When the United States imposed trade restrictions on technological partnerships with China in 2018, the electronic component supply chain braced itself for a tech war. Over the next year, the tariffs expanded to cover hundreds of billions of dollars’ worth of goods, including many tech-related products and components, such as semiconductors, circuit boards, and telecommunications equipment. Additional restrictions focused on tech partnerships, including blacklisting companies like Huawei Technologies in 2019, which prohibited U.S. companies from doing business with them without a special license.
While these strategies have a slow-burn effect, the world has already started to feel the effects as China’s response has unfolded. In 2022, China unveiled its plan to expand domestic demand, prioritizing IT infrastructure and reclaiming control of its data from foreign entities. With the initial tactics outlined in 'Made in China 2025' now taking shape, the electronic component industry is preparing for transformative shifts on a global scale.
With China's production of integrated circuits (ICs) and semiconductor equipment showing double-digit growth in Q1, the question of what China's technological self-sufficiency means for the electronic component industry at large becomes increasingly significant.
From Hardware to Software, China Hits 'Delete All' on U.S. Technology
China's strategic objective to reduce reliance on U.S. technology by 2027 has far-reaching implications across hardware and software domains. Initially, the focus was replacing hardware components. Measures such as blocking domestic firms from using Micron chips in critical infrastructure underscore China's determination to foster domestic alternatives. Huawei emerged as a significant player in this transition, with the Chinese government facilitating large purchase orders for memory chips before the ban on U.S. technology took effect.
Despite an initial impact from U.S. export controls, Huawei has strategically pivoted to concentrate on enhancing its chip technology. This move allowed Huawei to emerge as a preferred choice among Chinese customers. The surge in Huawei's profits reflects the success of this adaptation, as evidenced by customers' preference for building rack servers with Huawei chips over competitors like Dell and Hewlett Packard Enterprises.
This transition marks a sizable shift in the global technology landscape, with China's pursuit of self-sufficiency fundamentally altering the competitive dynamics.
China's Next Target: Telecommunications
The initial phase of China’s plan targeted U.S. chipmakers like Intel and AMD. While the deadline for phasing out these technologies extends into 2027, U.S. chipmakers faced the repercussions as early as Q1 this year.
Intel and AMD find themselves at the forefront of China's focus due to their substantial market presence and technological prowess. Intel, in particular, faces substantial risk, considering China constitutes its largest market. The potential loss of 27% of revenue underscores the magnitude of China's impact on global semiconductor giants. This vulnerability highlights how geopolitical tensions can swiftly translate into tangible economic consequences, prompting companies to reevaluate their international strategies and risk management practices.
While AMD's profit base in China has dwindled over the years, the country still represents a notable portion of its revenue, accounting for 15% in 2022. Despite this relative decrease, AMD remains susceptible to geopolitical fluctuations, emphasizing the interconnectedness of global markets.
As these tensions evolve, companies must navigate an increasingly complex environment, balancing market opportunities with geopolitical risks to sustain growth and resilience in the face of uncertainty.
AI Emerges as a Global Battleground for Innovation
Beyond its impact on supply chain dynamics, the ongoing tech war has positioned AI at the forefront of global technological competition, with the U.S. and China vying for dominance.
Nvidia stands out in this race as the foremost manufacturer of AI technology. The U.S. government has granted Nvidia's GPUs exemptions from tariff restrictions, underscoring their strategic importance to the U.S. economy. This exemption has solidified Nvidia's competitive edge and intensified competition among tech giants like Huawei, Intel, and AMD, all striving to catch up.
The U.S. recently revised its Section 301 tariffs to increase semiconductor tariffs from 25% to 50% and extended the GPU exemption. The tariff will go into effect in 2025, and the GPU exemption will end in May of the same year. Speculation looms over the potential ramifications. Such a move could reshape market dynamics, prompting strategic shifts and intensifying competition in the AI hardware sector.
In June, Huawei asserted its AI breakthroughs had outpaced developments in both the U.S. and Europe. Huawei's proprietary operating system, HarmonyOS, was launched in response to U.S. restrictions on smartphone operating systems and is gaining popularity globally. At a developer conference in Dongguan, China, the chairman of Huawei's Consumer Business Group highlighted HarmonyOS's rapid adoption, positioning Huawei's infrastructure as a major contender, second only to Nvidia.
Meanwhile, Intel and AMD continue their rivalry with Nvidia while navigating challenges such as declining market share in China. These dynamics create opportunities for companies like Huawei to capitalize on their strategic positioning amidst market shifts.
The Impact of China's Technological Pursuits on the Global Supply Chain
China continues to accelerate its efforts to reduce dependency on U.S. technology, creating implications that extend beyond hardware to encompass software, IT infrastructure, and information security. The fluctuating fortunes of Intel and AMD in China exemplify the intricate dance between geopolitical forces and economic realities, shaping the trajectory of the semiconductor industry and the broader supply chain landscape.
The outcome of the U.S. presidential election will likely mark the next phase of this evolving tech war, as policy shifts could either escalate or de-escalate the ongoing tensions between the two nations. Trade restrictions, national security concerns, and economic strategies will shape the future of U.S.-China tech relations, influencing global supply chains and the competitive dynamics of the semiconductor and AI industries. The next administration's approach will be crucial in determining the trajectory of this technological rivalry. As this transformation unfolds, the electronic component supply chain prepares for the decoupling of these historical forces in the technology industry.
For more information on how AI has influenced global competition, and the electronic component supply chain, download Fusion Worldwide’s State of the Industry Report | Volume 2: The Impact of AI on the Electronic Component Supply Chain.
