1、GlobalResearch14 February2019UBS Global I/OTech Hardware & SemiUBSEvidenceLabinside:willmovingfromChina becomeatrendandhowmuchcoulditcost?A need for diversification, but at what cost?BasedonUBSEvidenceLabsCFOsurveyofNorthAsiaexporters,46%ofrespondents havealready/aremovingproductionoutofChina,while3

2、6%plantomoveinthenear future.IfUS-Chinatradetensionsleadtoacceleratingshiftinproduction,webelieveit would be negative for companies with high production concentration in China (Hon Hai,Pegatron,Wistron).Wethinkcompanieswithtechnologyadvantagesordiversified productionaremoreimmune(TSMC,Largan,Delta),

3、buttheymaybeaffectedbylower demand.WeviewSamsungElectronicsasabeneficiaryofproductiontransferdemand. We believe the market has partially priced in the potential risks with higher impacted companies trading at the lower ends of their historical PEbands.Cost analysis of capacity relocationBasedonourco

4、stanalysisofAsiatechcompanies,weestimatetheearningsimpactof a 20% relocation of capacity to existing hubs at 10%/6% for assembly/component companies.Forrelocationtoalternativesiteswithalimitedclustereffect,weestimate anearningsimpactof18%/12%forassembly/componentcompanies.Forearnings,we believe the

5、market has not fully priced in the potential impact of costs, based on the pauseinnewtariffsimposedbytheUSonChinaandasconsumerelectronicsarenot yet on the tariff list. Most companies also have not yet made firm commitments regarding a shift in capacity.Longer build cycle from production site dispers

6、ionWe believe the need for diversification will lead to a fundamental shift in the structure of the supply chain over the longer term. Instead of production in concentrated clusters,weexpectagreaterdispersionofproductionsitesacrossthesupplychain.We believethiswillleadtoalongerbuildcycleandgreaterswi

7、ngsintheinventorycycle.As the effect is longer term, we believe this has not been pricedin.Potential impact on end demandIn terms of demand impact, we believe companies will seek to pass on part of the increaseincosttoendcustomers.Basedonourdemandanalysisoftransferordersand a longer replacement cycl

8、e, we estimate a -5.5% impact on US demand and a -0.5% impact on global demand for smartphones, and a -3.7% impact on US demand and a -0.9% impact on global demand for PCs. We believe the market has partiallypriced in the potential impact on end demand from a rise in US-China trade tensions. UBSs gl

9、obal forecast for handset shipments is -2.1% YoY for2019.Potential impact on select Asia tech companiesTechnology Hardware & EquipmentAsiaEquitiesWilliam DongTechnology Hardware & EquipmentAsiaEquities HYPERLINK mailto:william.dong william.dong+886-2-87227338AliceChen HYPERLINK mailto:alice.chen +88

10、6-2-87227343Nicolas Gaudois HYPERLINK mailto:nicolas.gaudois +852-29715681TimothyArcuri HYPERLINK mailto:timothy.arcuri +1-415-3525676JohnRoy,Ph.D. HYPERLINK mailto:john.roy +1-212-7139440Bill HYPERLINK mailto:bill.lu +852-29718360JimmyYu HYPERLINK mailto:jimmy.yu jimmy.yu+86-213-8668880Niall MacLeo

11、d HYPERLINK mailto:niall.macleod +852-29716186MatthewGilman HYPERLINK mailto:matthew.gilman +852-29718173Li HYPERLINK mailto:li.zeng +852-37123038Taewoo LeeAnalystHigherHigherimpactedcompaniesLower impactedcompaniesWistronSell21.1516.00TSMCBuy229.00285Hon HaiNeutral72.0079.00Delta ElectronicsBuy153.

12、50175PegatronNeutral50.7049.50LarganNeutral3,990.003,200Medium impactedcompaniesPotential beneficiariesCatcherBuy235.00375.00Samsung ElectronicsBuy46,20051,000TripodBuy83.80116.00Shareprice(LC)PricetargetShareprice(LC)Pricetarget HYPERLINK mailto:taewoo.lee taewoo.lee+852-29716873Jason AssociateAnal

13、yst HYPERLINK mailto:jason.sung +886-2-87227345Prices as of 13 February 2019. Source: UBS estimates HYPERLINK /investmentresearch /investmentresearchThis report has been prepared by UBS Securities Pte. Ltd., Taipei Branch. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 30. UBS does and

14、 seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decisi

15、on.UBS Global I/O: Tech HardwareUBS Research THESIS MAP a guide to our thinking and whats where in this reportMOSTFAVOUREDLEAST FAVOUREDTSMC, Samsung Electronics,Delta,LarganHon Hai, Pegatron,WistronPIVOTALQUESTIONSQ: Will factory relocation lead to an earnings impact of over 10% for supply chain co

