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Japanese chipmakers were having a rotten enough year before Donald Trump opened another front of his China trade war.
Even before Covid-19 wrecked Japan Inc’s 2020, the US president’s tariffs were upending export markets and supply chains. His moves to weaken the dollar were generating fresh headwinds.
Yet his escalating assault on China’s tech industry – national flagship Huawei in particular – threatens to be financially and managerially ruinous for some of Japan Inc’s biggest names.
Trump is going after Tencent’s WeChat and ByteDance’s TikTok, too. But the target on Huawei’s back is the one with the biggest consequences for gross domestic product in Japan and beyond.
One estimate from UK research firm Omdia has Sony, Toshiba and other giants losing more than US$10 billion of businesses annually.
US sanctions implemented last week on Huawei Technologies deprive the Chinese telecommunications equipment giant of access to any components made with US technology or software.
Essentially, we’re talking all semiconductors.
“These and other suspensions in reaction to any further US actions will severely disrupt global electronics supply chains,” says analyst Vincent Tsui of Gavekal Research.
Huawei, he adds, commands global market shares of 20-30% in both smartphones and network equipment.
The disruptions will be significant in Japan, forcing chipmakers to cast a wider net for business to fill the gap. That would be a tricky pivot at the best of times, let alone during a pandemic, a synchronized global recession and at a moment when the leader of the US is willing to throw allies under the proverbial bus to get re-elected in November.
The plight of tech companies is a microcosm of where Japan finds itself nearly four years into one of the worst political investments in modern history.
In November 2016, nine days after Trump’s surprise election, Shinzo Abe, then Japan’s prime minister, was the first world leader to visit Trump Tower in New York. Abe’s gamble was straightforward.
Befriending Trump would earn Tokyo a pass on tariffs on steel, aluminum and preferred trade status as Trump attacked China.
Hardly. Trump’s first big decision as president in early 2017 was pulling out of the Trans-Pacific Partnership, a multilateral trade deal Abe had spent considerable political capital joining.
Trump refused to grant Tokyo exemptions on import levies. And now Trump’s Huawei ban is making new Prime Minister Yoshihide Suga’s honeymoon a very brief one.
At a minimum, it raises questions about whether Suga should prostrate his government before Trump as fully as Abe’s did.
The immediate imperative facing Japanese firms who find themselves with holes in their accounts due to their inability to supply Huawei is diversifying the customer mix.
Japanese companies supply roughly 30% of Huawei’s components. Sony, Toshiba, Renesas Electronics and others are stepping up efforts to sell more to smartphone giants from Apple to Chinese companies that Trump hasn’t yet banned.
The key is focusing on those positioned to grab Huawei’s market share as Trump’s actions have it winding down production.
“Huawei is getting it on all sides,” says Bob O’Donnell, president of TECHnalysis Research. “It’s going to be a serious challenge.”
That means the roughly $35 billion the telecom space spends annually on chips is in flux as rarely before.
Sony recently announced it will be cutting capital spending by about $470 million for fiscal 2020, a direct response to Trump’s Huawei ban. The Japan Inc icon makes, or made, billions annually selling image sensors to Huawei.
Now, Sony is working to develop sensors for a wider range of applications – from automobiles to industrial machinery – in order to trim its reliance on the mobile device business.
Shelley Jang, an analyst at Fitch Ratings, warns Trump’s sanctions in particular “add uncertainty to Sony’s image-sensor business.”
Kioxia, a Toshiba spin-off, is pivoting away from its lucrative flash memory relationship with Huawei. It’s now working to repurpose capacity to make chips for other smartphone companies and data centers.
Renesas likewise has been forced to halt semiconductor sales that power Huawei’s 5G network base stations. It’s now turning its marketing charm toward Sweden’s Ericsson, Finland-based Nokia and other rival base-station manufacturers.
Japan Display is devising ways to sell more of its liquid crystal display panels to Oppo, Vivo, Xiaomi and other mainland smartphone makers.
That is, assuming Trump doesn’t broaden his ban to other Chinese tech firms.
It’s an uncertain and risky recalibration, though.
Compliance challenges alone are keeping senior management on its toes. It remains unclear whether the US Commerce Department might look askance at Japanese companies supplying chips to third companies.
Given the complexity of today’s supply chains, the odds of some components ending up in Huawei products somewhere along the line are remarkably high.
This has Japan Inc icons not known for their nimbleness scrambling to create proprietary Google Maps-like tracking or compliance systems – where parts are coming from where they are going – to keep themselves out of Trump’s crosshairs.
