Fitch: US-China tension, coronavirus will force tech supply chain to evolve

Fitch Ratings-Chicago has sated that the escalating US-China tension and coronavirus-driven production challenges and will force US technology supply chains to evolve over time.

Key notes

Supply chain changes that lead to less reliance on China and greater US production of core semiconductor components could have significant credit implications for the sector.

Costs would rise and substantial capital investment would be required with returns being delayed due to the time required to build infrastructure and amass intellectual capability.

Global trade tensions, due in part to national security concerns in the US and economic contraction caused by the pandemic, are major headwinds for the sector.

Increased domestic manufacturing of the more advanced components could act as a hedge against geopolitical risks.

The US announced a new export restriction on Chinese telecom-equipment maker Huawei last week that further limits the ability of top semiconductor companies to supply Huawei without a license from the US.

Huawei, which remains on the US Entity List, has shifted some orders to SMIC, the Chinese government backed semiconductor manufacturer, but SMIC lacks the technical prowess and capability to advance Huawei’s growth strategy.

Taiwan Semiconductor (TSMC) announced last week that it intends to build and operate an advanced semiconductor fab in Arizona with the mutual understanding and commitment of support from the US government. The announcement followed media reports that the Trump administration was collaborating with technology companies, including Intel (A+/Stable) and TSMC, to increase domestic production of semiconductors, the primary building block for technology hardware.

We view the US-TSMC alliance as a first step in building a more autonomous US technology supply chain, given high barriers to entry, specifically related to the significant capital and design capability required for leading-edge semiconductor manufacturing.

Such news keeps the US dollar underpinned. More on that here: USD/JPY: Bulls in control again, correction of recent pressures in play