16、mpanies?Yes, the costs of factory relocation from China could impact earnings by over 10%. While labour costswouldbelowerincountriessuchasVietnamandIndia,initialset-upcostscombinedwiththe need to maintain duplicate capacity during the transfer process could lead to higher costs. Due to the need for

17、diversification, we believe greater dispersion of production sites will lead to a shift in thesupplychainstructurewithwiderswingsintheinventorycycle. HYPERLINK l _bookmark1 Q: Will tech demand be impacted by higher end market prices?Yes,ifhighertariffrateswereimplementedorifproductioncostsroseduetof

18、actoryrelocation,we believesupplychaincompanieswillseektopassonpartoftheincreasetoendcustomers.Basedon ourdemandanalysisoftransferordersandlongerreplacementcycles,weestimatea-5.5%impact onUSdemandanda-0.5%impactonglobaldemandforsmartphones,anda-3.7%impactonUS demandanda-0.9%impactonglobaldemandforPC

19、s. HYPERLINK l _bookmark2 UBSVIEWNegative for supply chain companies with high concentration in China. Whether due to tariffsorrisinglabourcostsinChina,webelievetechsupplychaincompanieswillseektodiversify theirproductionfromChinatolowerconcentrationriskoverthelongerterm.Webelievetheimpact willbegrea

20、terforanacceleratedmove,butlesssoandmoremanageableifalongertimeistaken to adjust.EVIDENCEImpact analysis. Based on UBS Evidence Labs CFO survey of North Asia exporters, 46% of respondents have already/are moving production from China, while 36% plan to move in the near future. The survey shows that

21、exporters are considering a wide range of locations, which could resultingreaterdispersionofproductionsites.Ourcostanalysisindicatesanearningsimpactfroma 20%capacityrelocationbacktoexistinghubsof10%/6%forassembly/componentcompanies.For relocationtoalternativesiteswithlimitedclusters,weestimateanearn

22、ingsimpactof18%/12%for assembly/component companies.WHATSPRICEDIN?Not yet for factory relocation/partially for end demand impact. We believe the market has partially factored in risks from US-China trade tensions with the contraction in PE multiples for assembly and component companies relative to u

23、pstream companies. However, for earnings we believe the market has not fully priced in the potential cost impact of factory relocation. This is based on a pause in new tariffs imposed by the US on China and as consumer electronics are currentlynotonthetarifflist.Onthedemandside,webelievethemarkethas

24、partiallypricedinthe potentialimpactastheUBSglobalhandsetshipmentforecastis-2.1%YoYfor2019.Regardinga potential shift in the supply chain, we believe this is not in the price as the effect is longer term. HYPERLINK l _bookmark3 IC ComponentsHousing/ Systems AssemblySource: UBSExecutive summaryWithth

25、eriseinUS-Chinatradetensions,thekeyquestionis:willAsiatechsupply chaincompaniesgetcaughtupinthedisputeandsustaincollateraldamage?In effort to provide insight, UBS Evidence Lab conducted two independent CFO surveys.ThefirstwasaChinaCFOsurveyinwhich200manufacturingcompanies in China were surveyed on t

26、heir views of a potential tariff impact and their potential response. The survey result showed that 37% of the firms have already moved some production out of China in the past 12 months, and 33% plan to moveinthenext6-12months(see HYPERLINK /shared/d2mlUjCFN8 UBSEvidenceLabinside:ChinaCFOSurvey HYP

27、ERLINK /shared/d2mlUjCFN8 Where & When Firms Move Supply Chain).The second was the North Asia CFO survey of 450 executives of exporters in Taiwan, Korea and Japan. Consistent with the China CFO survey, 46% of respondentshavealready/aremovingcapacityoutofChinaand36%plantomove inthenearfuture(see HYPE

28、RLINK /shared/d20ULcQITAHxi3 UBSEvidenceLabinside:NorthAsiaCFOsurveyPartIand HYPERLINK /shared/d2Aad0l4j6gEch0 UBSEvidenceLabinside:NorthAsiaCFOsurveyPart2.In the Asia tech supply chain, we believe the need for diversification is pushing companies to consider relocating capacity outside China based

29、on high labour costs in China, the rise in US-China trade tensions as well as potential cyber security concerns. The key questions are: where would they move to and how much might it cost?Based on the CFO survey results and our bottom-up analysis of the findings, we note that relocating partial capa

30、city back to existing hubs such as Taiwan, Korea andJapanistypicallythefirstoption.Thekeyadvantagesaretheexistingpresence andestablishedclustersinkeyhubs.Thesecondoptionistoconsideralternative sites such as India and Vietnam for longer-termplanning.To evaluate the potential earnings impact of the tw

