How China’s slowdown may spill over to Malaysia

China’s slowdown is a key risk for the world economy, commodities and energy markets as well as the semiconductor industry. — Bloomberg

CHINA’S stuttering economic recovery post-Covid-19 pandemic reopening has stirred concerns that a protracted deep economic slowdown will have global repercussions, given its interconnectedness with each and every economy in this globalised world and transmission to both emerging and developed countries through different channels.

A slowing China economy is a bane for the world economy. While the global economy continues to gradually recover in 2023, the growth remains weak and low by historical standards, and the balance of risk remains tilted to the downside. It is not out of the woods yet.

Global manufacturing and services activities are losing momentum. Global trade, especially exports, remain in the doldrums, weighed down by weak consumer and business spending amid a continued inventory adjustment in the semiconductor sector.

Prices of commodities and energy have also softened. Global monetary tightening has started to weigh down on activity, credit demand, households and firms’ financial burden, putting pressure on the real estate market.

A slew of disappointing economic data for two consecutive months (June and July) from China indicated that the world’s second-largest economy (17.8% of the world’s gross domestic product or GDP) is indeed losing steam.

Falling exports, weak consumer spending, slowing growth in fixed investment and continued concerns about the property sector have dampened the recovery.

The emergence of deflation concerns adds to the complexity of China’s flagging recovery.

The Chinese government has provided a range of strategic measures aimed at targeting specific sectors.

These range from consumption (spending on new energy vehicles, home appliances, electronics, catering and tourism) to the property sector (reducing down-payment ratios for first-time homebuyers, lowering mortgage rates and easing purchase restrictions for buying a second house) and tax relief measures to support small businesses, tech startups and rural households.

China’s slowdown is a key risk for the world economy, commodities and energy markets as well as the semiconductor industry.

Prior to the Covid-19 pandemic, China was the world’s most important source of international travellers, accounting for 20% of total spending in international tourism (US$255bil overseas and making 166 million overseas trips in 2019).

We consider three channels through which China’s slowdown can have spillover effects on Malaysia via direct and indirect transmissions: trade and commodity prices, services and financial markets.

Overall, the estimated impact of a 1% decline in China’s GDP growth could impact about 0.5% points on Malaysia’s economic growth.

Trade is the most important channel as China has been Malaysia’s largest trading partner since 2009, with a total trade share of 16.8% (exports share: 13.1%; imports share: 21.2%) in the first half of 2023 (1H23).

Spillovers from slower China demand and commodity prices are negative for Malaysia, a net commodity exporter.

After recording seven successive years of increases in exports to China since 2017, Malaysia’s exports to China declined by 8.8% in 1H23.

In sectors such as tourism, China’s tourists are one of the major foreign tourists in Malaysia. In the first five months of 2023, Chinese tourists totalled 403,121 persons or 5.4% of total international tourists in Malaysia, and was only 12.9% of 3.1 million persons in 2019.

According to the Malaysia Inbound Tourism Association, though the number of Chinese tour groups coming to Malaysia has increased in July and August to between 800 and 1,000 for the summer vacation, the number of tourists per group is smaller between 10 and 20 persons.

While direct financial links between China and Malaysia are limited, there will be indirect spillovers through spikes in global financial volatility as investors worry that China’s deep economic slowdown would temper global growth, and also has spillovers to the US economy.

Will China foreign direct investment (FDI) inflows into Malaysia slow?

Capital movements will be influenced by the inter-linking of factors such as economic growth and investment prospects in the host country (Malaysia).

These include stable political conditions and good economic and financial management as well as conducive investment policies.

The US-China trade war and rising trends of geoeconomic fragmentation have witnessed FDI flows among geopolitically aligned economies that are closer geographically as well as geopolitical preferences.

Throughout the period 2015-2022, China’s gross FDI inflows into Malaysia averaged RM7.5bil per year. Even during the Covid-19 pandemic, China’s economic slowdown did not deter the inflows of FDI into Malaysia (RM7.8bil in 2020; RM8.1bil in 2021; and RM9.8bil in 2022).

