Challenges Faced by Taiwan's EMS in Expanding Production in North America

Taiwan's electronics manufacturing services (EMS) providers are strategically pivoting to expand production in North America. This shift is largely in response to tariff pressures, yet numerous challenges persist that could obstruct their progress, especially in the burgeoning AI server market.

Increased Focus on North American Production

Since the election of former President Trump, Taiwanese manufacturers have actively pursued growth opportunities within the United States. Yen Chou, an industry analyst at DIGITIMES Research, emphasizes how server manufacturers, in particular, are concentrated in Texas, where Foxconn’s operations are already up and running with plans for further expansion. This move aligns with broader trends where companies are attempting to mitigate tariff impacts associated with the ongoing trade tensions.

Recent Developments

In the past few months, notable developments have occurred within the sector. For instance, Wistron recently announced plans for a new facility in the US following a capital increase, while Compal is in the process of expanding its automotive electronics production in Indiana. Foxconn is also ramping up its operations in Houston to meet increasing demand for servers. However, these expansions are hampered by much longer construction times in the US. According to Chou, while building an EMS factory typically takes about a year in Asia, it takes significantly longer in the US—between 1.5 and 2 years. This increased timeframe, coupled with soaring labor costs in the US, results in manufacturers prioritizing higher-margin products over lower-cost ones.

Strategic Manufacturing Locations

The manufacturing landscape is evolving globally, with major EMS providers establishing operations across critical markets which include not only the United States and Mexico but also China, the European Union, Southeast Asia, India, and parts of Latin America. While shifting assembly lines to populous regions offers some flexibility, the real challenge lies in ensuring the availability and distribution of crucial components such as printed circuit boards (PCBs), semiconductors, and passive components.

Singapore has emerged as a key hub for server assembly due to its favorable 10% tariff rate for US exports. Moreover, Foxconn operates two facilities in the country that leverage ASEAN’s free trade agreements to source components from neighboring countries like Vietnam and the Philippines before final assembly and export.

Component Constraints and Future Bottlenecks

However, obstacles remain in the form of component shortages. Over the next two to three years, the AI server market could experience critical bottlenecks, particularly due to constraints within TSMC’s Arizona fab and domestic production of high bandwidth memory (HBM). With TSMC's facility only capable of producing around 10,000 12-inch wafers monthly, demand may outstrip supply if companies like Nvidia and AMD shift production to avoid tariffs.

Similarly, HBM production faces substantial limitations. Of the projected 1.5 million HBM chips expected in 2025, Micron is set to manufacture approximately 340,000 chips, with only about half of that production occurring in the United States. The remainder will come from companies like Samsung and SK Hynix, which primarily operate out of South Korea.

Market Implications

These constraints have the potential to divide the market into differing cost structures for similar products. Chou notes that consumers may see variations in pricing for Nvidia's AI accelerator cards based on whether they are made using US components or those sourced internationally with tariffs applied. Since it isn't feasible for vendors to sell essentially the same product at different pricing tiers, they may average costs, ultimately driving prices upward. This price increase could dampen demand for AI servers, particularly among small and medium-sized enterprises, which often work with limited budgets.

Ultimately, unless specific exemptions are granted, the anticipated hike in prices may force many potential customers to either delay or completely forgo purchasing AI servers. The evolving landscape underscores which countries stand to benefit from or be hindered by tariff regulations, and highlights the EMS players most vulnerable during these turbulent times.