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China’s Electronics Market in Perspective

By John MacWilliams | January 21, 2014

China’s Role in Electronic Product Manufacturing

012114-CS-china-1,China’s Electronics Market in PerspectiveMainland China has become the manufacturing center for the world, including high-volume manufacturing (HVM) of electronic products. The speed at which China became a leader in manufacturing is amazing, fueled in part by the wave of contract manufacturing that has swept the globe over the past decade. Oh, how much easier it is to outsource to willing suppliers with their own equipment than invest in your own potentially obsolete factory and train your own workers.

All major EMS firms now operate in China, including Foxconn, Flextronics, Sanmina, Wistron, Pegatron, and many others. Investments in plants and equipment are funded by OEMs, contract manufacturers, and even other countries (in the form of nationalized companies or low-cost financing). Taiwan’s move of PC manufacturing and Apple’s iPhone and iPad manufacturing in China (via Foxconn) are but two examples where gutsy decisions were made early on to outsource thousands of jobs from the Republic of China to Mainland China.

There are many aggressive companies operating in China, Foxconn being the largest, with more than half a million employees housed in several large campuses, including Foxconn City in Longhua, Shenzhen. There are others, including Lenovo, now #1 in PCs with the former IBM Thinkpad brand. Generally, many important electronic companies fall below the Fortune 500 radar screen, and OEMs, including Apple, Acer, Cisco, Dell, and HP, manufacture HVM products in China via subcontractors and/or their own facilities.

Connector companies also have plants in China, particularly large multi-product companies like TE Connectivity, Amphenol, Molex, and others. Assembly plants are often attached to or near large campuses of EMS suppliers to the OEM market.

Connector assembly plants in China tend to be focused on HVM, low-mix product lines that support computer, cell phone, tablet, and consumer electronics. These facilities tend to be operator-assisted bench operations that take advantage of China’s low-cost labor. However, costs have been rising in China for several years now and there has been a lot of job-hopping for better wages. The end result will be the following:

  • Low-cost labor pools will migrate to other Asian countries, such as Vietnam; in other words, China will no longer be THE low-cost venue.
  • After all costs were considered, there is a nascent movement to in-source back to the West.
  • This will pick up steam over the next five years, although it will be held back to some extent by infrastructure issues.
  • The types of products brought back to the West will be higher-end items like MacBooks or iMacs.
  • Offsetting this will be China’s local demand, which is growing versus all the manufacturing for export.
  • Right now, China is suffering through a down period after years of double-digit growth.
  • As China’s leaders re-jigger the economy to support local demand, more things will change.
  • One aspect of this is already happening: Lenovo is now #1 in PCs. Expect to see more local China OEMs become major players on the world stage, including a few automotive manufacturers.
  • Time will tell how much Western intellectual property has found its way into Chinese companies, and whether China’s largest electronics firms will be Chinese, Taiwanese (like Foxconn, Quanta, Compal, and others), or Western transplants.

What may also be missing in the West is the burgeoning infrastructure in China, and China’s potential shift from the world’s largest electronics exporter with hand labor to more automation and focus on internal demand. How this plays out will be critically important to major electronics OEMs and component suppliers. Key issues include:

  • Do OEMs set up their own manufacturing plants or work through Chinese EMS firms to market products in China?
  • Is China’s infrastructure (rail, power grid, telecom/datacom, and intelligent highways) up to the task?
  • Working through others could eventually result in losing business and technology to Chinese firms.
  • Will the Chinese government play favorites with local companies through legislation and financing?
  • Given China’s disposable income levels, how will products be redesigned and made at lower costs?
  • Will many more China-manufactured products for export be insourced to US, EU, or near-shore venues?
  • At issue will be a neglected domestic manufacturing infrastructure in the US and EU after massive outsourcing to China (such as tool and die skills, PCB manufacturing, plating, manufacturing automation, skilled assembly line workers).

Bottom line: China will continue to export from massive factories and add capacity for domestic demand. OEMs are beginning to insource products that can be built in NA and EU, mainly higher-value products, such as desktop PCs and iMacs, MacBook Pros, servers, base stations, and telecom central office products, as well as existing (but threatened) domestic parts manufactured for automotive, appliance, medical, industrial, military/aerospace, and niche market products. Foxconn, for one, has two plants in the US (Texas and Indiana) and one engineering facility. It has also announced a $30M expansion in Harrisburg, Pa., probably to manufacture Apple products. Going in the other direction, beleaguered RIM is outsourcing Blackberry production to Foxconn, but not in China. Still, it’s a watershed move for the Waterloo, Ontario, Canada company, and a sign of the continuing change that we’ll see in manufacturing in the years to come.

Part two of this article will be featured in our Feb. 4 issue.

John MacWilliams, Market Director, Bishop & Associates, Inc.

John MacWilliams
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