Last year, the tech world was rocked by a report alleging a major microchips supplier had been compromised by Chinese spies. Amazon became suspicious of potential cyberespionage after discovering unauthorized chips in Chinese made servers. Now, major American technology corporations have become worried about subverted power cords.
It was recently reported that two large Taiwanese semiconductor corporations were asked to relocate their manufacturing operations outside of mainland China. The reason being, some of their United States-based clients are concerned the Chinese government might be embedding surveillance hardware in their equipment. Specifically, spy chips in their servers’ power cords.
Now, on its face, U.S. tech firms’ concerns may seem absurd, like something out of a James Bond movie. But the truth is, their fears have some basis in reality. China has used subverted power cords to spy on its own people in the past. The government set up charging stations that copied user data once connected to a smartphone. However, there have been no reports of international Chinese power cord subversion.
Nevertheless, American anxiety about Chinese cyberespionage is having real consequences for the global semiconductor industry.
The Price of Fear…in China and America
Taiwanese-based firms Lite-On Technology and Quanta Computer serve some of the largest technology corporations on the planet. Lite-On makes electronic parts for Dell, Hewlett-Packard, and IBM. Similarly, Quanta makes servers and data centers for Facebook and Google. So, when those corporations expressed a potentially deal-breaking concern, the two firms snapped into action.
Lite-On was in the process of building a new $324 million research and development facility in Taiwan to fabricate electronic components for cars. Now, that facility will produce power parts for products sold to American companies. And Quanta is migrating its production facilities out of the Chinese mainland.
On the one hand, these forced changes are a significant disruption to the operations of the Asian semiconductors industry. Two major suppliers are now spending money to construct new Taiwanese-based facilities and suffering from production disruptions. These supply chain issues may have a negative impact on the output of U.S. tech companies in the short term.
On the other hand, this development may benefit the American tech sector in the long term by ameliorating the economic impact of the U.S.-China trade war.
The Financial Benefits of Paranoia
Earlier this year, it was reported that production and hiring in U.S. manufacturing hit a four-year low in Q4 2018. Insiders believe U.S. tariffs on trade with China caused the slowdown. Money that should’ve gone to production and workforce expansion is going to rising supply chain costs.
The tariff issue has already prompted several semiconductor producers, including Quanta, to move manufacturing operations from the mainland to Taiwan. So, with the added incentive of quelling U.S. cybersecurity concerns, there could be an industry-wide migration to Taiwan.
The trade war has already sparked significant interest in shifting production to Southeast Asia. A pivot to Taiwan would offer the same trade advantages as a pivot to Southeast Asia, but with lower relocation headaches.
In this instance, there may be a significant financial upside to American paranoia.