NVIDIA’s robust financial report reveals the true impact of AI on the technology industry, particularly in the AI server supply chain. …

As we look at the global economic growth rates for 2022, one country’s GDP performance stands out: Vietnam. According to the International Monetary Fund (IMF), Vietnam’s estimated GDP growth rate for 2022 is 7%, compared to 2.6% in 2021, making it the most fast-growing country among the neighbouring countries.

Undoubtedly, the country’s impressive performance is largely due to the global supply chain’s migration to the country, driven by the COVID-19 pandemic and the trade war between the US and China.

Pandemic and Trade War as Catalysts for Supply Chain Relocation

Long before the supply chain’s recent move, Samsung had already made aggressive investments by allocating 60% of Samsung Galaxy phones’ production in Vietnam. As a result of that, Vietnam’s electronics manufacturing exports surpassed its largest industry, textiles, a decade ago.

Over the last couple of years, the increasing tension between U.S. and China’s lockdown during the pandemic has made the leading brands aware of the high geopolitical risks as well as the importance of supply chain diversification. These concerns forced them to vigorously re-evaluate the plan to move their manufacturing factories to Vietnam, mitigating the risks they are exposed to.

Laptops: The Last Piece of Puzzle

In this migration, Apple and Dell have been the most proactive brands. After Shanghai’s lockdown, Apple has chosen Vietnam as its second-largest production base for laptops, tablets, and TWS earphones. Luxshare has already attracted attentions for building an AirPod production line in Vietnam, but not until recently, the laptop OEMs in Taiwan have geared up for expanding their investments there: a couple days ago Quanta Computer just announced a $50 million investment to establish a Vietnamese subsidiary to produce MacBooks; Foxconn, another key supplier of Apple’s macbook, is reported to begin their trial run for macbook after an $9 billion investment in 2022 for capacity increase.

On the other hand, it is said that Dell had actively reviewed its suppliers and component sources before 2022 to ensure the stable supply for their bidding market in the North American. As Dell becomes more aggressive in shifting their production lines from China to other locations, suppliers such as Compal and Wistron have also been actively building laptop assembly lines in Vietnam for the past two years.

A flexible production model is on the horizon

In the past, most OEMs considered Vietnam as a backup due to the complex logistic management potentially caused by the relocation of production lines. However, given that the most complicated and rigid laptop supply chains have begun to move, it is generally believed that this represents a solid trend where Vietnam is almost set to take over China’s position.

According to TrendForce, Vietnam is projected to account for 5% of global laptop shipments by 2023, which marks a notable increase from less than 1% just a year ago, making the country the second-largest laptop production base after China.

However, from the perspective of supply chain risk diversification, brand customers demand production models that not only reduce over-concentration in China but also enable quick response to possible contingencies at each production base.

That means even if laptop production is concentrated in China and Vietnam, if there is an urgent situation, OEM factories’ production lines in other regions must be able to provide immediate support. Such production models will inevitably reshape the supply chain landscape moving forward.

(Photo credit: Freepik)

Due to the explosion of the COVID-19 pandemic in China, Shanghai has adopted a rolling lockdown policy since March and Kunshan City, a major production hub for the electronics industry near Shanghai, has also felt the impact. According to TrendForce, limited manpower and logistics and suspended transportation options mean neighboring OEMs and ODMs can only rely on onsite inventory to barely meet the needs of production lines, further exacerbating component mismatches. Concurrently, a short-term surge in finished product shipments and demand for material replenishment after the various lockdowns are lifted may gridlock customs authorities, with delivery delays potentially lasting until the end of April before there is any chance for improvement.

TrendForce further indicates, starting from 4Q21, demand for consumer specification products, which account for the bulk of products sold by MLCC suppliers in Taiwan, Korea and China, weakened as customers continue to adjust their inventories. Although ODMs currently predict the demand for consumer specification MLCC will recover month by month in 2Q22, emergency lockdowns caused by the pandemic are bound to impose delays on logistics. Likewise, OEMs’ supply of key direct buy components will also be interrupted due to the Shanghai lockdown.  Shortages of CPU, battery module, and panel materials will impact production lines because materials cannot be delivered to relevant factory warehouses, exacerbating ODM component mismatch issues. On the other hand, the focus of downstream branded customers remains on low visibility and weak demand in the 2Q22 end market.

