How Will Chip Export Restrictions Affect Electronics Manufacturing Costs?

Without a doubt, overseas manufacturing of electronics has steadily increased over the past two decades. The cost to produce semiconductors, PCBs, and assemblies in China, which has the largest market share in these areas, has gone up over time, to the point that companies are looking elsewhere in Southeast Asia for cost-effective production capacity. Now, the newest round of export restrictions and trade deals among Western nations add a new cost dimension to the decision of producing overseas.

How will these export restrictions affect production, and specifically how will they affect costs? Cost is one of the major decisions driving companies to import electronics rather than host captive operations and produce locally, but export restrictions could limit where the next generation of products can be produced. This is where we need to examine the changes in the cost structure for electronics manufacturing.

Where Export Restrictions Came From

The newest set of export restrictions from the US are targeting components specifically to be used to support development of high-performance computers, semiconductor manufacturing equipment, and components for the aforementioned systems. These new export restrictions arise from multiple rules and pieces of legislation implemented in the US unilaterally and in coordination with other countries.

Not all of those products qualify as being critical to national security in Western countries. The unintended consequence is the potential to limit access to production capacity for systems supporting some of the most advanced and farest-reaching technologies. Some of these areas include:

• Processors at the most advanced technology nodes
• Newer RFICs supporting 5G/6G with on-chip processing
• AI-capable ASICs and processors
• High-performance FPGAs/GPUs capable of 600 Gbps+ aggregated data transfer
• Chips supporting 800G and higher data center architecture
• Electronic assemblies and end products including any of the above components

In effect, this forces onshoring or friendshoring of production for these products. In the near term, expect overseas production costs to remain higher and continue rising as wages continue increasing in overseas electronics manufacturing hubs. Over the long term, as more capacity comes online in 2024 and beyond, expect costs to start dropping for most products, including products requiring the most advanced semiconductors that are restricted from export.

Costs Remain Higher For Now

Because costs in global electronics manufacturing hubs would be expected to increase over the next few years, what are the cost dimensions to consider when choosing where to produce? Will onshoring a portion of production reduce total costs? The table below outlines broadly the cost dimensions that affect unit costs for an electronic product.

In the end, the location of PCB and semiconductor production is not a binary decision. Some components can be produced locally, and exported for assembly as long as the products do not run afoul of export controls. More advanced products, the limitations on manufacturing capabilities being imposed could drive up overseas production costs or eliminate that capacity by forcing companies to friendshore or produce locally.

Expect Lower Costs Later

Ultimately, chip export restrictions and equipment export restrictions will determine where you will be allowed to produce without penalties. This doesn’t mean everything needs to be onshored or friendshored , but expect costs to drop when more production capacity comes back to the US, and as the semiconductor industry enters in a state of inventory surplus in the near future. Costs can be expected to eventually change in the following areas:

• Component cost decreases direct from chip manufacturers or distributors
• Board fabrication costs are likely to equalize as more automation and capacity comes to nearby countries and China labor costs continue increasing
• Board assembly costs will likely follow board fabrication costs
• Logistics costs are expected to decrease as nearshoring trends continue
• Friendshoring may lead to reductions through mutually beneficial trade agreements

We shouldn’t expect all manufacturing to revert to the situation in the 1980s, where the major OEMs kept captive operations. This was problematic because manufacturers were constantly reinventing the wheel in terms of fabrication capabilities, and the rise of contract manufacturers that specialize in advanced production made great economic sense. However, as new foundry and CM capacity expands closer to end markets, we would expect a cost equalization trend to begin, where local production costs become on-par with overseas costs in Southeast Asia.

No matter where you want to produce your next electronics assembly, you can create designs and manage everything in the supply chain with the complete set of design and data management features in Allegro PCB Designer. Allegro is the industry’s best PCB design and analysis software from Cadence, offering a range of product design features with a complete set of management and version control capabilities. Allegro users can access a complete set of schematic capture features, mixed-signal simulations in PSpice, and powerful CAD features, and much more.

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