In 1H23, China’s gross FDI inflows increased by 25.2% to RM2.1bil though it is likely that the full-year FDI will be below the average FDI inflows of RM8.6bil per year in 2020 to 2022.

China was the largest foreign investor in Malaysia’s manufacturing sector in 2016 to 2022 before dropping to second position in 2022 and the fourth position in 2021.

There was a contrasting picture when it comes to China’s approved investment in the manufacturing sector, which saw two consecutive years of decline (2022: 42.5% to RM9.6bil and 2021: 6.5% to RM16.6bil) and declining further by 17.8% to RM4.3bil in the first quarter of 2023.

We believe that Malaysia will remain one of the preferred investment destinations to China, given both countries’ strong established friendship and bilateral ties in trade and investment as well as people-to-people movements.

Malaysia needs to enhance its investment climate with progressive policies to rival regional peers to offer the country as a China Plus One destination for China and foreign companies.

Malaysia can offer investments to build a chip-testing and packaging factory, advanced manufacturing technologies such as robotics and automation, manufacturing electric vehicle supply chain, petrochemicals, renewable energy, agriculture and food processing.

China can offer the technology, innovation and technical know-how as well as talent that deepen the country’s industry integration with global supply chains and also links Malaysia and China to South-East Asia.

China can invest in Malaysian manufacturing companies to help them adopt advanced manufacturing technologies and further improve their competitiveness.

The RM170bil prospective investments (comprising RM69.7bil from 19 memoranda of understanding and RM100.3bil from the round-table meeting) concluded during the prime minister’s visit to China are set to provide a massive investment boost to our economy for years to come.

Among these are China’s Rongsheng Petrochemical Holdings, which will invest RM80bil to build a petrochemical park in Pengerang, Johor; and investment from Geely, with an initial investment of RM2bil in the Tanjung Malim Automotive Valley, which will gradually increase to RM23bil in the future.

 LEE HENG GUIE is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.

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INTERACTIVE: Journey to Merdeka

TSMC: The global giant it didn’t aspire to be; US hijacks Taiwan's high-tech industries, squeezes island's economic future

 

FILE PHOTO: A smartphone with a displayed TSMC (Taiwan Semiconductor Manufacturing Company) logo is placed on a computer motherboard in this illustration taken March 6, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

 

Coupled with current plans, TSMC will have factories in five countries spread over three continents, rivalling the sprawl of rivals Intel Corp and Samsung Electronics Co. 

 

A LITTLE over three years ago, Taiwan Semiconductor Manufacturing Co (TSMC) was among the world’s most geographically concentrated technology giants with almost the entirety of its capacity within a 300-mile radius.

Now, it is on the verge of becoming one of the most globally diversified chipmakers. This wasn’t the plan.

A new facility near Dresden, Germany, is set to begin operations in 2027, the Hsinchu-based company said yesterday.

Coupled with current plans, TSMC will have factories in five countries spread over three continents, rivalling the sprawl of rivals Intel Corp and Samsung Electronics Co.

These overseas plants add to the significant operations it has in Taiwan and the two existing sites in China. (For more than 25 years it has also owned a fab near Portland, which though profitable is small and not seen as a company success story.)

Having all its manufacturing close to home has always been an advantage for the made-to-order chip foundry.

The tight relationship between research and development, and factory operations, where engineers can easily shuffle between production lines, helped TSMC become a fast-moving supplier in a high-stakes industry. Dotting the world with fabs risked diluting this advantage.

But then TSMC’s true global expansion kicked off in May 2020 with the announcement of a new facility in Arizona, a project which was enhanced two years later to include a second plant at the site, taking total investment in the Southwestern state to US$40bil.

A venture with Japan’s Sony Group Corp, unveiled in 2021, took TSMC in a new direction. Instead of owning a factory outright, Sony Semiconductor Solutions Corp will take a 20% stake in a factory being built in Kumamoto.

Automotive components supplier Denso Corp later signed on to take a stake of over 10%. That plant is closer to Shanghai than Tokyo.

Dresden is a continuation down that path of working with clients to jointly own facilities, largely to supply the growing demand for components used in automobiles.

