The local technology sector’s original design manufacturers (ODM) are likely to be affected the most as US president-elect Donald Trump and the Republican-led US Congress signal their support for a border tax, Daiwa Capital Markets Inc said.
“The objective of the border tax adjustment is clear: Encourage greater US-based production and discourage imports,” Daiwa analyst John Hetherington said in a report published on Wednesday.
While the publicized details of a possible border tax are still a long way from forming a coherent plan, Daiwa has conducted a sensitivity analysis on 43 Asian companies tracked by the brokerage that derive more than 20 percent of their revenue from the US.
The analysis estimates the impact to gross margins under the assumption that Asian firms, excluding Japanese ones, would bear a 10 percent top-line tax.
Daiwa’s findings show that Pegatron Corp (和碩), one of Apple Inc’s iPhone assemblers, and Quanta Computer Inc (廣達), the world’s largest server and notebook computer manufacturer, would face the most severe challenges from a border tax.
Quanta is facing a 46.2 percent drop in its gross margin to 2.8 percent, while a 39 percent decline to 3.6 percent is forecast for Pegatron, the report said.
While technically possible, it would be difficult for the two companies to expand their US-based manufacturing to mitigate the effects of a border tax due to higher labor costs and a shortage of qualified workers in that nation, the report said.
“For downstream tech hardware companies, the local supply chain support is extremely important and does not exist in the US at the moment,” Herrington said.
There are no local US rivals that can replace the two companies, as there are no other ODMs in the PC and smartphone businesses there, the report said.
Garment and shoe suppliers, such as Makalot Industrial Co (聚陽實業) and Feng Tay Enterprises Co (豐泰企業), would also see significant adverse effect from a possible border tax, the report said.
Makalot’s gross margins are estimated to fall by 35 percent, or 7 percentage points, to 13 percent, while a 26 percent decline, or 6 percentage points, to 17.1 percent is forecast for Feng Tay, it said.
As the global garment manufacturing capacity is almost entirely located outside the US due to cheaper labor, it would not be easy for Makalot to shift its manufacturing into that nation, Daiwa said.
Feng Tay also faces the same challenge, as shoe manufacturing is extremely labor-intensive, it said.
Hetherington said that while Makalot derives a significant 76.8 percent of revenue from the US, the figure is comparable to the 67.2 percent US revenue contribution for Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), but the world’s biggest contract chipmaker is only projected to see a 3.9 percent drop in gross margins to 49.7 percent.
“Having a large percentage of sales exposure to the US is not in itself a reliable indicator of a company’s sensitivity to the border tax,” Hetherington said.
He said that companies with larger profit margins are more resilient to a border tax, all else being equal.
Daiwa said that component sales to US customers for use in products that are sold elsewhere should face a lower tax than their US sales exposure would suggest, such as Taiwanese companies involved in the iPhone supply chain.
The brokerage firm assumed that only 30 percent of TSMC’s US-derived sales are subject to the border tax, as the remaining 70 percent are from products that are sold outside the US.
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