Wolfson caught in middle of the Sino-US chips war
ANALYSIS
Bill Magee
CITY favourite Wolfson Microelectronics is pinning ambitious growth plans this year on somehow avoiding the global effects of an escalating microchips war involving the United States and China. The international row looks set to dominate the Edinburgh-based integrated circuit manufacturer’s first AGM as a publicly-quoted company on 22 April, and co-founder and chief executive David Milne told a recent board meeting that he is keeping an eye on the issue.
Analysts have warned that as the fallout hits Wolfson’s radar screen, its honeymoon period is fast coming to an end. It was the first technology company to float on the London Stock Exchange for three years last October, valuing it at over £250 million.
The hi-tech fallout between the two super powers has, according to analyst David Cunningham, of Bell Lawrie White, come at the worst time for Wolfson: "It could do without this uncertainty right now, especially as market leader and embarking on the next vital stage of its development."
Wolfson keeps costs down by outsourcing manufacturing to Taiwan and Singapore, where most of the world’s semiconductor factories are based, producing a suite of 50 mixed signal high-capacity integrated circuits for numerous digital applications. Highly-lucrative US customers include Microsoft, for audio input to its X-Box games console, and the Apple iPod MP3 player. Wolfson also inputs to DVD players, mobile phones, hand-held computers and photocopiers. Other clients include Hewlett Packard and Toshiba.
Another analyst said: "It’s all about US unease over China’s fast developing electronics economic power and if it does not give way, which is likely, the Americans will probably retaliate by blocking the flow of consumer goods from the east. Such an impact on the end product market would really hit Wolfson.
"In the weeks and months ahead, it is a case of keeping the head down and getting on with its business to avoid getting caught in the crossfire."
The firm recently moved into new city headquarters at Murrayfield House, from where Julian Hayes, vice-president (marketing), conceded that the firm could be hit. "China does appear to be flexing its muscles, but I would hope any impact [on us] from the fallout would be marginal," he said.
In the meantime, Wolfson cannot afford to be held back and Hayes has just returned from the US, where he knocked on the doors of several large key customers checking on their needs in the months to come. The firm has an office at San Diego, in the heart of Silicon Valley.
Wolfson is looking to secure a strengthened supply chain in China for its business, of which over 60 per cent is in the Asia Pacific region. Of the threat of trade barriers, Hayes said: "I am rather sceptical that there could be no consumer goods or toys in the shops."
However, according to one industry source, it will prove difficult to avoid being hit: "Make no mistake, Wolfson is caught bang in the middle of what has rapidly become a mighty row of global proportions."
THE World Trade Organisation (WTO) has intervened following a US government official complaint last month about Chinese tax rebates to domestic chip makers, claiming that China’s action unfairly discriminates against foreign, overwhelmingly American, imports.
China imposes a 17 per cent value added tax on imports and home-grown chips, but gives back 11-14 per cent to producers who show they research and design chips locally, claiming it is simply buoying its small, emerging chip industry.
US action also reflects a growing frustration over China’s huge manufacturing trade surplus with America, with the Chinese importing more than 80 per cent of semiconductors, a significant proportion from the US. As the fastest growing market for chips, China may buy more than £11 billion worth this year.
For Wolfson, at stake is a plan to boost its product portfolio by 40 per cent this year, building on a trebling of profits to £6.7m, for the year to end-December 2003. It relies totally on the international market for a smooth, constant and cheap flow of raw chips with volumes running into millions.
A WTO decision could come as early as next month or June and if it rules in favour of China, the US is likely to hit back by introducing tariff barriers against Asian microchip-driven consumer goods imports.
The industry source added: "There is no doubt that Wolfson has done everything right, establishing various local partnerships in the Far East and winning valuable contracts with big US players.
"However, any disruption to the international flow of consumer goods would have a catastrophic effect on markets, with a knock-on negative effect on the firm’s plans, its bottom line and share price."
A heavy presence in Asia has played in Wolfson’s favour, especially during the past 12 months when business has grown rapidly. Last November, a new sales office in China’s Shenzen province was followed by one in Seoul, South Korea last January, complementing presences in Taipei, Taiwan, and Japan’s Yokohama.
Japan has now joined the EU in questioning the Chinese tax rebates to local semiconductor makers. China has agreed to discuss the matter with the US, as the WTO stands by.
However, no-one is immune to American action. Last year, the influential US Semiconductor Industry Association persuaded the US International Trade Commission to impose a 44 per cent import duty on Korea’s Hynix, the world’s third biggest producer of memory chips, claiming unfair state subsidies.
On a happier note, Wolfson’s staff shared in a £26m windfall on flotation, but no dividend will be announced at the annual meeting.
Instead, all future earnings are being retained for investment in developing and expanding the business. That is, providing the Americans and Chinese don’t spoil the party.
