How Intel can avoid the brunt of Donald Trump’s China tariffs blows

The US chip maker can move production around its various international operations to dodge the worst of the trade war fallout, analysts say

PUBLISHED : Tuesday, 19 June, 2018, 1:01pm
UPDATED : Tuesday, 19 June, 2018, 11:10pm

Intel Corp, the world’s biggest chip maker by revenue and a prominent US manufacturer, could avoid the most severe effects of a new list of Chinese tariffs proposed by US President Donald Trump by shifting production among its facilities, analysts said on Monday.

On Friday, Trump said he planned to push ahead with tariffs on US$50 billion worth of Chinese imports. While chips were largely spared from the initial list of targeted goods released in April, US trade officials on Friday released a second tariff list of 284 products worth US$16 billion that includes the processor and memory chips at the heart of Intel’s business.

China promises to hit back if US President Donald Trump imposes new tariffs

Analysts said those tariffs would not go into effect until after a public comment period, and there was a chance that chips could be cut from it before it was made final. But Intel shares dropped 3.4 per cent to US$53.22 on Monday on investor concerns. Late Monday, Trump also announced he might pursue tariffs on US$200 billion more of Chinese goods, though it was unclear whether the list would include more chips or computing products that might affect Intel.

Fast-moving trade war puts asterisk on annual survey of Chinese companies doing business in US

Intel could shift its production strategies to avoid much of the blow. Intel produces raw chips at six so-called wafer fabs, with three in the United States, one in Ireland, one in Israel and one in China. From there, chips go to so-called assembly and test facilities.

After that, they are sold to Intel’s customers, large computer brands or contract manufacturers who work on their behalf. Most of those entities are legally based in China because that is where most electronics are built, and that explains why Intel booked US$14.8 billion in China revenue in 2017.

But it is Intel’s US$12.5 billion revenue from the United States that is at risk. If Intel makes a chip at its US plants in Oregon, Arizona or New Mexico, then sends it to China for low-level assembly work and then brings it back so it can be put into a device manufactured in the United States, the chip would get hit by the tariff.

How China can hit back in a long, grinding trade war with the United States

But Intel also has assembly and test centres in Costa Rica, Malaysia and Vietnam. Chips from non-Chinese wafer fabs sold to American companies that pass through those facilities likely would not be hit.

“My sense is they can probably skip most of the tariffs,” said Dan Hutcheson, CEO of VLSI Research.

Intel does have a factory in Dalian, China, where it makes memory chips, which would be directly affected by the tariff if bought by US customers directly. While memory chips made up only US$3.5 billion of Intel’s US$62.7 billion in revenue last year, they are viewed as a key driver of the company’s plan to diversify away from its heavy dependence on CPU chips.

“Trade wars in general are going to be bad for the global economy, and semiconductors tend to be global,” Bernstein analyst Stacy Rasgon said.

The assembly and test work that many chip makers carry out in China makes up only about 10 per cent of the value of a chip, with the design and manufacturing making up the bulk of a chip’s value. Jimmy Goodrich, vice-president of policy for the Semiconductor Industry Association, said chip makers could be forced to pay tariffs on their own products simply for doing a small portion of the work in China.

“We should be talking about a policy framework that supports, not slows down, an industry that, unlike many others, still manufactures here in the US,” Goodrich said.