Think China's electronics industry is getting too big? You ain't
seen nothing yet. Low labour costs and a fast-growing domestic market
will spur China's consumer electronics manufacturing industry to more than double by 2010, according to In-Stat, the US-based market research firm.

The
industry is predicted to grow from $71.5bn in 2006 to $167bn in 2010
and if the past pattern continues, it will be foreign capital that
funds most of the growth. According to In-Stat's analyst Anty Zheng:

About
two-thirds of China's electronics manufacturing revenue comes solely
from foreign-funded or Sino-foreign joint ventures The world's top 10
electronics manufacturers have all invested in China and consider China
to be a key region in their global manufacturing facility layout.”

There
is one area where China's electronic sector is still weak —
semiconductors. More than 90% of the chips that China uses for
electronics have to be imported. Nevertheless, a few Chinese fabless IC
companies have managed to carve out niches producing chips for mobile
communications and MP3 players.

Talking of MP3 players, Chinese electronics firms where quick to jump aboard the iPod bandwagon and this year they will produce $33m worth
of accessories for Apple's iconic iPod — an 85% increase on last year,
according to Global Sources. Taiwanese firms will produce $71m worth of
accessories.

But when it comes to the iPod itself, China's electronics industy hardly gets a look in.

ipod18x200.jpgResearch firm iSuppli recently did a teardown analysis on the new iPod nano to discover its bill-of-materials cost and identify the sources of the main components.

By now, I guess everyone knows that the iPod is assembled in China because Apple was forced to investigate the employment practices of its Chinese subcontractor, Hongfujin Precision Industry, after media reports that its workers were mistreated.

The iPod may be assembled in China, but none of the key components are sourced from the mainland.

South
Korea's Samsung supplies the main processor, based on a design of the
UK's ARM. Another UK chip designer, Wolfson Semiconductor, supplies the
audio driver chip and Philips of the Netherlands supplies the power
management chip. The flash memory comes from either Samsung or Hynix,
both of South Korea, or Japan's Toshiba and two US firms, National
Semiconductor and Cypress Semiconductor, also supply specialised
controller chips.

Due to design changes and component price
declines, iSuppli estimates that Apple has reduced the BOM cost for the
new 4GB iPod nano, which retails for $199, to just over $72. That's 20%
cheaper than the BOM cost of the previous-generation nano, which had
half the memory.

Now, if Apple can achieve that level of cost
savings from its existing suppliers, which are all established western
or Asian chip firms, then China's fledgling semiconductor design
industry faces a formidable task.

Im sure that Chinese firms
could, if asked, design a suitable chip for the iPod. But could they
produce it in volume, at a sufficiently attractive price and with
sufficient guarantees that Apple would be prepared to take the risk of
using an an unknown Chinese supplier for such a high-profile and
lucrative product?

The answer, today, is undoubtedly no. But just wait a few years, and I think the world will be surprised.

More on China's electronic design sector in this earlier EngagingChina story.

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