China: Tomorrow’s leader in electronics?
The growth of electronics equipment production in China has
been widely described as the most fundamental shift in the world electronics
industry. Moreover, China is the main beneficiary of the 2001-2002 crisis as
its share of the world electronics production grew from 10% in 2000 to 18% in
2003 at an amazing rate of 15.4% per year over the period, ensuring a solid
business activity in difficult times for international players. This
development is actively supported by the Chinese government, whose objective
is to make the national electronics industry an independent and competitive
activity, pulling the development of the country.
As growth of the electronics industry in more developed
countries is picking up again, the question arises whether China is just a
good business opportunity in difficult times, or a growing permanent threat to
the established industrial base in Europe, the USA and elsewhere.
In reality the situation is more favourable. China’s
strong growth offers long-term market opportunity for electronic OEMs
worldwide. Developing production in China, both for the local market and for
worldwide sales, affords an opportunity for investors. This should not be seen
only as competition for production in other areas than China. Electronics
production continues to grow in the other regions of the world, although
slower, following the market.
China, a new competency centre for the electronics
industry
China is now the first world producer of a large number of
mass-market electronic products that were for the most part already made in
the Far East (cathode ray tube TVs, computers, optical disc players etc…).
China attracts most of the production transfers and new investments, as other
smaller countries did some decades ago (Korea, Taiwan, Hong-Kong, Singapore,
Malaysia, Indonesia, the Philippines, not to mention Portugal and Ireland…).
What makes China specific is its huge and fast growing domestic market.
Equipment manufacturers locate their new production plants
in China because this country is pulling the growth of the electronics
industry worldwide. This concentration of fresh investment forms technology
clusters and competency centres that increase the attractiveness of the area.
Other regions with slower growing demand such as Europe or the USA already
have a manufacturing base suited to the size of their local market. Production
follows the market and Chinese products are more competitive because the new
facilities in China are more productive.
The digitalisation of electronics greatly favoured the
development of the Chinese electronics industry. Assembling digital blocks
using the same basic digital technologies is much easier than assembling
complex analogue circuits and systems. The convergence of electronic
applications, technologies and products favours the development of wide range
portfolios by the Chinese conglomerates.
While sourcing critical components abroad (Japan, Taiwan,
but also Europe and the USA), China developed its manufacturing output through
partnerships with international players and outsourcing services, mainly based
on assembly work. Benefiting from technology transfers, the Chinese
electronics industry is now moving towards independence and self-sufficiency
by developing home-grown standards of future mass-market digital products
(digital TV, high definition DVD, 3G mobile communications). The country
already provides more engineers than the USA every year and R&D facilities
are being built in China near production and technology clusters. As
production followed the market, R&D has already started to follow
production. Electronic component manufacturing is also developing fast to
provide a comprehensive supply chain and support the growth of local
production.
Main findings and new trends
Whereas mass-market equipment production is developing very
fast in China, professional electronic sectors have difficulties to acquire
modern technologies. In particular, political movements such as the Cultural
Revolution have disrupted the Chinese drive to develop an independent
professional industrial base. China consequently heavily relies on foreign
technology (mainly Russian) in professional sectors such as defence and
aerospace. The strong domestic demand for those categories of equipment makes
China an important export opportunity for the world leaders of the sector.
In mass-markets, the Chinese business environment is
changing dramatically following the entry of China into the WTO in 2001.
Although Chinese government protection allowed domestic players to capture a
dominant share of their local market, it has also led to an unbalanced
industrial structure where profitability was not the main objective of local
firms who now rely on exports to maintain their margins.
As Chinese equipment manufacturers go global (Lenovo
(ex-Legend) partnership with the Olympic Committee, TCL-Thomson), a profound
reorganization of the local industry will take place where technological
independence will be the key to success for Chinese manufacturers. Maintaining
a low-cost product strategy would require to relocate production sites outside
China to counter tariff barriers and anti-dumping procedures raised by major
export markets.
On the other hand, entry barriers into the Chinese market
have been lowered for international manufacturers wishing to develop their
sales in China. Not only the regulations have been changed but the fast
development of a middle and high social class in China will facilitate the
penetration of high-end goods into households. In the same way as Chinese
companies will need the help of international manufacturers to develop their
exports and familiarise themselves with other cultures and sales networks,
foreign manufacturers will need domestic actors to develop their sales in
China.
After a period of great disturbance, the coming years could
be characterised by a more level playing field where the global electronics
industry finds a new balance (that is, until India enters the game).
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Summary
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