The Chinese government has its own reasons for encouraging electronics multinationals to manufacture in China — it wants their money, technology, and expertise — even as it is funding promising indigenous companies’ expansion locally and overseas.
The growth of manufacturing in emerging markets, especially in the electronics industry, is inevitable. But it will not come without challenges. Labor costs are rising in China, which reduces the benefits of moving production there. The production of goods for the military isn’t occurring in any of these countries yet, for security reasons. There are also significant risks associated with weak intellectual property laws, especially in China.
Still, firms are learning how to manage these risks. At this time, the world’s leading electronics companies are not shifting production of their most complicated products and cutting-edge technology to China, because of concerns about intellectual property protection. To strengthen their local capabilities in China, companies are transferring experienced executives from their home country to fill senior management positions, and they are moving some production out of coastal regions where labor costs are rising rapidly. In all emerging-market countries, multinationals are conducting more due diligence on management issues, such as governance structures and local staff qualifications, before partnering with local firms.
It is far better for today’s global electronics companies to prudently bear the risks of manufacturing in China and other emerging markets than to lose out on the opportunities in this historic shift. For most companies, taking these risks is a competitive necessity.
Barry Jaruzelski ([email protected]) is a vice president with Booz Allen Hamilton based in New York. He concentrates on corporate strategy and organizational transformation for companies in the high-tech industry.
Jay Kumar ([email protected]) is a senior associate with Booz Allen Hamilton based in New York. He focuses on strategic and operational issues facing high-tech and telecommunications firms.