US steps up export regulations again
In their forecasts at the end of last year Leadership Group members of the Electronic Components Supply Network (ecsn) and International Distributors of Electronics Association (IDEA) predicted that our industry might have to contend with a number of fairly major political upheavals in 2020, as the US steps up export regulations again. Many these upheavals could seriously restrict growth in the global electronic components markets,
COVID-19 of course wasn’t foreseen but the global economic recession triggered by the pandemic is likely to be ratcheted up by US government’s imposition of technology restrictions, which can only further exacerbate electronic components supply network issues. In this article IDEA and ecsn chairman Adam Fletcher provides an update on the latest US export regulations.
US / China initial trade pact
In the New Year 20 Global stock markets surged on the news that the US and China had agreed an initial trade pact, the terms of which cancelled the import tariffs the US planned to impose on Chinese-made mobile phones, toys and laptop computers but left in place the 25% tariffs on a $250-billion array of Chinese industrial goods and components used by US manufacturers. As I write China’s retaliatory tariffs on over $100bn in US goods also remain in force.
The agreement was greeted as a big win for technology markets because it forced some very interesting changes to how the Chinese legal system responds to issues surrounding international standards on Intellectual Property (IP) theft, Trade Secrets (TS) and Confidential Business Information (CBI).
One of the most useful of these changes is that Chinese businesses and Chinese Government organisations and agencies are now required to acknowledge pre-existing IP ownership, TS and CBI issues. Further, it mandates that current breaches are to be uprated from “Administrative” to “Criminal” enforcement issues and that appropriate tariffs (fines, penalties, jail terms) are to be put in place.
The COVID-19 outbreak started in Wuhan China in January ’20 but rapidly became a global pandemic. Many organisations were severely affected as the population lock-downs spread around the world but the political fallout between China and many advanced Western economies has recently increased primarily because of a perception that the Chinese government has withheld information it holds on the outbreak that could possibly have significantly reduced the loss of life and mitigated the global economic impact.
The Chinese government’s current policy of disinformation and the arbitrary imposition of trade sanctions against dissident nations are widely seen as hot helpful and nor for that matter are recent comments from the US President. Neither has done anything to calm a Global emergency, which ultimately will only be resolved by a united international effort.
Overall, the global electronics industry has fared reasonably well during the COVID-19 pandemic. Generally speaking, its manged to continue to operate fairly well, although significant disruption was caused in Q’1 to the supply chains of Tier 1 manufacturers reliant on Just In Time (JIT) deliveries to their international operations.
Most customers for electronic components are however served by manufacturer authorised distributors who maintain large buffer inventories and as a result, were able to shelter their customers from the worst supply network disruptions. In the UK the electronic components distributor total available market (DTAM) experienced a revenue decline of (10%-to-15%) in Q1’20 and is widely expected to experience a larger decline in Q2’20, feared to come out at around (20%-to-25%).
US / China trade war rumbles on
There are 114 Chinese organisations (including Huawei) who remain on the US ‘table of denials’ for the purchase of US technology products, services and software for use in the design and manufacture of their equipment. On the 15th May the US Department of Commerce announced that semiconductor designs produced by any organisation on the ‘table of denials’ list or their partners (suppliers or customers) are made subject to additional export administrative legislation.
In effect this means that US technology suppliers will need a licence from the US Department of Commerce for any use of US intellectual property (software, hardware, IP etc) by organisations on the ‘table of denials’, which in practice will mean that affected organisations will find it very difficult to design and manufacture advanced semiconductor products without a licence. The US has confirmed that this legislation applies to all wafer starts after May 15th ‘ and that they will only allow a 120-day grace period to ship any work in progress.
This legislation will have a profound impact on organisations like Huawei who will struggle to design, test, manufacture, package and final test advanced semiconductor components and without the appropriate licence, will not be able to have their advanced semiconductor products made at leading foundries like TSMC.
Huawei has complained that this action is unjustified and previously has been able to get around US legislation by using its subsidiaries and partners to purchase products on its behalf and in the short term, has been able to continue manufacturing operations by stockpiling advanced semiconductors.
Whilst Chinese organisations are reliant on leading edge Western technology, Western organisations are also reliant on Chinese organisations for a huge range of low to medium technology mass produced products, where they now have little manufacturing capacity. There are a number of possible solutions to organisations who find themselves on the US’s ‘table of denials’ list.
They could attempt to design using their existing or in-house variants of existing tools or use alternative semiconductor foundries and test houses who have the relevant expertise but are not dependent on US technology. Whilst this may be possible with legacy products and design rules, it will be difficult to achieve for the advanced semiconductor products that these organisations need to use in their latest designs.
The easiest solution for all is probably just to request an export licence from the US Department of Commerce and see what the conditions of licencing are. Having reviewed the previous agreements signed by the US and China I suspect that these conditions will probably be balanced and fair. After all, it would be very difficult for either government to publicly defend licence terms that were not…
The ‘Table of Denials’ list is also a significant problem for US technologists for whom these innovative organisations are valuable customers, as are the large semiconductor foundries and the multitude of specialist organisations embedded in their supply chains. It also impacts the mutual dependence, trust and goodwill that has been developed at many levels between suppliers and their customers. However, important intellectual property and know-how has been widely misappropriated by Chinese organisations (and therefore the Chinese state) from Western technologists for over thirty years and this haemorrhaging has to be stopped!
Whilst acknowledging that access to and the control of intellectual property are critically important to economic growth for all, in the interim and until this trade dispute and ramifications of COVID-19 are resolved, we’ll almost certainly have to manage with more disruptions in the electronic components supply network.
I encourage you and your organisation to play your part in the communication process, both up and down your supply network. It costs nothing but can yield significant rewards, such as improved competitive advantage.
Adam Fletcher is Chairman of the Electronic Components Supply Network (ecsn), a business association established in 1970 that today offers support to all organisations with an interest in electronic components throughout their entire lifecycle. He is also Chairman of the International Distribution of Electronics Association (IDEA), an association of individual country electronic components associations whose objective is to share best industry practice.