Electronics industry joins the party as China turns 60
22 January 2010
On the 1st of October, 1949, Chairman Mao Zedong told his people that "the Chinese people have stood up", and declared the founding of The People's Republic of China. China has since risen from being a backward, impoverished state to a nation that commands respect and is now being courted by the leaders of governments around the world.
For more than twenty years, China’s low labour costs and the attractive incentives that its Government has offered to entice electronics firms from around the world to relocate manufacturing operations to China’s high-tech zones has had both positive and negative impacts on the industry, globally.
For example, workers from the electronics industry based in Europe and the US have suffered significant job losses due to the rapid expansion and improvement of China’s manufacturing capabilities. On the plus side, this has meant that consumers across the globe have benefitted greatly from China’s low manufacturing costs, which has resulted in downward pressure on prices of almost every type of consumer electronics (CE) device available today. Of the electronics manufacturers that have relocated some or all of their manufacturing operations to China, a number have reaped benefits that have had a positive effect on their bottom lines.
With China’s CE market now maturing, more opportunities for the global electronics industry are beginning to emerge. Instead of seeing China as simply an avenue to lower costs, vendors are now turning their attention towards addressing the increasingly sophisticated requirements that this huge market is presenting.
In one generation, we have seen China rise rapidly to become the world’s leading CE manufacturing base (in 2004) as well as the second largest CE market, after the US.
The achievements that China has made in the past sixty years are remarkable considering that the nation began life as an international pariah state. For the first half of its life, The People's Republic of China had to endure social and economic disasters such as the ‘Great Leap Forward’ and the ‘Cultural Revolution’. It has only been in the past 30 years, following the reforms and ‘open-door’ policies initiated by Deng Xiaoping, that China begun its rapid rise to become the world's third largest economy in 2008. It is inevitable that China will overtake Japan and the US to become the world’s largest economy. The only question is when; some analysts predict within a decade, while others predict that it will take twice as long.
At this stage, I feel it’s only fair that I warn you that there will be a not insignificant amount of figures and statistics to follow from here on in, so if you haven’t got your number-spectacles on, perhaps it’s time to look away for now. That said, any treatment or analysis of the China market is almost inevitably touched by its sheer scale and potential, making it impossible to describe without liberal use of comparative figures, so let’s begin.
The widely-held public perception that China controls the world’s electronics industry supply chain from start to finish is far from reality. For example, according to a report by IC Insights, China overtook the US and Japan to become the world's largest integrated circuits (IC) market in 2005. China consumes around 20% of the world's ICs. However, it is predicted that China's IC production volume will account for only 5% of the world's total in 2010. 15% of the ICs consumed in China are manufactured in the country. Chinese IC manufacturers are in desperate need of investment in research and development and in the enhancement of their manufacturing technologies and production capabilities. This provides huge potential opportunities for foreign IC vendors.
In response to the economic downturn and the sudden loss of export markets, the China government looked to tap domestic consumption, especially in unexploited rural markets. China has around 800 million rural residents living in more than 50,000 townships scattered across the country.
As part of its US$590 billion economic stimulus package, China piloted the ‘Rural Household Appliance Purchase Subsidy Programme’ in a few selected provinces. The programme gave a 13% subsidy to farmers buying designated brands of colour TV sets, refrigerators and mobile phones. Following the scheme’s initial success, it was extended country-wide and four more product categories, motorcycles, personal computers, water heaters, and air conditioners, were added.
The programme achieved its aims and boosted sales of household appliances in rural areas by 2.5%, which translates into 480 million units at a value of around US$135 billion. In a sense, the economic downturn enabled China to find a ‘new’ market: its own.
According to a spokesman for Gome, China's leading electrical appliance retailer, demand for colour TVs in rural areas could reach 100 million units over the next decade, and demand for refrigerators could be as high as 145 million units.
