Border Tax Shakeup

A border tax is the talk of the financial world.

While this has clear implications for car manufacturers, where it’s rather easy to tell where parts such an engine block or a braking system were manufactured, it’s far less tangible when it comes to electronics in general, and semiconductors in particular. In a complex SoC, IP can be developed in more than one country, and multinational technology companies often leverage internal IP in derivative designs that are country- or region-specific. Moreover, an SoC can be manufactured in pieces in different places, then packaged together somewhere else, with software that can be developed and updated even post-manufacturing.

In a briefing to the Global Semiconductor Alliance this week, Dan Niles, founding partner of AlphaOne Capital Partners, said a border tax in itself is not that radical of a concept. But how it gets implemented is spurring some heated debate among financial analysts everywhere.

“The issue is how it works,” Niles said. “When your two biggest trading partners (Mexico and China) are in your crosshairs, the disruptions could be huge.”

Niles noted that economies everywhere are growing, but he said that can be undone rather quickly.

Supply chains are all about efficiency. When Ford began mass production of the Model T, the company had its own iron mines, steel mills and sheep farms for seat leather. That proved more expensive, though, than buying parts and materials from third-party companies that specialized in those components. The supply chain that developed in the ensuing years became so diverse that in the 1950s it was commonly said that when Detroit sneezed, the rest of the country caught cold.

More than a half-century later, the semiconductor industry has created one of the most efficient supply chains in the history of industry. Initially modeled on the automotive industry, it has taken on a life of its own. Part of that is due to the fact that it’s easier to ship code and soft IP than a car chassis. But part of it also is due to the fact that much of the semiconductor supply chain came of age at a time when globalization was unquestioned. Companies working within that global supply chain currently leverage expertise from universities, trained labor pools that often grow up next to them, proximity to end markets, natural resources such as water, power and materials, not to mention a variety of local government incentives and lower labor costs.

Bolstered by free trade agreements and instantaneous communication, the supply chain has proved remarkably resilient. During the dot-com era, it was common practice for companies to double and triple order parts due to constrained supplies and inadequate communication and checks. When the bubble burst in 2001, it created an inventory glut that lasted for several years, sending the PC industry into a spiral from which it never fully recovered.

By 2008, when the deepest recession since the Great Depression hit, the PC era had been supplanted by the mobile phone, which relied much more on third-party IP and components. Lending and end-demand slowed significantly, but inventory imbalances were minimal.

The question now is how that will be impacted. No one is quite sure what a border tax will look like, and it is uncertain just how big an impact it will have on the semiconductor industry. But the idea of overhauling the supply chain is not a pretty picture. It could have an impact on semiconductor content on a grand scale, the competitiveness of certain components, and the overall price of end devices. And it could have a big impact on company relationships, create issues in delivery schedules, reliability, competitiveness and market demand.

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