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 / Winter 2003 / Issue 33(originally published by Booz & Company)


What Will Be Made in China

It is increasingly likely that the television set, computer, or PDA you purchase in the next few years will have been made in China. In fact, China is grabbing the lion’s share of the electronics manufacturing that, increasingly, is moving to developing countries.

Given the twin needs to cut costs in this hypercompetitive industry and find new markets, multinational electronics companies — like other manufacturers before them — are heading to emerging economies, where they can reduce manufacturing labor costs by 80 percent and find growing local demand for their products. Although many industries have shifted assembly offshore, what is different in the case of electronics manufacturing is the speed of the shift and the fact that a significant number of high-value, knowledge-based jobs like design and engineering are involved.

Today, 16 percent of all electronics manufacturing — $65 billion worth — occurs in developing countries. According to a study published in June 2003 by the International Finance Corporation (IFC), the private sector arm of the World Bank, and Booz Allen Hamilton, electronics manufacturing in Latin America, Eastern Europe, and Southeast Asia (not including Hong Kong, Korea, Singapore, and Taiwan) will nearly double in value to $125 billion by 2005, accounting for 43 percent of total worldwide manufacturing growth. Three-fourths of electronics production growth will occur in China, at a rate twice as fast as that in any other developing country. However, Russia, India, Mexico, Romania, Bulgaria, the Ukraine, Malaysia, and Thailand are also countries to watch.

China currently accounts for more than half of the emerging-market electronics production and 8 percent of the total global production. In the future, it will take a commanding lead in key value chain elements; for example, it will account for more than half of all final assembly activity by 2005. Higher-margin activity, such as design and engineering, will move there as well, but not as rapidly as production will.

Several factors explain China’s attraction. First, it has made electronics a priority, and it is sweetening the pot with highly subsidized financing. In some cases, to draw multinational investment, the government even provides facilities and equipment. As a result, electronics production in China is expected to surpass Western Europe’s production, reaching $80 billion in 2005. China’s growing base of talent and experience is also a lure; some Chinese who study engineering and other disciplines in the United States are now returning to China to provide leadership.

In addition, a “cluster” effect is taking hold: As the electronics industry in China matures, foreign manufacturers can find suppliers nearby, which makes manufacturing more efficient. The traditional fears of developed-country manufacturers operating there — that China is too far from the markets to which they are selling, that their products are too high-tech to be produced in a developing country, that the transportation infrastructure isn’t good enough, and that the necessary parts for manufacturing aren’t available — are slowly disappearing.

Multinational electronics producers are also interested in China because they want to penetrate its huge market, now the world’s largest market for cell phones and color televisions, and the second largest for personal computers, after the United States.

China’s importance was emphasized when the Dell Computer Corporation reported its second-quarter results for 2003. Total unit volume in China grew 71 percent, the third straight quarter that the increase was higher than 65 percent. Dell’s server shipments within China were up 79 percent, and notebook computer shipments doubled. Chip manufacturers are also moving production to China to take advantage of the computer and communications device consumption boom there. In August 2003, the Intel Corporation announced it would build a $200 million semiconductor assembly and testing factory in China.

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