexandre Schmidt quantified the exposure of several European players in terms of their turnover. It appears that AMS is most exposed to Huawei, with an estimated 4 to 6% of annual revenues, ahead of STMicroelectronics (2 to 4%) and Infineon (1 to 2%). In Liberum's coverage universe, Melexis, ASML and Aixtron would not be directly involved. At this stage, the design office does not know whether the supply will stop or whether European manufacturers will continue to trade with Huawei. In any case, the Chinese could break contracts if they cannot obtain supplies from their American suppliers. There is no need to start building smartphones that have no chance of being completed. This is enough to "seriously reduce Huawei's ability to sell smartphones and communication equipment," says Liberum.

The threat is therefore major, but the sanction that has hit European players on the stock market is excessive, according to the two analysts. First, with regard to the above-mentioned figures. Secondly, because a consumer who cannot buy a Huawei or an Honor will refer to other brands. The duo "believes that the telephone content provided by STM is higher at Samsung and Apple than at Huawei". Finally, because the Chinese have probably stockpiled components to ensure a few months of production, which could hold until a political agreement is reached.

This agreement between Beijing and Washington remains the core of the war. The preceding lines show the deep intertwining between the actors of the IT equipment ecosystem. What would happen if the Americans refused to sell to the Chinese and the Chinese refused to sell to the Americans? The numerical answer is very complex, but not the spontaneous answer: a hell of a mess, to stay polite.
Stocks mentioned in the article
ChangeLast1st jan.
AIXTRON SE -0.07% 8.694 Delayed Quote.3.47%
ANALOG DEVICES 0.61% 113.93 Delayed Quote.31.96%
APPLE INC. 0.93% 264.2257 Delayed Quote.66.07%
ASML HOLDING N.V. 0.33% 244.4 Delayed Quote.77.60%
CORNING INCORPORATED -0.54% 29.46 Delayed Quote.-0.89%
DINGLONG CULTURE CO LTD End-of-day quote.
INFINEON TECHNOLOGIES AG -0.18% 19.62 Delayed Quote.13.19%
MELEXIS 0.00% 68.7 Delayed Quote.34.97%
QUALCOMM -0.14% 90.78 Delayed Quote.59.85%
SAMSUNG ELECTRONICS CO LTD End-of-day quote.
STMICROELECTRONICS -1.00% 21.86 End-of-day quote.80.54%
SYNAPTICS INCORPORATED 1.15% 60.54 Delayed Quote.60.76%

Anthony Bondain
© MarketScreener.com 2019
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