Putting this ‘new’ rural market to one side, Research and Markets, a leading source for international market research and market data, reports that certain sectors of China’s CE market have matured to a point where they have reached a plateau. TV penetration into the average households in China’s major cities is now over 100%. Research and Markets suggests that new sales growth in China’s urban areas can only be based upon technology upgrades that rely upon industry innovation in new technology.
Currently, very little innovation comes from China’s ‘home-grown’ companies. However, the China Government, like most others around the world, is proactively introducing legislation targeting electronics devices that are designed to address areas such as energy efficiency, safety standards and new technologies. This can sometimes force consumers to adopt new products, while at the same time hopefully improving services.
For example, China has been busily upgrading its digital broadcasting infrastructure and is expected to roll out all-round digital broadcast services by 2010. Under the official timetable for digital broadcasting, China will phase out analogue broadcasting service by 2015. China’s digital switchover will force consumers either to invest in a set-top box (STB) to deploy with their existing TV, or to invest in a brand new TV.
The China Content Broadcasting Network (CCBN) organises an annual Conference in Beijing for the digital broadcasting industry. According to its website, if current development trends continue, estimates indicate that the transition from analogue to digital broadcasting in China will create a market of several trillion US dollars. It is also cites estimates that the annual global output of digital TV and supporting industries in 2010 will reach US$300 billion. If only 15% of China’s 360 million families purchased a digital TV, the sales volume would reach more than $US1.5 billion. In a global market worth approximately US$100 billion, China could potentially account for a market share of US$15 billion.
In its report, Research and Markets points out that the way that Chinese consumers use their electronics products is also having an effect on market growth patterns. For example, until recently MP3 players represented one of the fastest growing sectors in the China market, but this sector is now in decline. Chinese consumers are now buying mobile phones with in-built MP3 and camera functions. The industry-led move towards convergence is in fact ‘cannibalising’ the CE market's own sectors.
The China market continues to grow in more ‘traditional’ or ‘past generation’ CE sectors. For example, home entertainment systems (Hi-Fi sets) sales continue to grow, particularly in rural areas. Despite the advent of audio CDs more than 25 years ago, a market still exists for cassette tapes in rural China. In fact, CD sales across China are now in decline due to the popularity of MP3s, Internet and mobile phone downloads and the widespread availability of pirated CD copies of popular music. A similar situation has emerged with the DVD and DVD player sectors; both are suffering from increasing Internet bandwidths and the wider availability of downloadable video.
Also, Business Monitor International (BMI), a leading global provider of country risk analysis, macroeconomic forecasting and industry research, recently issued a report that outlined the fact that various segments of China’s CE market are showing clear signs of improvement.
BMI predicts that China’s CE devices market, which it defines to include computing devices, mobile handsets and video, audio and gaming products, is projected to grow at a 8.9% Compound Annual Growth Rate (CAGR) to US$164.5 billion by 2013.
Computers accounted for around 44% of China’s consumer electronics spending in 2008, with mobile handsets around 28% and Audio/Video products around 20%.
BMI forecasts that China’s domestic market computer hardware sales, including notebooks and accessories, will reach US$52 billion for 2009, up from almost US$50 billion in 2008.
China’s handset market sales are expected to grow at a CAGR of 5.2% to 244 million units by 2013, but the rate of growth will decline as the market matures. The rural market will be the main source of subscriber growth, while vendors will also focus on an expected 74 million 3G subscribers by 2013 and on new areas such as Wi-Fi capable handsets.
China faces numerous challenges in the coming years, both political and economic. A recent US intelligence assessment predicts that China is "poised to have more impact on the world over the next 20 years than any other country", though one should perhaps bear in mind that US intelligence assessments are not necessarily always known for their reliability. This is not news to anyone involved in the electronics industry. With the changes that have occurred in China in the past 20 years alone, along with the emergence of so many ‘game-changing’ technologies, it’s hard to imagine what China (and the rest of the world) will look like in another 60 years.
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