China’s manufacturing sector evolves locally and nationally as Year of the Tiger arrives
28 April 2010
The best indicator of future conduct is to look at past conduct. I think I may have read something like that in a parenting manual somewhere. In any case, as a new calendar and lunar year dawns, a quick look back over the last 12 months could be a good way to gauge some of the prospects that may lay ahead for the industry, locally, nationally in China, and further afield.
It goes without saying that the subprime mortgage crisis and the global downturn that ensued meant that last year stood out as being rather special, but not for positive reasons. In fact, 2009 will no doubt be remembered as one of the most dismal years in the history of the global electronics industry; but, the year wasn’t all bad really, and what’s important, it could have been worse. Anyone remember 2001-02?
In the Chinese zodiac, 2009 was the Year of the Ox, which is said to symbolise prosperity through fortitude and hard work. I don’t know about the prosperity, but the year was definitely hard work, and fortitude certainly came in handy. Apparently, ox people know that they will succeed through hard work and sustained efforts and do not believe in get-rich-quick schemes, characteristics that appear to have precluded them from being employed in any significant numbers on either Wall Street or in the City of London.
China’s government and its electronics exporters received a rude awakening last year. The sharp contraction in demand for imports in the Western consumer markets led to the realisation that China urgently needs to transform its export-oriented growth model into one driven by domestic consumption.
To its credit, the government quickly reacted to the downturn and introduced its mega-stimulus programme, which included elements specifically designed to fuel domestic consumption of consumer electronics. The programme was largely successful in triggering a significant recovery for China as well as its Asian trading partners, although a number of commentators warn that the growth it generated is unlikely to be self-sustaining.
The electronics industry in China experienced some pain as it underwent structural change as the landscape of country’s manufacturing sector, which relies heavily on immigrant workers from mainly rural provinces, continued to rapidly evolve. For example, an estimated 30 to 40% fewer employees returned to their jobs in the manufacturing belt in the south-east following last year’s Chinese New Year holiday. A large proportion of these workers found new work in their hometowns, a situation which is strengthening as a result of the government's stimulus package.
Public works projects have generated a significant number of jobs in the countryside. An estimated 20 million farmer-turned-migrant workers who were laid off at the height of the global financial downturn found improved economic conditions and employment, and some were able to start small businesses. This exacerbated the labour shortage in the country’s factories, which intensified as the exports started to pick up. This forced manufacturers and suppliers to adapt to face the challenges of the ever-changing nature of the job market.
Europe’s electronics industry was particularly hard hit in 2009. For example, shipments of semiconductors to the region were estimated to have fallen by more than 20%. In stark contrast, total shipments of semiconductors to Asia were forecast to decline by only 6.8% and the region is set to post the strongest performance both as a supplier, as well as a consumer of semiconductors, according to iSuppli.
Further to this, Global Sources recently surveyed electronics manufacturers in China, and surprisingly a whopping 55% reported that the economic downturn had little or no impact on their business.
One significant market driver has been China's PC market which has shown signs of resilience and growth, some of which can be attributed to the government's economic stimulus package, and particularly the initiatives to subsidise rural computer buyers. According to figures from research firm Gartner, the PC market in China was estimated to have grown 28.5% in the third quarter of 2009, compared with a worldwide average growth of 0.5% in the same period.
Apart from the good numbers coming out of China, there have also been positive signs showing that the global industry is starting to recover with some sectors of the supply chain appearing to have bottomed out, and others beginning the climb back up.
Market research company iSuppli has attributed the better-than-anticipated numbers towards the end of 2009 to a "surprisingly strong performance" in the memory market, as well as in sales of chips for consumer electronics and wireless products. The memory market fared the best of all major semiconductor segments in 2009 with an estimated decline of only 6.7%. iSuppli reported that it expected NAND flash memory to actually achieve double-digit growth with a projected 16.4% rise in revenue in 2009.
Specific to regional and application trends, iSuppli noted that the wireless communications market for semiconductors was the most resilient segment in 2009 with an estimated decline of only 8.2%. The company expects data processing, with a projected decline of 9.8%, to be the second-best performing segment.
The hardest-hit areas in 2009 were the automotive electronics industry, with a drop of 26.1%, followed by industrial electronics and consumer electronics at negative 15.2% and 15.1% respectively.
Looking forward to 2010, the China government has stated that it will maintain its current stimulus policies to prop up economic growth despite fears of overcapacity and asset bubbles, and a number of companies have recently demonstrated faith in China’s electronics manufacturing capabilities moving forward.
Foxconn, the largest manufacturer of electronics and computer components worldwide and most well known as an OEM for iPod and iPhone for Apple Computer, will invest a total of US$200 million in new facilities in Hangzhou Economic and Technological Development Zone over the next five years.
Advanced Micro Devices (AMD) said China could become the company's largest single market within the next two years, boosted by the country's booming rural market and increasing demand for notebooks.
According to AMD president and chief executive officer Dirk Meyer, "There are speculations that China will become the world's largest PC market by 2012, but for us, China could become our largest market sooner than that, as we have a higher market share in the country."
Bart van Ark, Chief Economist of The Conference Board, a global, independent business membership and research association working in the public interest, said, "Global growth will resume in 2010, with global output per head returning to pre-crisis levels. Looking further out, emerging and developing economies will account for a much larger share of the global pie, as much as two-thirds by 2016. And while China will surely be a major force in the unwinding of the crisis, we'll see other emerging markets increasingly fuelling global growth."
It’s comforting to know that some of the industry’s leading researchers and analysts are predicting that we can look forward to improved market conditions for the global electronics industry next year with a degree of confidence. However, it’s worth noting that 2010 is the Year of the Tiger, which according to the Chinese zodiac is a year that is traditionally associated with massive changes and social upheaval and one that is very likely to be volatile both on the world scene as well as on a personal level.
It will be interesting to look back this time next year and see whose predictions were more accurate. In the meantime, I wish you and your families ‘Kung Hei Fat Choi’ and ‘Gong Xi Fa Cai’ (‘congratulations and become prosperous’) for the Year of the Tiger.
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