Chinese firms are beefing up research and new product development programs in a bid to gain higher margins from the global market, according to industry experts. As a result, the number of innovative devices coming out of China has risen steadily in recent years and this pace is only likely to accelerate in future, according to Gordon Orr, a director with McKinsey & Co.
In the electronics industry, Chinese firms like Huawei and ZTE are jostling for sales in developing economies and winning contracts away from Western enterprises. In addition to being hobbled by regulations that restrict sales of certain technologies to China, OEMs like Cisco Systems and Ericsson are taking a drubbing at the hands of Chinese competitors in certain parts of the world where cash-strapped governments often opt for cheaper and innovative products and services offered by Asian companies.
The Chinese government is itself pushing enterprises in the country hard to move up the food chain. As economic weakness in Europe and other parts of the world dampens demand for Chinese manufacturing service, the government has intensified efforts to spark growth in value-added services, including in the design and development of innovative products that can help improve the competitiveness of local firms. Observers believe the government is strongly committed to this strategy and will continue to implement policies that will further its achievement.
“Political and economic leaders in China have clear plans and supporting policies that they are sticking to,” said Orr, in a recent report. “You can debate the pace at which actions are being taken, but not really the direction in which the country is traveling.” (See: What Could Happen In China in 2015?).
Where exactly is China headed? Based on statements by government officials and regulatory actions, China wants to become the high-tech industry’s value-added manufacturer. Opportunities available to Chinese firms remain limited in some sectors of the global electronics market due to policies restricting the export of certain dual-use (civilian-military) technologies to the country so they are instead using partnerships with Taiwanese companies and Western counterparts to improve their R&D activities. China is benefitting heavily from R&D investments in the country by Western-headquartered companies like Alcatel-Lucent, Ericsson, Hitachi, Intel and Microsoft, to name a few. They have also tapped the expertise of returning Chinese citizens who trained and worked at Western companies and universities to bolster R&D initiatives in the country.
What this means is that the electronics supply chain’s already deep roots in China are getting longer and capturing fatter margins in the design chain. Companies like Legend and Xiaomi have shown clearly that Chinese companies can take market share from Western rivals. These companies aren’t simply selling copycat products. They are marketing innovative – and often cheaper – devices that are comparable to products available from once-dominant Western companies. In the area of purchasing, China is today the biggest market for electronic components.
Surging demand from the country helped catapult WPG Holdings to the No. 2 position globally in the components distribution market just behind Avnet Inc. and ahead of Arrow Electronics. These two titans of the components market know WPG Holdings must (and would) take steps to evolve beyond traditional distribution and become a marketer of value-added products and supply chain services. Like Foxconn, the world’s biggest electronics contract manufacturer, WPG may be a Taiwanese company but it’s really a symbol of what China can do in the high-tech world.
Don’t bet against Chinese innovation. Find a way to tap into it because a wave of products invented in China and made in China is on the way.
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.