TSMC will invest up to €3.5bil for a 70% share of newly formed European Semiconductor Manufacturing Co.

Robert Bosch GmbH, Infineon Technologies AG and NXP Semiconductors NV each take 10%, and total capital expenditure is expected to be around US$11bil, with the money coming from equity, debt and German and European Union funding.

Since its founding by Morris Chang more than three decades ago, TSMC eschewed equity partnerships in favour of maintaining full control over its operations, and thus its destiny.

But the global winds have changed, and its new leaders, chairman Mark Liu and chief executive officer CC Wei, have had little choice but to adapt.

TSMC’s balance sheet is solid, its cash flow is stable, and its credit rating is high. It doesn’t need clients nor governments to hand it money in order to pay for these new facilities.

What it does need, though, is buy-in. These remote factories at locations many time zones from home require firm orders as well as a solid commitment from third parties motivated to ensure the company’s success.

Having the likes of Sony, Infineon and NXP on the ownership list ensures they have skin in the game, while government involvement should help secure political and economic support.

Suddenly, TSMC goes from being an under-the-radar Taiwanese supplier solely focused on a coterie of semiconductor clients, to a global entity with multiple stakeholders across numerous national and local jurisdictions. It’s already proving to be a difficult adjustment.

Liu last month announced the delay of its Arizona opening by about a year. Time spent navigating local regulations and a struggle for talent, including among vendors, means TSMC won’t kick off operations there until 2025.

Last week, the company signed an agreement with Arizona governor Katie Hobbs to follow a worker safety programme that’s stricter than federal rules, a sign that TSMC needs to keep adjusting to a changing regulatory landscape.

Continued concerns about pay and conditions among local workers means a labour dispute could flare up at anytime, a situation uncommon at home in Taiwan.

Also of surprise is the escalating scale of divergence between costs in the United States and Taiwan, which will likely force the chipmaker to charge clients like Apple Inc and Nvidia Corp significantly more for products made in Arizona.

The Japan plan appears to remain on track for production late next year, with a high chance a second fab will be added to the project. Yet despite the US$60bil to be spent in total by all parties, the new facilities will account for no more than 10% of global capacity.

And not all fabs are created equal; the best stuff will remain in Taiwan for the foreseeable future, with Dresden and Kumamoto both deploying much older production technology – which is fine because automotive chips don’t need anything more modern.

Still, these foreign partners have no reason to complain. Clients are getting a stake in, and access to, precisely the factories and know-how they need.

Governments, meanwhile, can tell their constituents that they’ve been successful in luring the world’s most important technology company to their shores.

TSMC is also a winner. Just five years ago, the company warned investors that the European Commission was looking into concerns about “alleged anti-competitive practices” in relation to semiconductor sales.

The US Fair Trade Commission was also showing interest, it was reported at the time. Nothing came of these probes, but it would be particularly awkward for regulators in either jurisdiction to now accuse TSMC of being a predatory tech giant when its management has bent over backwards (and spent billions of dollars) to set up shop on their turf.

These overseas plants also dampen the constant drumbeat among rivals that TSMC is overly concentrated in one place, and that governments and chip customers need to look elsewhere.

Now, the company is giving them that “elsewhere.” Half the world gets a piece of TSMC, and in return all the chipmaker had to do was lean into globalisation. — Bloomberg

Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia. The views expressed here are the writer’s own. 

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US attempts to cannibalize TSMC and hollow out Taiwan's chip industry R

 US attempts to cannibalize TSMC and hollow out Taiwan's chip industry. Cartoon: Carlos Latuff

 

US hijacks Taiwan's high-tech industries, squeezes island's economic future

Washington has firmly taken grip over the Democratic Progress Party (DPP) authorities' mind when it comes to “relying on the US to seek secession,” while at the same time hollowing out Taiwan region's economy, and making the island a complete ...

 

Restricting investments in China, US is creating a 'dammed lake' for itself: Global Times editorial

The high-tech field is crucial for a country's future development prospects, but it also naturally possesses the new characteristic of interconnectedness in this era. It is unrealistic for any country to isolate itself and strive for research dominance in the field of technology. The future of the technology field belongs to countries that embrace the world with open arms. If the US fails to understand this, it will only get further away from its goal to “outcompete” China.