31、o different scenarios, we conducted a detailed cost analysis based on sampling of typical assembly and componentcompanies.Basedonouranalysis,weestimatetheearningsimpactof relocation back to existing hubs at 10%/6% for assembly/componentcompanies. For relocation to alternative sites with limited clus

32、ters, we estimate an earnings impact of 18%/12% for assembly/componentcompanies.Basedonthesurveyresults,ourcostanalysisandourdemandimpactanalysis,we note that an accelerated shift in production away from China would be negative for tech supply chain companies with high production concentration in Ch

33、ina, such as Hon Hai, Pegatron andWistron.Incontrast,webelievecompanieswithatechnologyadvantageormorediversified production and less concentration in China to be more immune, such as TSMC, LarganandDeltaElectronics,althoughtheymaybeaffectedbylowerdemand.We viewSamsungElectronicsasabeneficiaryofpoten

34、tialtransferdemand.Ifendmarketpricesriseasaresultofeitherhighercostsfromcapacityrelocation or higher tariffs, we estimate a -5.5% impact on US demand and a -0.5% impact on global demand for smartphones, and a -3.7% impact on US demand and a -0.9% impact on global demand for PC.Overthelongerterm,webe

35、lieveagreaterdispersionofproductionsiteswilllead toashiftinthesupplychainstructurewithwiderswingsintheinventorycycle.Figure 1: Summary resultsChinaCFOsurvey Already moved production out of China37%PlantomoveproductionoutofChina33%North AsiaCFOSurvey Already/are moving production out of China46%Plant

36、omoveproductionoutofChina36%Earningsimpactfor20%capacityrelocationMoving back to existing hubs for assemblers-10%Moving back to existing hubs for component companies-6%Moving to other sites for assemblers-18%Moving to other sites for component companies-12%End-demandimpactanalysisofhighertariffsPote

37、ntial impact on US smartphone shipments-5.5%Potential impact on global smartphone shipments-0.5%Potential impact on US PC shipments-3.7%Potential impact on global PC shipments-0.9%Source: UBS Evidence Lab, UBS estimatesUBS Global I/O:TechHardwareUBSResearchPIVOTALQUESTIONS HYPERLINK l _bookmark0 ret

38、urn Q: Will factory relocation lead to an earnings impact of over 10% for supply chain companies?UBS VIEWYes,thecostsoffactoryrelocationfromChinacouldimpactearningsbyover 10%. While labour costs would be lower in countries such as Vietnam and India, initial set-up costs combined with the need to mai

39、ntain duplicate capacity during the transfer process would lead to higher costs. Due to the need for diversification, we believe greater dispersion of production sites will lead to a shift in the supply chain structure with wider swings in inventory cycles.EVIDENCEWe conducted a detailed cost analys

40、is based on a sampling of a typical assembly and component company. Based on the analysis, we estimate the impact on earnings from relocation back to existing hubs at 10%/6% for assembly/componentcompanies.Forrelocationtoalternativesiteswithlimited clusters, we estimate an earnings impact of 18%/12%

41、 for assembly/componentcompanies.WHATS PRICED IN?We believe the market has partially factored in potential risks from US-China trade tensions. However for earnings, we believe the market has not fully pricedinthepotentialimpactoncostsfromfactoryrelocationsoutsideChina. This takes into account the pa

42、use in new tariffs by the US and the fact that consumerelectronicsarecurrentlynotonthetarifflist.Mostcompanieshave also not yet made a firm commitment on shiftingcapacity.Potential disruption from a rise in US-China trade tensionsWiththeescalationinUS-Chinatradetensions,akeyquestioniswhetherAsiatech

43、 supply chain companies would be caught up in the dispute and suffer from collateral damage?So far, the US has announced two rounds of tariffs on: 1) US$50bn worth of exports;and2)US$200bnworthofexports.Thusfar,thetariffshavenotincluded consumerelectronicssuchasPCsandsmartphones.Theconcerniswhethert

44、heUS will implement additional tariffs of US$267bn to include essentially all imports fromChina.ThiscouldbedetrimentaltoAsiantechsupplychaincompaniesgiven their extensive manufacturing operations inChina.In addition, if for reasons of cyber security the US government takes additional measurestoprohi

45、bittheimportofselecttechproductssuchasserversortelecom equipment from China, it could lead to further disruption of the Asia tech supply chain.Inthiscase,justpayingthetariffwillnotbeenough.Forproductsdestined fortheUS,manufacturingfacilitieswillneedtoberelocatedoutsideChina.Figure 2: Production capa

