China: Tomorrow’s leader in electronics?

China: Tomorrow’s leader in electronics?

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).