It’s easy to find evidence to convince anyone China will in future play a diminished role in the electronics manufacturing market. Don’t believe the hype. True, aside from regular supply chain challenges arising from its location and distance from main Western markets and other economic, geo-political and logistics issues, the country’s edge in production has been dulled in recent years by a variety of factors, according to analysts. As a result, more Western manufacturers are known to have either shifted or considered moving production back home and closer to customers. This trend is seen accelerating in coming years, at least, so goes the argument.
There’s some truth to this assumption. For the last three years or so China’s manufacturing wages have been going up at an annual rate of 15 to 20 percent. Finding – and retaining – skilled workers is so difficult today many supply chain executives often spend weeks each quarter in China just recruiting and training new hires only to have them snapped up barely months later by competitors. This adds to already rising costs and makes moving production out of the country a tempting option, observers said.
That line of thinking could be dangerous because it leaves out many of the other – and more important – factors that make China extremely attractive for many OEMs. Wages are important but China offers manufacturers a lot more than lower payrolls. In fact, what’s keeping the electronics supply chain in China today is the eco-system of capabilities, facilities, and potentials. Those manufacturing in the country have their eyes on not just the country’s ability to help them reduce costs but also its growing profile as a direct market for their products. Add to this the supply chain ecosystem in place and China remains the dominant electronics production center for the foreseeable future.
To understand better why the country remains compelling for manufacturers and why it’s not in danger of losing its pre-eminent position in electronics production, we need to explore further the three factors – capabilities, facilities and potentials – mentioned above. There are other ways of describing them and you can swap your own terminologies for them but from a manufacturer’s perspective they together explain our fascination with and continued embrace of China.
Executives at companies providing supply chain services to the world’s leading electronics and industrial OEMs say a tsunami of production moving back West isn’t on the horizon. Mexico and other locations in Eastern Europe are becoming more attractive as China wages go up but they don’t really threaten the country’s dominance. These other locations factor into corporate considerations for plant location but they aren’t displacing China now and won’t in the near future.
Nothing I’ve seen tells me China’s position in the global electronics manufacturing supply chain is under serious threat. Contract manufacturer Flextronics International Ltd., for example, has more than 100,000 employees in China and although it is making products for Motorola Mobility in the United States, it is not about to start cutting jobs in the Far East, according to CEO Michael McNamara.
“China is still like the best place in the world to manufacture consumer products despite the wage increases,” McNamara said during a recent discussion with investors at the Citi Global Technology Conference. “China gets all these noise because wages went up but it went up from $3.5 per hour last year to $4 an hour this year. It’s still a pretty inexpensive place to operate and the supply base is very, very robust.”
Rather, than avoid China many companies involved in the global supply chain are actually expanding operations there. Components distributors especially have no intentions of pulling back; customers want them there and sales there are on the increase. Arrow and Avnet, for example, are generating more sales in the country and Digi-Key is planning to set up shop in the country in the near future, according to Mark Larson, president of the company.
“There are many things converging in China today,” Larson said in an interview. “The number of [electronics equipment] designs being done in China is increasing. Those are forces pushing us forward.”
In future blogs I will discuss the implications of China’s deeper foray into the design chain.
DISCLAIMER: Bolaji Ojo is editor-in-chief and publisher of Electronics Purchasing Strategies. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at firstname.lastname@example.org.