Donald Trump won the election in part by promising large numbers of new jobs, especially in the rust and coal belts. One clear target of his attention is the People’s Republic. His view is that China is eating up U.S. manufacturing, using tactics that don’t give us a level playing field.
Does this hold up in reality? Many electronics companies in China are largely, even majority, owned by government agencies or universities. This might be a natural result of a transition from communism to capitalism, which obviously needs strong government level intervention to create the skeleton of a market infrastructure. This clearly is occurring in the electronics industry, where investment structures involving large government subsidies occur often.
An example is the effort, with Chinese vendors such as XMC, to create sufficient flash memory fabrication capability to make China a net exporter of flash die. This is part of a $24B strategic government initiative, the National Integrated Circuit Investment Fund, to make China independent in electronics component manufacturing by 2025.
With this as background, it calls to question where is China heading with manufacturing of finished electronic goods such as smartphones, computer boards and televisions. In each case, China enjoys a large market share. The pace of growth of this share has been dropping in recent years as Korea and Taiwan have expanded production, but there is still no question that for very high volume production of a single SKU China is the place to shop. Just ask AWS, Google and Azure!
These industry segments employ literally millions of assembly workers in China, with several companies with workforces in the hundreds of thousands. There are, however, two trends moving against the massed battalions approach. One is the rising cost of China’s labor, and the other is the arrival of inexpensive flexible automation.
The cost issue is making China less attractive as a manufacturer, especially given the long lead times that ocean shipping creates. The result is pressure to move production to the country of consumption, which would imply huge US factories, for example. This seems to be happening even without tariff action.
We aren’t quite close enough on costs between China and the U.S. to engender a large wave of on-shoring yet. This is where Trump’s tariffs may play a very important part. An effective price increase for Chinese goods brings price parity or better in many product sectors. This is likely enough to accelerate on-shoring sharply.
But, will we get a lot of new jobs? That’s a complex, multi-dimensional question. In the short haul, in electronics we will see a significant reduction in unit sales, driven by higher prices. For IT, spending will likely be delayed awaiting lower-price gear from Taiwan and any US assemblers that still exist, though we might see a bubble of buying if tariffs are scheduled to start in a few months rather than immediately.
The net of this is that hardware companies will be hurt somewhat as sales drop. This will be compounded by the three large cloud providers migrating their buying to what will now be lower cost suppliers in Taiwan. That’s a massive move of buying power, but the alternative is for China to subsidized prices below cost to offset the 30% tariff, which runs into anti-dumping laws.
The issue of robotics raises its head here. Foxconn and others in China have been planning a move to robotics on a large scale. Under the original plan, these would be in China, but migrating from very low tech hand assembly to hyper-scale robotics is a major challenge and one where the US has a large lead in experience.
An alternative model, where the robots are in the country of product consumption, has been mooted around as the answer. This shrinks the length of the supply chain dramatically, opening up just in time response to consumer demand, while obviating the high labor costs associated with consumer nations.
This is where the jobs question gets really tricky. Robotic factories don’t hire many workers. Moreover, those that are hired are mainly skilled in technology. This makes even large investments in on-shoring a weak source of employment. Let’s look at the impact for the United States.
The on-shoring movement is likely to focus on those states that already have robotics capabilities, since this implies an available workforce with the education and skills needed. That doesn’t fit the coal belt demographics well and matches just a few rust bell areas such as Detroit, Philadelphia and Boston. More likely, we’ll see an emphasis on the West Coast, including Arizona, and high-tech oases in the mid-west such as Austin or Boulder.
The supply chain should see a more on-demand profile, with assembled product lead times cut to around a week or two with the most efficient suppliers. This will also lead to a wider variability in configurations and products offered, which will impact fulfillment operations doing that type of final configuration assembly work. Longer term, the component supply chain, which also is heavily automated, may also migrate in part back to the US, including capacitors, chips etc.
Trump is also talking up weakening Environmental Protection Agency (EPA) regulation. Too tight rules on pollution have often been cited as a primary cause of moving manufacturing in electronics offshore, so some readjustment may be needed to allow on-shoring to proceed without long delays.
Will this happen without the tariffs? Probably, but it will take a few years longer. Can Trump’s administration make on-shoring more attractive? Remember that tilted playing field! Investment incentives, tax breaks, removing China from any eligibility of “Made in America” and a strategic investment plan in high tech infrastructure and production all will have near-term positive effects.
Longer term benefits will accrue from a strong emphasis, backed by dollars, on high-tech education. Computer science and math should be requirements to graduate high-school, for example, while a separate, generous, grant class with incentives should be offered to university science students.
Backlash is a distinct possibility, both at the realpolitik level and in business. The obvious one, bilateral tariffs isn’t much of a threat to U.S. interests, though major investments such as Intel’s proposed Chinese NAND fab may hit some rocks. More likely, real impact will be felt in a loss of investments, which might spill over to China keeping all its assembly work rather than starting up in the U.S.
Summing up, irrespective of generating huge numbers of jobs, re-on-shoring high-tech production is strategically essential for America’s long term success, both economically and for national security reasons. That’s part of “Making America great.”