Shifting supply chains and ringfencing data

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Hello, this is Kenji from Hong Kong. As usual, this is the time of the year when thousands of companies listed here start releasing their midterm results. The local bourse doesn’t require quarterly earnings disclosures.

While most of these companies, as well as those listed in mainland China, choose to announce their formal results much closer to the regulatory deadline at the end of August, hundreds do issue brief, early guidance to investors in the form of “profit warnings” or “preliminary estimates”.

We’re still in the early stage of this earnings season and companies with better results tend to share them sooner, yet corporate performances already point to weaknesses in the Chinese economy. This week has seen profit warnings from tech players like Sunny Optical Technology and Q Technology, which provide camera modules mainly for Chinese smartphone brands. Both said they expect net profit to drop by over 60 per cent compared to a year ago.

On Monday, Beijing’s statistics bureau said the economy grew 5.5 per cent on the year in the first six months and that overall momentum in the economy was “picking up”.

While question marks remain over the state of Asia’s largest economy, global tech companies are dealing with another type of uncertainty — simmering Beijing-Washington tensions — by continuing to shift production away from China. Chinese leaders have been aggressively courting western business, including laying out the red carpet for CEOs visiting Beijing recently, but that has not stopped the march of supply shift diversification, as Nikkei Asia’s Taipei team reveals.

Diversification goes on

HP has started working with suppliers to shift part of its production of laptops to Thailand and Mexico from its main production base in a southwestern Chinese city of Chongqing.

Multiple sources told Nikkei Asia’s Taipei-based tech correspondents Cheng Ting-Fang and Lauly Li that the world’s second-largest PC maker is considering moving production of some of its commercial notebooks to Mexico and a portion of consumer laptops to Thailand.

Even though the combined production volume in those two countries is expected to be around 5mn units at most this year — less than 10 per cent of what the company shipped globally last year — the move is a significant step for HP, whose PC supply chain is deeply rooted in China.

The company has been slower than two of its compatriots in expanding production beyond China. Dell is set to produce at least 20 per cent of its laptops in Vietnam this year and aims to stop using “made in China” chips entirely by the end of next year. Apple started producing MacBooks in Vietnam this year.

“The primary purpose of supply chain diversification is to mitigate risk factors related to US-China tensions, or to take advantage of emerging production hubs in Vietnam and other south-east Asian countries,” said Kieren Jessop, an analyst at Singapore-based IT research company Canalys.

HP’s planned shift to Thailand would also further enhance the tech supplier base in south-east Asia, making it more competitive vis-à-vis China.

Hard break

Global companies are moving to digitally decouple from China as the country rolls out increasingly stringent data and anti-espionage laws and geopolitical frictions between Washington and Beijing rise.

US consultancies including McKinsey, Boston Consulting and Oliver Wyman are some of the groups that have recently been working to split their IT systems, Ryan McMorrow writes for the Financial Times.

An executive at one consultancy described how their company was undertaking the split by creating a costly “for China” version of nearly every digital tool. Its staff have been banned from taking their China-issued laptops out of the country, and the company created Chinese servers and second email addresses ending in “.cn” for local team members to ensure that client email stays in China.

“We’ve got two IDs now basically,” the consultant told the FT, noting the data issue “goes to the heart of why it’s hard to do business in China”.

Other major multinational companies like banks, asset managers and even corporate loyalty programs are moving to hive off their China data for fear of accidentally sending information abroad in violation of Beijing’s tightened data laws.

Onshoring offshore power

While leading American PC makers are reorganising their supply chains to reduce their reliance in China, Japan’s Toshiba is building a supply chain at home for offshore wind turbines by collaborating with its business partner General Electric.

The Japanese company aims to procure 60 per cent of the turbine parts and materials by value domestically by 2040, with production to start by 2026, Nikkei’s Aya Onishi writes.

Toshiba’s move is intended to build up a domestic industrial base for renewable energy, a sector where European and Chinese manufacturers dominate global supply.

The Japanese government is backing this onshoring effort. The Ministry of Economy, Trade and Industry has established a public-private council to facilitate the installation of 30 to 45 gigawatts of offshore wind power facilities by 2040. The government has also set a goal of having 60 per cent of investment in wind turbine production and related construction come from domestic operators.

Battered by the boom

GAC Mitsubishi Motors, a joint venture between China’s Guangzhou Automobile Group (GAC) and Mitsubishi of Japan, has emerged as the latest victim of the cut-throat competition in the world’s largest auto market.

The joint venture admitted in a letter to its employees informing them of job cuts and a suspension of production that it had been unable to keep up with the market’s rapid shift to electric vehicles, Nikkei Asia’s Kenji Kawase reports.

In hindsight, doubling production capacity in 2018 could hardly have come at a worse time, as sales and revenue began to fall soon after. GAC’s two other Japanese joint ventures, which enjoy stronger brand recognition in China, have fared better, with factory utilisation rates far above that of the Mitsubishi JV.

The rush to EVs is threatening local newcomers as well as traditional foreign players. Beijing SinoHytec, the country’s largest fuel cell maker, collaborated with state-owned automaker Changan Automobile to market their first fuel sedan last August, but not a single car was sold for six months straight until May.

Suggested reads

1. SoftBank Vision Fund invests in UK insurtech Tractable (Nikkei Asia)

2. Chinese fast-fashion rivals Temu and Shein take ‘war’ for US to court (FT)

3. Turkey’s Baykar signs largest drone deal with Saudi Arabia (Nikkei Asia)

4. Thai crypto exchange Bitkub looks to gaming to build market (Nikkei Asia)

5. Tesla chair Robyn Denholm joins Australian AI healthcare start-up (FT)

6. Technology remains core battle with Beijing (FT)

7. South Korea’s Naver bets on generative AI as Google encroaches (Nikkei Asia)

8. Asian tech rivals pare back ‘superapp’ approach as losses mount (FT)

9. Komatsu unveils midsize electric excavator for quiet digging (Nikkei Asia)

10. EU asks metals producers to explore making chip inputs after China export curbs (FT)

#techAsia is co-ordinated by Nikkei Asia’s Katherine Creel in Tokyo, with assistance from the FT tech desk in London.

Sign up here at Nikkei Asia to receive #techAsia each week. The editorial team can be reached at [email protected].