Midstream tech firms to move out of China, S&P says

Some global midstream technology hardware firms have started moving out of China or adding new capacity elsewhere, following in the footsteps of their customers, according to an S&P report.

In phase one of the relocation, many downstream electronic manufacturing services (EMS) firms, including Taiwan’s Foxconn Industrial Internet, had moved to diversify their investment from China to other countries such as Vietnam and India. This phase has been largely completed.

Phase two of the exodus, which refers to the shift-out of midstream capacity from China, will involve more spending and higher ongoing operational costs and the possibility of botched executions.

“Technology firms will continue to diversify supply chains away from China over the next two to three years, with the focus shifting to the midstream of the technology value chain,” Clifford Kurtz, a primary credit analyst at S&P, says in the report.

“A more geographically distributed production footprint would help tech firms manage geopolitical risks, including the loss of key supply lines, the emergence of punitive tariffs or any other events stemming from US-China tensions,” he says.

He adds that the phase two relocation will be hard to reverse as it involves heavy investment in plants and equipment that are difficult to move.

The S&P report says technology hardware producers that are likely to speed up investment outside of China in 2024 to 2026 are suppliers of passive components, power electronics and motors, connectors and sensors, printed circuit boards and outsourced semiconductor assembly and test services.

S&P has found that the exposure of 14 midstream technology firms it tracks by fixed-assets dropped to 26% in 2023 from a peak of 30% in 2021. Over