Tech hardware firms completes phase one of China shift out

S&P Global Ratings said phase two to be more disruptive and costly.

Global tech hardware firms have largely completed phase one of their shift out of China, according to S&P Global Ratings.

The first wave of tech hardware firms expanding capacity outside of China largely involved downstream electronic manufacturing services (EMS) firms building in countries such as Vietnam and India.

S&P Global states that phase one was less risky and costly to execute because production facilities are not too capital intensive and can be rebuilt for moderate cost. 

Phase two will involve midstream tech hardware firms adding capacity outside of China. The ratings agency assumes the transition to be meaningful because of the rebalancing of downstream capacity outside of China. 

However, S&P Global Ratings says phase two will be more disruptive and costly as relocation efforts will present more credit risks. 

“Adding to the risks is the possibility of botched executions and reversal difficulty as it involves heavy investment in plants and equipment," said S&P Global Ratings credit analyst Clifford Kurz.

"Moreover, as the shift in midstream capacity has only occurred over the past one or two years for many firms, we are only getting an early glimpse of the effects. We believe the costs and the drag on operations over the next decade will accelerate, and will be substantial,” he added.