Partners and fierce rivals. That’s primarily what offshoring of manufacturing to the Far East has given Western manufacturers. From Huawei, Lenovo and Oppo to Xiaomi, ZTE and Foxconn, currently the world’s No. 1 contract manufacturer, the global technology market is witnessing one of the fastest and deepest changes in its population with Chinese companies rapidly ascending to or near the top of the industry.
They haven’t yet made any significant inroads into the semiconductor market – the Mount Everest of the electronics industry – and it may take many years more and perhaps another decade before the advent of the first truly competitive Chinese chipmaker that can take on the likes of Intel Corp., Broadcom and Qualcomm. However, nobody should have any doubts that China has its sights on winning a bigger slice of the global $305 billion semiconductor market. The same strategy that helped the country in its push to dominate areas like smartphones and telecommunication equipment will come in handy for the inevitable leadership tussle for the IC industry.
Though this wasn’t by design, offshoring of manufacturing helped propel Chinese firms like Lenovo (known as Legend when it was a contract manufacturer) to the top of the PC market. With all the major semiconductor companies, including Intel, STMicroelectronics, Texas Instruments and Qualcomm hiring boatloads of engineers and researchers in China and specifically doing more of their R&D design in the country, the transfer or offshoring of manufacturing and research intelligence from West to East will again play a critical role in the next evolution development of the global technology market. (See: How Will Western Business History Rate Offshoring?)
It’s uncertain if the momentum can be stopped or even if stopping it is desirable. What’s clear is that many Western enterprises did not fully assess the potentially disruptive effects of offshoring on their own long-term future as well as the potential implications for local economies before rushing to establish manufacturing operations in Asia. The goals of many companies when that process began decades ago could be boiled down to two: Drastically reduce production costs thereby improving the competitive position against fellow Western enterprises and; second, to someday secure access for their products in Asia.
The objectives seemed very reasonable and easily achievable then. Few, however, envisioned the speed with which China would embrace Western economic values and, even more swiftly, duplicate its enterprises. In addition to the transfer of hundreds of billions of dollars in foreign direct investments to China and other south East Asian nations, the West has also either directly granted access to or shared crucial intellectual property and expertise with Chinese partners and former employees that are now direct competitors.
In China, today, the greatest competitors Western companies face in their efforts to sell products to the local market are Chinese firms and not fellow Westerners. In the smartphone market, for example, the biggest vendors are no longer Apple and Samsung but companies like Huawei and Xiaomi. In the second quarter, Xiaomi outsold Samsung in China to become the country’s biggest vendor of smartphones, according to researcher Canalys. In fact, Chinese companies grabbed eight of the Top 10 slots in the Chinese market, Canalys said.
“This is a phenomenal achievement for Xiaomi,” said Canalys research analyst Jingwen Wang in a statement. “Undoubtedly this was helped by an anticipated, temporarily under-strength Samsung performance during the quarter. But that is only half the story - Xiaomi has also executed on its strategy to grow volume shipments. It has delivered compelling products at aggressive price points, focused chiefly on its locally relevant MIUI software features and services, backed by effectively targeted marketing.”
Today, Chinese firms have not only emerged as competitors in almost all segments of the global economy but are increasingly establishing themselves as dominant global brands in many sectors, including telecommunications, data and networking equipment, mobile communications, etc. In addition to challenging Western enterprises for and winning a bigger share of the local Chinese markets, companies like Lenovo, Huawei, TCL and others in the high-tech segment are competing for and taking businesses away from Western rivals in developing economies once dominated by companies like Cisco Systems, Motorola and Alcatel-Lucent.
Lenovo, for instance, has grown rapidly through normal business expansion and via acquisitions, including the purchase of IBM’s personal computer business and, more recently the American company’s x86 server business. The Chinese company also bought Motorola Mobility from Google Inc., adding the American company that launched the mobile phone to its already chest-pounding purchase of the IBM division that gave the world the personal computer.
“The acquisition of such an iconic brand, innovative product portfolio and incredibly talented global team will immediately make Lenovo a strong global competitor in smartphones,” said Yang Yuanqing, chairman and CEO of Lenovo in a statement. “We will immediately have the opportunity to become a strong global player in the fast-growing mobile space. Lenovo has a proven track record of successfully embracing and strengthening great brands – as we did with IBM’s Think brand – and smoothly and efficiently integrating companies around-the-world.”
Perhaps Lenovo only gained boasting rights to famous although flagging brands but Chinese entrepreneurs are doing more than just tacking on Western firms to their growing businesses. In recent years, China has seen the advent of major players in key sections of the high tech market. In fact, many of the entrepreneurs who founded some of China’s leading technology companies cut their teeth at Western firms where they anchored the establishment of Chinese branches of these businesses before branching out on their own.
Take the example of Xiaomi, now one of China’s biggest consumer electronics companies. The founding team of Xiaomi is chock full of former employees from Western companies, many of them executives who anchored Chinese operations for Google, Microsoft and Motorola. Guangping Zhou, co-founder and vice president at Xiaomi, for example, worked at Motorola and in 1999 helped his then-American employer set up its first R&D center in China. Another co-founder, Juangji Wong, worked at Microsoft for 13 years before helping to establish Xiaomi in 2010.
The Missing Link Between Design & Manufacturing
In addition to helping to transform China and empowering Asian workers, offshoring has had the decidedly negative effect of leaving employees left in Western headquarters and facilities bereft of critical production knowledge essential to design expertise. Experts in the electronics supply chain often stress the importance of the knowledge of production processes to design engineers. In industry parlance they refer to this factor as design-for-manufacturability.
This essentially is the bond that ensures design concepts translate easily to production efficiency. A design engineer with limited knowledge of the production process may find moving from concept to full production and volume sale a tortuous experience. It’s not a uni-directional information flow process, though. Often, production workers can and regularly pass crucial information back to design engineers.
That’s how efficient organizations work. Offshoring and outsourcing severed this critical link, according to Ken Bradley, CEO of Lytica Inc., a supply chain and pricing information provider. Bradley decried the loss of production knowledge at Western OEMs, noting in a recent article written for Electronics Purchasing Strategies: “Everyone knows [the Chinese] dominate manufacturing but they are now emerging as leaders, or at least equals, in technology as well.”