46、city in China for select Asia tech companiesChina capacityOther capacityTaiwan capacityAssembly companiesAsus28%6%66%Compal75%13%12%Hon Hai70%13%17%Inventec51%1%49%Lenovo50%50%0%Pegatron80%14%6%Quanta80%1%19%Component companiesAAC85%15%0%BYDE98%2%0%Catcher88%0%12%Casetek100%0%0%Chicony31%22%48%Delta

47、95%0%5%Goertek80%20%0%Largan2%0%98%Lens Tech98%2%0%Luxshare Precision100%0%0%O-Film100%0%0%Sunny Optical100%0%0%Upstream companiesAU Optronics10%0%90%ASE41%12%47%Chipbond15%0%85%GWC7%73%20%Innolux0%0%100%SPIL18%0%82%TSMC5%3%92%UMC20%9%71%Source: Company dataBased on UBS Evidence Labs CFO survey of N

48、orth Asia exporters, 46% have already/are moving production from China, while 36% plan to move in the near future. In terms of the impact, the Taiwan companies surveyed generally expect negativeeffectsfromUS-Chinatariffs,unliketheircounterpartsinKoreaandJapan who expect net positive effects.ForTaiwa

49、n,webelievethisisinpartduetothehigherconcentrationofproduction facilitiesinChina,especiallywithintech.Assuch,techsupplychaincompaniesare increasingly being asked by their key customers to assess the potential of relocating part of their production outside China.With rising labour costs in China, tec

50、h companies have been consideringshifting production outside China. However, the need for supply chain clusters has generally prevented major shifts, even when the all-in labour cost of factory workers in China (including bonuses, overtime pay and insurance) has risen to a level similar if not highe

51、r than countries such asTaiwan.Figure 3: Expected impact ofUStariffsFigure 4: Plans for moving production out ofmainlandChina80%60%40%20%0%-20%-40%-60%TaiwanJapan TaiwanJapan Steel tariffsAuto tariffsUS-China tariffsSignificant positive effectSome positive effectSignificant negative effectSome negat

52、ive effect100%90%80%70%60%50%40%30%20%10%0%TaiwanJapanKoreaWe dont have plans to move production out of mainland ChinaWe haventproduction out of mainland China yet, but we are planning to do so in the nearfutureWe have already moved/are moving production out of mainland China overthepastyearTaiwan J

53、apanKoreaTaiwan JapanKoreaSource: UBSEvidenceTaiwan JapanKoreaTaiwan JapanKoreaWhile very few tech companies would benefit from overall higher procurement costs,ahandfulofOEMsmayseesomemarginalbenefit.SamsungElectronicsin particular has the advantage of having moved its centre of gravity from China

54、to VietnamandIndiaformobiledevicemanufacturing(seebelow).Assuch,itcould address US demand without China production. This could lead to share gains in theUSmarket.Thatsaid,anoverallnegativeimpactondemandwouldstillaffect its memory and displaybusiness.Figure 5: Production capacity for Samsungs mobile

55、device business in 2019EOther 12%Korea 4%China 13%Vietnam 47%India 24%Source: UBS estimatesWhile the final outcome of US-China trade dispute remains to be seen, the need for diversification is certainly at the top of the agenda for many Asia tech companies, especially those with high a concentration

56、 of production capacity in China.Manyarenowreassessingtheiroptionsandacceleratingplansforpotential relocation.Thekeyquestionsarehowmuchwillitcostandhowlongwillittake?Where to move to?Inordertoassesswhetheritwouldbeeconomicaltorelocate,webeginbylooking atthevariousrelocationoptions.FormanyAsiatechcom

57、panies,webelievepartial relocation of capacity back to existing hubs such as Taiwan, Korea or Japan (i.e. thehomemarket)istypicallythefirstoptiontobeconsidered.Thekeyadvantage is the presence of an already established supply chain cluster. Adding capacity wouldbecomplementarytothesupplychaincluster.

58、Theincreaseincostwillalso be more manageable, in our view.Forexample,companiessuchasQuantaandCatcherhaveannouncedplansfor partialrelocationofcapacityfromChinatoTaiwan.Thishasbeenreflectedinthe rise in demand for factory sites inTaiwan.However, with an aging population and a shift in the labour struc

59、ture, one of the key bottlenecks in relocating factories back to home markets, such as Taiwan, is the shortage of factory workers. To compensate, Taiwan has been increasing its reliance on foreign labour. The total number of foreign workers in Taiwan has steadily increased by 5-10% pa to 696,000 as

60、of September 201861% in the manufacturing sector, 36% in the elderly care/domestic help sector, and 3% in others.This is still insufficient to support full migration of main factory lines for most companies.Assuch,mostcompaniesconsideringamovebacktoTaiwanplanto increaseautomationattheirTaiwanesefact