The immediate task facing executives is measuring how risky certain transactions might be. Yet such assessments, and ways to arrive at them, are a work in progress.
Count Toshiba among those taking no chances. Last week it imposed a temporary moratorium on supplying chips and hard disk drives to the US to get a clear picture of the potential liabilities.
The issues infecting Toshiba headquarters are shared industrywide. A mixture of fear at violating sanctions and nailing down exactly what came from where in one of the world’s most complex supply chains.
The penalties – fines of up to US$1 million – pale in comparison to worries about the reputational risk of being on a US blacklist, and institutional investors making judgments based on that classification.
Not to mention, incurring the wrath of the US president himself – and who know what pyrotechnics that could lead to for an unlucky or careless company?
Huawei saw all this coming. It was able to front-run Trump’s sanctions by stocking up on inventory. That buying binge by Huawei helped send prices of DRAM chips vital to smartphones up 7% in early September.
Yet the road ahead is extraordinarily uncertain, particularly as it looks like Huawei has nobody to fabricate or supply its advanced system chips.
“Strength in China alone will not be enough to sustain Huawei at the top once the global economy starts to recover,” says analyst Mo Jia at research company Canalys.
Japan is hardly alone in bracing for the fallout. Omdia reckons that Japan, South Korea and Taiwan cumulatively supply well over $26 billion of parts to Huawei.
Samsung Electronics’ memory technology divisions do major business with Huawei. Ditto for South Korea’s SK Hynix. Taiwan Semiconductor Manufacturing Co, the globe’s top chipmaker, does roughly $5 billion of annual sales to Huawei.
How things shake out is anyone’s guess.
“Just as nature abhors a vacuum, so do markets,” Tsui says. “As supply chains realign, US actions against Chinese companies will create opportunities for companies elsewhere in Asia to plug gaps in the three main business areas affected: smartphones, network equipment and chip fabrication.
“Over the coming quarters, the effects on the export growth and economic performance of different Asian countries could be material – and materially different.”
Japan, though, is particularly in the line of fire amid a sputtering economy. It is also vulnerable to the fallout from China retaliating against the US, and vice versa if the trade war enters a spiral of escalation.
“To think the Chinese will back down is not really credible, even naïve,” says analyst Roger Entner at Recon Analytics.
Semiconductor makers Beijing worries Trump might sanction next include Semiconductor Manufacturing International Corp and China Mobile. That has China upping the ante.
On September 19, China’s Ministry of Commerce unveiled the beginning of its long-awaited “Provisions on the Unreliable Entities List,” or UEL, process.
Beijing pledged to punish US and other foreign firms for employing export controls to block supplies of critical technologies or services to Chinese firms. It’s expected that President Xi Jinping’s government will name at least one US company in short order.
“The timing of the move, just hours after the Trump administration’s US ban on TikTok and WeChat went into effect, is not a coincidence,” says Michael Hirson of Eurasia Group.
“Beijing has been internally debating the UEL for more than a year. Using it poses political and economic risks, but the TikTok and WeChat bans and potential US export controls against the likes of semiconductor maker SMIC and China Mobile forced Beijing’s hand.
“The leadership is under domestic pressure to show that it is fighting back and developing a reciprocal form of deterrence.”
Suga’s new government also would be naïve to think Trump is done with upending Asia’s supply chain. Even if Japan’s economy isn’t the intended target, the ways in which Trump’s assault on Huawei are slamming Japan Inc shows that risks are rising exponentially. The stakes, too.
This moment is as good as any to remind Tokyo that the US is not in Asia – and of the need for better trade ties with China and South Korea. This moment should be a reminder of how little the Shinzo Abe government was given in return for its fealty to a Trump White House.
Trump’s reneging on TPP wrecked plans to use multilateralism to contain China’s rise. The trade war complicated Japan’s efforts to put deflation in the rear-view mirror. Trump’s White House is even tried to shake Tokyo down, Tony Soprano-style, for an annual $8 billion tribute payment for hosting US troops.
ByteDance can relate. Trump’s team is reportedly putting the moves on the TikTok owner to set up a $5 billion fund to to “educate people” about the “real history of our country.”
Recent history has shown Tokyo that with friends like Team Trump, who needs trade adversaries? The fallout from Trump’s Huawei shenanigans, and its devastating blow to Japanese chipmakers, should have Tokyo looking for better friends and markets.