State of China's Electronics Manufacturing

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Anyone visiting Shanghai in the past 10 years can easily be convinced that China's superpower ranking is rising to the top. Today half the world's contract electronics manufacturing is in China, and Foxconn (with most of its employees in China) is now the world's tenth-largest employer. Yet at the recent IPC APEX EXPO conference, attendees were flush with stories about electronics manufacturing projects leaving China and returning to North America, Europe, or other geographies. TFI Chief Economist Matt Chanoff and I point to three factors that threaten China’s position as the world’s electronics producer, three factors that strengthen it, and then provide our take on it.

First, the three biggest threats to wholesale, unabated growth of the electronics contract manufacturing industry in China:

Return to regional manufacturing strategies. For reasons of greater control, IP protection, reduced risk, lower total cost of ownership, social and environmental concerns, and shorter cycle times, some products previously manufactured by contract manufacturing (CMs) in China are now moving out to customer regions. Customers outsourcing not only manufacturing but also design to Chinese Original Design Manufacturers will have a greater barrier to leaving China; the CM model has a lower threshold for change.

Competition from the ODM model. Our recent research supports our long-held forecast that more name-brand companies of differing sizes and product varieties prefer to outsource design as well as manufacturing--favoring the ODM model. At the same time, however, some China manufacturers in search for more profitable business models have shed ODM business lines, or, like Pegatron, are shifting from ODM to EMS-type models (more on this in an upcoming post). Those name-brand companies that DO maintain control of design are more susceptible to the regionalization strategy described above.

Increased costs. This refers both to the substantial increase in salaries for contract manufacturing workers as well as the “soft costs” of inadequate (1) labor law enforcements, (2) intellectual property protection, and (3) environmental scrutiny (e.g., widely publicized incidence of lead in children’s toys and toxic toothpaste).  Also consider that as oil prices rise product-shipment and customer air-travel costs rise. All of this affects the total cost of China manufacturing.

However, these three threats are balanced by several factors that continue to drive the Chinese EMS market:

Supply chain supremacy. Despite rising direct labor costs, several factors have enabled China to maintain a leading role in electronics manufacturing. Coastal China has developed the world’s leading supply chain and transportation infrastructure for high-volume electronics. In the process, Chinese businesses have created a near monopoly on the supply chain; many products necessitate sourcing components in China regardless of where manufacturing takes place.

Engineering prowess. More engineers are graduating from Chinese universities than from universities in any other country. From TFI’s years of experience in training Chinese engineers we know that the engineers are hungry for challenging product-design positions.  

Market of the future. China is becoming a substantial electronics market in its own right. China consumers are increasingly able to purchase home and personal electronics. At the same time, several B2B industries are growing strong in China, such as aerospace, thus narrowing the distance and culture gap between CMs and their corporate customers. So for consumer and B2B markets in China, manufacturing in China IS a regional strategy.

Underlying these specific opportunities and challenges for the CM model in China is the overall slowdown in the growth of electronics outsourcing in general. Manufacturing of networking, consumer, and other electronics are already highly outsourced, meaning that CM growth now mirrors growth in product demand, and no longer gets a lift from new adoption of outsourcing strategies. Meanwhile, segments like military and industrial electronics retain significant resistance to adopting outsourcing. Many Chinese OEMs, such as Huawei, are growing rapidly, but they already benefit from a low-cost Chinese manufacturing base, and gain less advantage by switching to outsource providers.   

In the balance, TFI forecasts that the China CM industry will continue growing through 2016, then experience moderately diminished growth owing to the factors above.


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