News #63 - Chinnese tech suppliers to establish supply chains in Vietnam and Thailand

Taiwanese companies and others face stiff competition from deep-pocketed rivals

Chinese tech suppliers are taking the battle for business to Southeast Asia, where Taiwanese and other rivals have long been helping the likes of Google and Apple expand production.

Google was one of the first global technology companies to ask suppliers to build production capacity outside China due to escalating tensions between Beijing and Washington. Foxconn, Compal Electronics, Quanta Computer, Pegatron and Inventec, all longtime Taiwanese suppliers, were the major pillars that helped Google -- and other U.S. tech giants -- quickly diversify away from China.

Now, however, they risk seeing orders slip away to Chinese rivals who are also flocking to the region.

Google is asking its Chinese supplier Goertek to build Pixel watches in Vietnam, Nikkei Asia has learned.

Orders for the device's assembly have long gone exclusively to Taiwanese companies, but Goertek will be in charge of making the newest edition of the watch in 2025, a source with direct knowledge of the matter said. It is currently unclear who will win the orders for 2026.

"It's a purely business consideration [to go with Goertek] for consumer electronics goods," the source said. "They have an OOC [outside of China] option, their quality is good, their service attitude is good and their prices are competitive."

China's BYD, meanwhile, is bidding to make Pixel phones in Southeast Asia, though Google is far from reaching a decision on the matter, according to two people familiar with the matter. All Pixel phones are currently built by Taiwanese suppliers. BYD makes Apple iPads and has massive production capacity in Southeast Asia.

Google did not respond to Nikkei Asia's request for comment.

Goertek and BYD's ambitions underscore the intensifying competition in the tech supply chain.

"Of course we are feeling the heat. We're now directly competing against the likes of BYD, Goertek and Luxshare," said an executive with Taiwan's New Kinpo, which has been manufacturing a variety of products in Thailand for more than 30 years.

Southeast Asia has emerged as a manufacturing powerhouse thanks in part to the escalation of tensions between Washington and Beijing. Geographic proximity to China and considerably lower labor costs make countries like Vietnam and Thailand top choices for supply chain diversification, as companies can easily ship Chinese-made components to these markets for local assembly.

Chinese tech suppliers have been among the most aggressive when it comes to building factories outside China. For example, in the last Apple top suppliers list, 37% of the 35 Apple suppliers in Vietnam are Chinese companies, according to Nikkei Asia's data analysis.

TCL Technology, one of China's top TV makers, expanded its Vietnamese capacity in February 2019 and says on its website that its strategic growth in the country is in response to Beijing's Belt and Road Initiative of overseas infrastructure building.

Political tensions are not the only factor pushing China's suppliers overseas. China's economic slowdown has also spurred many Chinese companies to explore international opportunities, according to Lai Ming-Kuen, a general manager at Acter.

Acter is a Taiwanese builder of manufacturing facilities serving a wide range of electronics sectors, including displays and chips. The company entered Vietnam in 2009, and has recently ventured into Malaysia and Thailand.

"Because of the economic downturn in China, we recently found a lot of Chinese companies are racing to Southeast Asia to grab markets and seek growth drivers beyond their domestic market. A lot of them are also following their customers [BYD and Luxshare]," Lai said.

And these suppliers, Lai added, have more than an economic advantage. "Chinese companies not only offer lower prices to grab projects. In many of these Southeast Asian nations they have quite good diplomatic ties with local governments, and that also helps their companies gain business."

Political pressure is likely to intensify this competition in another way, according to Jeff Lin, a tech analyst with Omdia.

"On the international front, we see and expect China's leading companies to become even more committed to expanding overseas," Lin said. "This outward push is driven by the strategic goal of earning more foreign currency and bringing those earnings back to China."

Meanwhile, the "red supply chain," as the industry refers to Chinese suppliers, is rapidly shedding its reputation for low cost and low quality, says Vincent Chang, managing director for Asia and intercontinental regions at Advantech, the world's biggest industrial computer maker.

"Their quality has improved to a certain high level," he said. "They are absolutely not second-tier product suppliers anymore. If you keep such outdated impressions of them, you will lose terribly."

For non-Chinese suppliers, all this adds up to unprecedented competition for everything from workers and land to -- perhaps most urgently -- customer orders.

"Competition with Chinese suppliers basically stayed within China in the past, but now we are facing severe local competition [in Southeast Asia]," Chang said. "They have deep pockets and they have good quality. Our advantage is that we have experience of operating outside of our home earlier than them."

Printed circuit board (PCB), the material on which components and chips are mounted, is a prime example of a sector where competition with Chinese suppliers is heating up.

Nearly 55 PCB makers and their suppliers announced investment plans in Thailand between 2023 and April this year, of which 33 are Chinese, according to data from the Taiwan Printed Circuit Association. At least 13 have started construction in the Southeast Asian country.

"Intense fights over talent, land and orders are the imminent issues we will see when all of the new PCB capacity starts going into production around the end of next year," TPCA Chairman Maurice Lee, who also serves as a senior advisor at Unimicron, Taiwan's leading PCB and substrate maker, told Nikkei Asia.

Moreover, Lee said total production capacity is growing due to geopolitical uncertainties that pushed building new factories -- but total demand is not. "The first thing for everyone is to fight for customer orders. How? By cutting prices."

Many suppliers are already struggling to make use of their existing capacity elsewhere.

"It's a dilemma for us. We will lose orders if we don't invest in overseas capacity, but in the meantime, there's not enough orders for us to fill our old factories in China," said an executive with a Taiwanese thermal solutions provider.

Brian Chen, partner at KPMG Taiwan and KPMG Vietnam, said Chinese tech suppliers moved very fast to make significant investments in Southeast Asia over the past two years. Combined investments from China and Hong Kong exceeded the top single source of foreign investment, Singapore, in 2023.

"Take Vietnam, for example. Either private or state-owned Chinese companies are systematically diversifying their capacity [there]," Chen told Nikkei Asia. New production capacity in Southeast Asia for exports could help Chinese suppliers in the context of the trade war, he added.

Chen, who has lived in Vietnam for years, said Chinese suppliers plan to build a deep supply chain in the country, and some have even started moving to central Vietnam due to crowding in the nation's north, near the Chinese border.

Expanding the local supply chain, however, could have unintended effects.

"After COVID, Chinese suppliers were aggressively establishing footprints in places like Southeast Asia and Mexico -- in what the U.S. called 'friend-shoring countries' -- to manufacture and export," said Kristy Tsun-Tzu Hsu, director of the Taiwan ASEAN Studies Center at the Chung-Hua Institution for Economic Research in Taipei.

Washington was starting to take note of the large number of Chinese suppliers moving to Southeast Asia, she said, pointing out that the U.S. previously opened an investigation under the former Trump administration into Vietnam's trade practices.

"It is worth monitoring how the U.S. changes its attitude if the trade surplus from Southeast Asia continues to expand," she said.

Source: https://asia.nikkei.com/Business/Business-Spotlight/From-Vietnam-to-Thailand-tech-suppliers-face-tougher-battle-as-China-moves-in

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