MCLL supplier production centers in China including those located in Tianjin, Suzhou, Wuxi, and Guangdong, have yet to be locked down but inter-provincial logistics and transportation have clearly felt the escalation of inspection and supervision since the end of March, resulting in prolonged transportation timetables. However, the biggest problem for MLCC suppliers at this stage is they cannot deliver materials to Shanghai and Kunshan. There are a number of large ODM plants at these two locations, such as Quanta Shanghai Manufacture City in the Songjiang District of Shanghai and the Compal, Wistron, and Pegatron campuses in Kunshan. At present, ODMs’ average inventory level for consumer specification products sits at 3 to 4 weeks, which is sufficient to meet the needs of short-term production. However, stocks of certain high-voltage automotive MLCC of 250V or higher specifications and high-end server MLCC size 0805/1206/1210 items may be in danger of depletion.

Looking to 2Q22, the lockdowns of Shenzhen, Dongguan, and Shanghai that began in March have hobbled China’s manufacturing industry and sent it into a period of contraction. In addition, the Russian-Ukrainian war and rising inflation continue to slow demand growth for mainstream consumer electronics, potentially risking recession. With so many unfavorable factors, ODMs must still observe an easing of component mismatching before further considering MLCC stocking momentum after restrictions are lifted. If the pandemic in China cannot be effectively brought under control in the short term, overall ODM inventories will continue to be maintained at a high level for approximately 1 to 1.5 months to prevent similar sudden lockdowns disrupting operations. However, TrendForce believes that it will be difficult for MLCC suppliers to surmise the visibility of customers’ real demand. Once the purchase order situation reverses, they will be unable to respond quickly with capacity adjustments, thus becoming a primary focus of MLCC manufacturers’ risk management in 2Q22.

The “new normal” in the post-pandemic era has seen the meteoric rise of high-speed and high-bandwidth 5G applications, which subsequently brought about a corresponding increase in cloud services demand. As such, the global server shipment for 2021 will likely reach 13.6 million units, a 5.4% increase YoY. As commercial opportunities in white-box servers begin to emerge, Taiwanese ODMs, including Quanta, Wiwynn, and Foxconn are likely to benefit.

The prevailing business model of the server supply chain involves having the ODM responsible for the design, hardware installation, and assembly processes, after which servers are delivered to server brands (such as HPE, Dell, Inspur, and Lenovo), which then sell the servers to end-clients. In contrast, a new business model has recently started to emerge; this business model involves having server ODMs responsible for manufacturing specific and customized server hardware, available directly for purchase by such end-clients as cloud service providers, thereby bypassing brands as the middlemen.

With regards to market share, Foxconn accounts for nearly half of the total server demand from Microsoft Azure and from AWS, while Quanta accounts for about 60-65% of Facebook’s server demand.

According to TrendForce’s investigations, ODMs including Quanta, Inventec, Foxconn, Wiwynn, and QCT have all received server orders from clients in the cloud services sector in 1H21. In particular, both Quanta and Inventec received orders from Microsoft Azure, AWS, Facebook, and Google Cloud. With regards to market share, Foxconn accounts for nearly half of the total server demand from Microsoft Azure and from AWS, while Quanta accounts for about 60-65% of Facebook’s server demand, in turn giving Foxconn and Quanta the lion’s shares in the ODM market.

The aforementioned Taiwanese ODMs have been aggressive in growing their presence in the private industrial 5G network and edge computing markets, with Quanta subsidiary QCT being a good case in point as an ODM that supplies servers to both telecom operators and private industrial networks for these clients’ respective 5G infrastructures build-outs.

More specifically, QCT stated the following in a press release dated Jan. 4, 2021:

“Quanta Cloud Technology (QCT), a global data center solution provider, independently developed Taiwan’s first 5G standalone (SA) core network, which recently passed interoperability and performance verifications for 5G Open Network Lab operated by Taiwan’s Industrial Technology Research Institute (ITRI). The core network was successfully connected to partner radio access networks (RAN) and third-party user equipment, realizing end-to-end 5G signal transmission from edge to core and achieving significant acceleration in both uplink and downlink speeds.”

In response to the edge computing demand generated by global 5G commercialization efforts, Wiwynn recently released the EP100 server, which is a 5G edge computing solution compliant with the OCP openEDGE specification. Developed in collaboration with U.S.-based 5G software solutions provider Radisys, the EP100 can function as an O-DU or an O-CU depending on the various 5G RAN needs of telecom operators.

Furthermore, Wiwynn is continuing to develop the next generation of edge computing servers targeted at the enterprise networking and edge computing segments.

Foxconn, on the other hand, has been focusing on developing vertical solutions for private industrial 5G networks. Foxconn’s hardware infrastructure offerings include edge computing servers, TSN network switches, and gateways. The company also offers a slew of software solutions such as data management platforms and other apps, hosted by Asia Pacific Telecom. Last but not least, Foxconn recently announced an additional US$35.6 million investment in its Wisconsin project; this injection of capital will make the company well equipped to meet the demand for servers as well as 5G O-RAN and other telecom equipment.

（Cover image source：Pixabay）