Trade War Provoked Chinese to Take ‘Sudden’ Protectionist Turn, Photronics CEO Says

The Chinese “irreversibly accelerated” their Made in China 2025 industrial program since the summer, taking a sharp protectionist turn as the U.S.-China trade war persisted with no negotiated breakthrough, Photronics CEO Peter Kirlin said on a fiscal Q4 call Dec. 11. “They ain't turning back,” said Kirlin, whose company drew more than half its Q4 revenue from the photomasks it supplied Chinese panel makers, produced at Photronics factories throughout Asia, including in Xiamen and Hefei, China.

As the U.S.-China trade talks “have gone unresolved,” and U.S. export restrictions remained in place on Huawei and other Chinese telecom companies, “the resulting uncertainty has motivated Chinese companies to seek local solutions” for their supply needs, Kirlin said. Their “growing need for photomasks” is a positive “outcome” for Photronics as Chinese tech firms strive to become “more independent and self-sufficient,” he said.

Kirlin doesn’t expect the Chinese “momentum” swing toward self-sufficiency to diminish, he said. The market is “part of it, but also the government is behind it,” he said. “They see non-Chinese suppliers as strategic liabilities.” The swing was no “temporary blip,” but a “material change in how the business goes,” he said.

When “some very prominent companies got put on restricted trade lists” over the summer, there came “disruption in the product development road maps,” Kirlin said. The Chinese “came to the conclusion that by buying from Chinese companies,” they can build their products independent of foreign suppliers, he said. “When they came to that realization, we saw a real acceleration” in sourcing from Photronics, he said. It was “an acceleration that for me was really remarkable,” he said.

Photronics factory capacity was “sold out” in the quarter ended Oct. 31 “as a result of trying to satisfy this sudden uptick in China demand,” Kirlin said. “Even if a trade deal is finalized, we believe this trend will continue, as many Chinese technology companies are concerned about future restrictions and want to avoid any potential impact from trade wars.”

Photronics expects to run the Hefei factory at “full capacity” for the rest of fiscal Q1, Kirlin said. “When we designed our Hefei cleanroom, we included the option for future expansion within the building’s footprint to allow us to grow without the need to add bricks and mortar.” It’s weighing whether to accelerate its “phase 2 investment” and expand Hefei, he said. “We have not definitively made up our minds how much to invest” in Hefei and when, Kirlin said during Q&A. “But our global factory is sold out. We have no more capacity. We’re turning business away from multiple customers.”