 

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Malaysia’s surging COVID-19 cases hits chip supply, firms urged to shift production to China

Disruptions in Malaysia affect Chinese companies

Malaysia breaks Covid-19 record with 22948 new… - Malay Mail

Workers are busy at a chip factory in Suqian, East China's Jiangsu Province in July 2021. Photo: cnsphoto

 

 

As surging COVID-19 cases in Malaysia disrupted the production of semiconductors and other key components, Chinese experts are suggesting that companies should move certain production lines to the Chinese mainland to ensure the smooth running of their facilities while meeting the huge demand.

` A manager of a Chinese autonomous driving firm told the Global Times on Wednesday that the new outbreak in Malaysia has already caused major disruptions to the company's chip supplies.

` "The lead time for chip supplies has been extended to as long as 20 weeks, and we have to pay a skyrocketing price for urgently needed chips," the manager said, "there is no way out. We have to wait for an explosive surge in the supply of semiconductors, and we have no idea how long it will take."

` Due to continuous supply shortages of master control chips, FAW-Volkswagen Automotive was forced to partially stop production of some Audi models starting from August 12, including the A4L, A6L and Q5L vehicles, according to a notice from the company circulating online on Wednesday.

` It said that production is projected to resume in the first quarter of 2022.

` The severity of the global chip shortage has led to a decline in the supply of new cars, driving consumers to shift to used cars. Data from the China Automobile Dealers Association showed that transactions involving used cars hit 8.43 million in China in the first half of 2021, up 52.9 percent year-on-year, approximately 27 percentage points faster than sales of new cars.

` With the fast spread of the Delta variant, Malaysia continues to grapple with a worsening COVID-19 outbreak. The country had a staggering 19,631 new cases of COVID-19 on Tuesday, local news portal the Star reported, citing its health ministry.

` With new infections still on the rise, the Malaysian government has ordered many businesses and factories to shut down, affecting production in a wide range of sectors, especially the packing and testing of chips and passive component manufacturing.

` Dozens of semiconductor companies have facilities in Malaysia, including international giants such as Intel, Infineon Technologies and STMicroelectronics.

` Malaysia accounts for 13 percent of the global sealing and testing market, and it is the world's seventh-largest semiconductor exporter, according to media reports.

` Xu Daquan, executive vice president of Bosch (China) Investment, posted on WeChat on Tuesday saying that a chip supplier's factory in Muar, Malaysia had been ordered to extend its closure till August 21, which directly affects its chip supplies such as vehicle control unit, domestic business news portal yicai.com reported.

` Xu confirmed to the media outlet that the chip company is STMicroelectronics, adding that supply will be basically cut off for the rest of August.

` CEO of XPeng Motors He Xiaopeng reposted Xu's comment, expressing anxiety over the chip shortage.

` The company declined to give details when reached by the Global Times on Wednesday.

` In addition, the production of passive components such as resistors, capacitors and inductors in Malaysia has also been disrupted.

` Amid the Malaysian government's extended lockdown orders, production at the world's two largest electrolytic capacitor makers - Japan-based Nippon Chemi-con Corp and Nichicon Corp - was halted in July again. The suspension of these production lines in March 2020 caused severe price fluctuations.

` The extension of Malaysia's restriction order has posed severe challenges for the global multi-layer ceramic capacitor market, with products such as smartphones, servers and 5G base station components expected to be affected, according to a report from TrendForce in July.

` The supply chain uncertainties in Southeast Asia, along with China's huge demand for semiconductors and other key components, may drive the packing and testing of semiconductors and passive component manufacturing to the Chinese mainland, industry analysts said.

` Ma Jihua, a veteran telecommunications industry analyst, told the Global Times on Wednesday that chip shortages may be exacerbated due to the raging pandemic overseas and chip hoarding.

` Possibly, the problem won't be solved until the first half of 2022, Ma said, suggesting that enterprises shift their chip sealing and testing production lines to the Chinese mainland.

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