China's manufacturing industry, long focused on producing simple, inexpensive goods, has made a high-tech shift. Chinese factories today manufacture flat screen TVs as well as cheap plastic toys. In fact, the electronics and IT sector is now the nation's largest industry and one of the largest in the world.
In 2005, domestic electronics and IT sales took in an estimated US$420 billion, up 28.3% over 2004. Given the growth of the Chinese middle class, this consumer trend is expected to continue with steady growth for the next several years. Besides domestic consumption, Chinese electronics manufacturers are looking to foreign markets to increase their sales.
In 2004, China became the world's largest exporter of a wide range of electronic goods including computers, mobile phones and digital cameras, now exporting 20% more information and communications technology than the US.
With cheap labor as the key initial attraction, electronics factories first arrived in the 1980s doing subcontracted assembly and OEM manufacturing for foreign companies. The cost advantage is still one of the primary factors driving such impressive growth. Labor costs in mainland China are about one-sixth of those in Taiwan and one-tenth of the US. But other factors, including a stable political scene, good infrastructure, a well-trained and educated workforce, favorable tax conditions and an improving regulatory environment are also pulling manufacturers into China from other markets.
But the real growth potential lies in China's huge domestic market. Urban China now enjoys all the latest household and personal technology found in the developed world, from refrigerators and microwaves to cell phones and laptops.
China's electronics sector has expanded into a diverse and comprehensive industry. Although imports or foreign brands still make up a significant share of sales, domestic brands have flourished to at least rival the market shares of multinationals like Sony and Toshiba. Lenovo Group is China's largest IT company, its robust computer sales pushing Dell into second place. Haier presently occupies fourth place among the world's white goods (large household appliances) manufacturers, with about 30% of the domestic market. Companies like Changhong – China's largest television producer – Konka, and TCL, hold large shares in the electronics market.
The Pearl River Delta region in Guangdong was the first place to experience an electronics industry boom and still remains a focal point of activity today. However, operations in the Yangtze River Delta, including Shanghai, Suzhou and Hangzhou, are newer and therefore generally have a slight technological advantage over those in Guangdong. The Yangtze region's hightech industry experienced a huge influx of operations from Taiwan in the late 1990s, as Taiwanese restrictions on investing in the mainland have loosened, and now it accounts for the majority of China's semi-conductor business. Intel, TSMC and equipment provider Applied Materials have all established operations in Shanghai. Suzhou, now the world's largest laptop computer producer, hosts production centers for Samsung and Fairchild.
But there is some activity inland too. Infineon has a design center in Xi'an in addition to production bases in the Yangtze River Delta. Philips began operating a plant in northeastern Jilin in 2004 while Intel brought a US$375 million facility online in the western city of Chengdu, Sichuan in 2005. Many new facilities being constructed on the mainland were originally planned for Taiwan, but lured to China by lower costs and bigger local sales potential.
The northern coast has also emerged as a hightech leader. Qingdao is home to names such as Haier and Hisense, two of China's best known domestic brands. Dalian has become a center for IT, with operations of IBM, Hewlett Packard, Microsoft, Dell, Sony, and other IT celebrities.
Low profit margins
Fierce competition in the Chinese domestic market caused protracted deflation during the late 1990s and early 21st century (see chart). The prices of electronics appliances here are amongst the lowest in the world. The profit margin of DVD players for sale in Guangdong dropped to about US$1 per machine in 2004. More than 30 suppliers of DVD players closed down in the first few months of that year.
While struggling amid cutthroat domestic competition, Chinese companies have expanded to foreign markets, Electronics now comprise over one-third of China's total exports, totaling US$200 billion in 2004 (up 40% year-on-year) and projected to reach US$400 billion in 2005. In the first nine months of last year, China exported nearly US$300 billion worth of machinery and electronics, up 33% over the same period of 2004, according to the latest statistics from the Ministry of Commerce.
On the world markets, however, Chinese electronic products are still often known more for their low prices than for their high quality. China is trying to improve the image of its electronics industry abroad by tightening quality control regulations. For example, new standards were set in 2005 to meet EU quality guidelines for all products exported to that region. Still, China is lackng a Sony or a Samsung that is known for quality and reliability the world over.