Is China Still the Best Place to Manufacture Electronic Products These Days?

You wouldn't believe how many times I get asked this question. Before getting ahead of yourself, first consider if China is the best choice to begin with. Companies outsource manufacturing or product development to China to lower cost; however, "going to China" only makes sense if the following criteria are met:

Quantity

Volume is king in China, and lot size is the first thing most factories will want to know. In general, outsourcing only makes sense when the order is worth at least US$10,000; anything below that makes transport and management overheads too high.

Labor intensity

The more labor involved in assembling and packaging the product the more money you save.

Injection Molds

Savings on injection molds often amount to 50%, so if molds make up a significant part of your total project budget then China becomes a lot more interesting.

Electronic components

70% of the world's electronics are now made in Asia, due to its extremely rich cluster of suppliers of electronic components. If your product is currently built with branded Western components, you can save a lot of money by using Asian equivalents.

Product Development

Here again the savings can be huge. Of course it makes no sense to just compare the salary of a mediocre engineer somewhere in the sticks in China with the cost of an ace engineer from Silicon Valley. A lot more project management is needed for example to make sure that everybody understands what your product needs to do. But all said and done you still can expect to save at least 50%, and the more complex your product to design, the more you save.

Moreover, because so many electronic products are now completely developed in Asia, the knowledge base is often a lot stronger there, to the point where it has become practically impossible to design a notebook outside of Asia.

So, in a sense, if your product does not meet volume requirements and uses somewhat sophisticated electronic components and programming, then, no, China is probably not for you. In such a case, I would most likely opt for Taiwan, which is where we do most of our electronic product development work. Taiwan may be a bit more expensive than China, but the engineers tend to be a lot more experienced, getting you to market faster. So for a new, unproven product we recommend developing it in Taiwan, do some pilot production runs there, and once the product proves successful, to move production over to China to save cost. Taiwan may not be as cheap as China, but developing an unproven product in Taiwan in smaller quantities is prudent and then moving when a production ramp-up is required.

But I digress...back to China.

Paradise Lost?

Recently, Beijing has raised minimum wage by 20 percent; other cities are expected to follow. The reason for wage hikes? State authorities insisting on higher standards, and the nationwide effort to close the gap between rich and poor. While this is good news for the average factory worker, it is a nightmare for the factory owners who have to pass on the increase in manufacturing costs to their customers; all this in an already competitive environment. As a result, many Western companies are seriously considering venturing out of China in search of cheaper frontiers.

But Where to Next?

There's quite a bit of talk about moving production further to more remote, less-developed areas of the Chinese interior; however, lack of skilled labor and logistical problems are likely to be impediments. So, in short, don't hold your breath. Recently, Vietnam, India, and Indonesia have been on the radar as prime candidates for taking production away from China. However, these countries work best for products with very high labor content such as garments and shoes. But for electronics, a complex infrastructure is needed that only super sized integrated factories such as Foxconn (who makes the iPhone) dare to make this move. Another impeding factor is bureaucracy and rampant corruption -- not that these do not exist in China, mind you, but Chinese factories tend to be so good at dealing with such issues that they seldom cause problems for you as a Western buyer.

Other Problems

Power Supply. Many of the above mentioned countries have unstable power supply due to prevailing weather conditions or source (hydro power in the case of Vietnam). This can create challenges given the high power consumption demand associated with manufacturing.

Intellectual Property. Protection of IP can be considered weak all over Asia. Naturally, this does happen in China, but it's easier to prevent (for us anyway). For example, we were recently asked to develop a biometric scanner to be used at high security facilities like Swiss banks and airports. IP protection was of the essence for our client. To ensure this, we purchased electronic components from several local vendors, did the housing at one facility, and had the entire unit assembled at an obscure keyboard factory in Taiwan that knew nothing about biometric security systems. Read more on the topic of IP.

Transportation.

Transportation system in these countries is often in relatively poor condition with less than 45% of its roads paved.

Telecommunications.

Poor telecommunications infrastructure means getting through may at times be a challenge.

Suppliers. Unlike China or Taiwan, you'd be hard-pressed to find local suppliers of components that are competitively priced.

So there you have it. Despite recent challenges, it doesn't look like China will be going away any time soon. Although wages have increased, at $145 a month, it's still considerably cheaper than most places. Oh yeah, in addition, inflation within China and the projected increase in the Yuan are likely to drive up the cost of exports. China has been under pressure from its main trading partners to allow the renminbi to appreciate against the US dollar. According to the Economist, "The Chinese government is likely to remain very cautious in the operation of its exchange-rate policy, and is unlikely to bow to US pressure for a large-scale revaluation. However, the government will allow the renminbi to resume a slow but steady rise against the US dollar around the middle of 2010, probably in July, as part of a gradual tightening process."

So perhaps you should be "going to China" sooner rather than later before it becomes economically unfeasible to do so.

Bryan Moore is Managing Director of Titoma, Taiwan. He has years of experience coordinating projects in Taiwan and China and getting things done in this part of the world. He can be reached at bryan.moore@titoma.com

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