There is an 800lb gorilla in the room here at SEMICON this year. The uncertainty around dealing with China has come up in almost every major presentation and in many conversations. To say the situation is complicated is like saying the Grand Canyon is pretty big. On top of it all no one company appears to be in a similar situation with respect to China as any other. Here is what we’re hearing, thanks to Mark Patel at McKinsey and others for the data.
Almost every major semi company is a multinational with some piece of their business in China, no one has the exact same motivations.
Factories buying equipment coming out of China are worried about paying 25% tariffs. No one knows from one day to the next how to plan around this, apart from suppliers being driven out of China
IP theft is a major concern, including up to people being put in jail for trying to steal secrets. Targeted phishing attacks are on the rise.
China is 2nd in semi R&D spending, but imports 6x more IP than they export. There is a similar story for Chinese culture as a whole (I.e. they’ve largely shut the door on their own people being a part of the global community). This hamstrings their own potential for trade and development.
There is $100B in semi spend by the China government, most of this in Chinese owned factories. The amount of capacity coming online is massive. We’re already seeing it contribute to falling memory prices.
China has industrialized faster and with more people than any country in history by a large margin. The result is lightening-fast cost/standard of living increase and manufacturing cost parity with other nations, like Mexico. China’s manufacturing cost differentiation has eroded.
Their computer chip (IC) consumption has continuously grown faster than their production, even as new manufacturing continues to come online. China currently only produces ~17% of their demand. Tariffs mean paying more for this supply.
China has the largest debt overhang in history while presenting a cash rich position externally. Like the mortgage bond credit default swap that led to the Great Recession, the bill will come due.
Short story here is that oversupply in memory and significant uncertainty in Chinese-involved markets, coupled with hidden debts do not spell a good picture. Some sort of crash is on the way, and unlike the solar power boom-bust of last decade, this one threatens more than an economic sliver. The big loser will be China, with collateral damage felt around the world. A lot of this is self inflicted, and current US trade ‘policy’ is adding fuel to the fire. We’re not predicting another Great Recession, nor even could we. The positive momentum of diversification and innovation (#AI, #IoT, #SelfDrivingCars, #Mobile, #AdvancedManufacturing) should prevent derailing the economy as a whole. What is likely to happen is that the gorilla will be put back in the cage for a while.