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China no longer viable as a world factory, says Kyocera

China no longer viable as a world factory, says Kyocera

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US restrictions on China’s access to advanced technology are destroying its viability as a manufacturing base for export, the head of Japan’s Kyocera said, as one of the world’s largest chip component makers shifts production elsewhere and invests heavily in domestic assets.

Hideo Tanimoto, president of a company that’s a vital part of the chip supply chain, delivered his stark assessment as he leads an aggressive investment strategy for Kyocera that includes building its first factory in Japan in nearly two decades.

“It works for so long [products are] made in China and sold in China, but the business model of producing in China and exporting abroad is no longer viable,” Tanimoto told the Financial Times. “Not only have wages gone up, but obviously with everything that’s happening between the US and China, it’s difficult to export from China to some regions.”

In October, the US announced export controls that will seriously hamper Chinese companies’ efforts to develop cutting-edge technologies. Last month, Japan and the Netherlands also reached an agreement with the US to restrict exports of chip-making tools to China.

Kyocera’s products include phones, printers and solar panels, and the company holds a 70 percent global market share of ceramic components for chip-making equipment. Tanimoto said US export controls were one of the reasons the company cut its full-year operating profit forecast by 31 percent this month.

“If chip equipment manufacturers stop shipments to China, our orders will be somewhat affected. . . You are now even [being] asked not to ship their non-modern tools,” Tanimoto said.

Kyocera was already increasingly involved in the trade dispute between the world’s two largest economies.

In 2019, it shifted manufacturing of its copiers for the US market from China to Vietnam to avoid tariffs imposed on China by the Trump administration. In addition, the production of vehicle cameras for the USA was transferred from China to Thailand.

Tanimoto said it’s now almost impossible to produce hardware in China without access to the chip technology affected by the tightened regulations, although the country may still have a competitive advantage in software and artificial intelligence.

For decades, the Kyoto-based manufacturer has taken a conservative approach to investing in order to focus on making a profit. But under Tanimoto, who took over as president in 2017, the company has shifted gears to explore new growth opportunities and spent 62.5 billion yen ($464 million) to build a semiconductor packaging facility at its Kagoshima facility issued in southern Japan.

In November, it pledged to nearly double capital spending to 900 billion yen over the next three years to expand production of chip components and capacitors for smartphones and other products. The first domestic plant to be built in nearly 20 years will be an electronic components factory in Nagasaki, which is expected to start operations in 2026.

Investors welcomed Kyocera’s bolder spending plans but also urged the company to improve its corporate governance and return on equity by selling its 15 percent stake in telecom company KDDI, founded by the group’s founder, Kazuo Inamori. He died in August.

Tanimoto said the company will not reduce its stake in KDDI, which is worth 1.4 trillion yen, and instead use it as collateral to borrow 500 billion yen for its electronic component acquisition plans.

“If you sell it you’ll be taxed pretty heavily because it’s a capital gain. If you borrow money and use it as collateral, you can borrow it at a lower interest rate and still receive dividends,” said the Kyocera president. “Dividends are much higher than interest rates. . .[Keeping the stake]can accelerate the growth of our business.”

Responding to shareholders’ calls to divest Kyocera’s underperforming businesses like smartphones, Tanimoto said the company will first focus on making a profit by transitioning to selling its devices to businesses rather than consumers.

“I believe that after the switch to business use, we can get back to double-digit profits,” said Tanimoto. “I told our team to get there in the next three years to survive our communications business.”

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