The attraction of manufacturing electronics in China has faded a bit lately. But China’s role as the world’s largest centre for electronics production, valued at $1.1 trillion in 2012 according to Semiconductor Intelligence, a market research company, will continue to grow robustly in the future, for a wide variety of important reasons.
This means that Thai policymakers and companies in Thailand need to sharpen their strategies and tactics for both partnering with and competing against the industry in China, which has seen 10% annual growth rates in recent years.
To be sure, a few giants such as General Electric and Apple have recently shifted some of their manufacturing operations and outsourcing back to the United States. These days, high-tech products do not require much labour as an input, so China’s relatively low labour costs don’t help as much as before.
Chinese wages have spiralled upward; minimum wages rose 12% in early 2013, to as much as 1,500 renminbi per month, equivalent to 7,650 baht or $245, in some provinces. Actual wages can be much higher. And higher shipping costs due to the tripling of oil prices during the past 10 years offsets some of China’s remaining cost advantage.
So Apple, for example, has now decided to make its premier Mac desktop computers in the United States for the first time in 10 years, reaping gains not only in terms of cost factors such as inventory and logistics, but also in customer goodwill, creating jobs in the US at a time when industry in China has been tarnished by scandals involving environmental and labour rights issues.
But Mac desktops are a small slice of Apple’s vast output, now mostly mobile devices. For Apple and other multinational companies, there is little alternative to relying heavily on the production bases and supply chains established in China during the past 20 years because this network is so vast and extensive, especially since these China-based operations fit into larger supply chains extending throughout Asia.
Chip manufacturers such as Intel, IBM and Toshiba use their Chinese operations to supply parts to their plants and customers throughout the region, for example, allowing them to respond rapidly to the demands of a global market that itself is increasingly centred in Asia.
Chinese policymakers have long sought to increase industrial value-added in China, such as by mandating that foreign companies transfer technology and knowhow when they set up manufacturing operations. Policy incentives were among the reasons that Intel now has not only a chip plant in China but also an R&D centre in Shanghai with about 1,000 researchers.
Of course, China’s electronics industry is not just multinationals and outsourcing. Chinese companies have become adept at quickly producing low-cost, generic versions of premium, high-tech products with a level of quality acceptable to the mass market, such as in smartphones.
As well, China’s own brands are increasingly strong. Huawei, for example, has become a leader in telecommunications infrastructure, electronics and appliances. Its smartphone revenue ranked third in the world, behind only Samsung and Apple, in the fourth quarter of 2012. Huawei has invested substantially in R&D around the world, for ever-stronger product offerings.
A few Chinese electronics companies have successfully pursued an M&A approach to market share and brand visibility. Lenovo, for example, acquired the PC division of IBM in 2005. The company has enjoyed continuous revenue growth, and now ranks first in its share of the world PC market.
China’s huge and increasingly affluent consumer market will further drive expansion of electronics manufacturing industries there. For more than five years already, the consumer electronics industry has derived most of its revenues not from rich countries but developing nations within Asia.
China itself accounts for 30% of the world’s market share for key electronic products such as computers, mobile phones, tablets and smartphones. Within the next two decades, purchasing power in China will multiply many times from the current level.
So if China appears destined to remain the centre of the world’s electronic and electrical goods manufacturing, what can Thai industry do to stay relevant? One approach is geographic: take advantage of Thailand’s location to serve as a hub connecting the manufacturing chain throughout Southeast Asia to value chains in China.
Thai and foreign companies based in Thailand can use the country as a base from which to tap the most competitive materials, parts and engineering input from all around the region and beyond to add value before shipping components or finished products to operations and end-users in China.
Strengthening R&D, manufacturing capabilities and branding here would make this hub proposition more viable, helping to increase the value of Thailand’s total electronics production.
Some international companies are reluctant to site sophisticated operations in China because of weak intellectual property protection there. Thailand can work to attract more of these companies, whether as joint ventures with Thai partners or 100% foreign-invested, in either case increasing the strength of the nation’s total electronics supply chain.
And because Chinese companies themselves are building up their capabilities abroad, to reduce risks and costs, Thailand can benefit by hosting more of their operations and joint ventures. Industry is not a zero-sum game, and there are many ways for Thailand to gain.
EIC, a unit of Siam Commercial Bank Public Company Limited, offers in-depth macroeconomic outlook and sectoral impact analyses. For more information, please visit